What is a referral agreement in real estate?
A real estate referral agreement is a legally binding contract between real estate agents, brokers, or service entities (such as mortgage brokers or title insurance agents) that facilitates the referral of clients from one party to another. The fundamental purpose of this type of agreement is to allow parties to share or process clients seamlessly, whilst ensuring compliance with relevant legalities and best business practices. This kind of arrangement can greatly expand the networks of both parties and link sales or services in a way that contributes to a variety of possibilities in a real estate transaction .
While the specific contents of such agreements can vary based on the terms set by the parties, typical components include an exclusionary provision (which states that no compensation will be provided for transactions in which a referral does not occur), details on compensation rates or amounts, the duration of the agreement, obligations of both parties, and jurisdictional specifications that point to where legal action would be taken if necessary.
It is essential that real estate referral agreements are not construed as violating any industry statutes, such as RESPA, and require a careful eye from all parties involved.
Pros of referral agreements in real estate
The advantages of a referral agreement are simple and compelling. First, one can cultivate deep, meaningful relationships with other agents and be able to pass on business to them, while at the same strutting one’s knowledge, expertise, professionalism and character. And second, who doesn’t like money for something one is already doing? Not only do referral agreements maximize the potential for future business via warm leads generated by other equally invested and passionate agents and brokers, but when there’s no business to pass on, a referral payment is just that much more money for doing nothing but thinking of another agent’s success.
As far as an agent’s benefit, the referral contract is a way to build one’s own brand. Those with experience, and an existing pipeline of clients, serve as mentors to their less experienced counterparts, creating an expanding network and referral list. When two agents decide to work together, they build their brands in a symbiotic, positive way. Each codependent brand now expands the other’s brand. This implicitly creates a more attractive package.
A referral agreement ultimately provides a more hands-off approach for agents to keep their pipelines healthy. As an investor or property owner, having an agent that you want to do business with is invaluable.
How to write a referral agreement
Like any business relationship, real estate referral agreements should be reduced to writing, preferably by an experienced attorney. The first step is to gather the basic information about the parties and the property, along with any other pertinent details that are unique to that particular transaction and relationship. This information would typically include:
- Name of the referrer;
- Name of the referral recipient;
- Type of property to be sold or leased;
- Address of the property;
- Listing price;
- Specific language as to what exceeds the expectation of ordinary due diligence and any fees or commissions for which the referral recipient will be compensated;
A few key terms that should not be overlooked in a real estate referral agreement are:
- Mutual release and indemnification between the parties;
- Acknowledgement that the parties are acting as independent contractors;
- An acknowledgment that the referral agreement must comply with the federal Real Estate Settlement Procedures Act and state anti-kickback laws;
- An acknowledgement that the referral agreement will be held confidential;
- A requirement that the agreement be in writing, including whether the applicable state requires this; and
- A governing law provision.
There may be other boilerplate provisions that may apply to a real estate referral agreement, such as forum selection, the understanding that the entire agreement is contained within the written agreement and not other documents or representations, the need to keep the agreement confidential, and the ability of the referring party to market the referral recipient to other agents or brokers. The agreement should be expire either one year, or the subject property should be identified.
Many real estate referral agreements may also have a survival clause that provides for the enforcement of certain sections, such as obligation for confidentiality with respect to proprietary information, to survive even after expiration of the agreement.
The most crucial element is to ensure compliance with RESPA and state laws that may contain anti-kickback provisions.
Legal aspects of a real estate referral agreement
Every state has its own licensing laws that apply to the referral of real estate services. Some states permit unlicensed referral fees paid to unlicensed persons or companies. Most states specify who may receive a referral fee- licensees, their affiliates or employees, or other persons licensed in the same field. But don’t assume that all states permit all of these. Some require a license even for the payment of referral fees to an unlicensed person. Some state regulations may require any persons or companies receiving a referral fee to be affiliated with the person or company making the referral- while other regulations do not have this limitation. Some states allow anyone with a real estate license to pay or receive referral fees in any amount, while others limit the amount of the fee that can be paid. In Utah for instance, there is no limit. But in South Dakota, the statute is rather unique: Except as provided in subdivision (1), no person or persons in a transaction may give, pay, or receive a fee or other compensation as a real estate broker or salesperson or as an unlicensed person or persons in relation to the transaction except a person licensed under this chapter whom the party to the transaction employs or with whom the party to the transaction contracts. A broker, salesperson, or unlicensed person may distribute a referral fee with any person licensed under this chapter if the referred client is identified to the licensee. No money may be offered or given in a business arrangement, as well as a referral or finder’s fee, to an unlicensed person or persons in relation to the transaction. A person licensed as a real estate broker or salesperson may offer or give a fee or other compensation to a qualifying provider as defined in § 36-21C-2 . . . as referral fees or otherwise. No person or persons licensed under this chapter may give or receive fees or other remuneration except through their broker. Sometimes, as in California, referral fees between brokers are governed by a statute that specifies that those fees must be reasonable and "no more than is customary for the services rendered." In California, if the broker receiving the referral fee does not perform the services, then the referral can be viewed as a kickback. Whether or not you can pay an unlicensed person a referral fee, whether you have to be affiliated with the unlicensed person, and whether you need to disclose the fact that there is a referral fee payment can depend on the situation-so always confirm with your local regulations.
Common pitfalls of a real estate referral agreement
Real estate referral agreements are governed by Section 5.12 of the Real Estate and Business Brokers Act, 2002. A common error in these agreements is that the form used is not a form prescribed by the Real Estate Council of Ontario. The prescribed form for both Listing Agreements and Buyer Agreements is the TREB Form 350. If an agent uses a different form to ensure there are no gaps in the referral agreement or otherwise, it is a violation of the Act and there are consequences to using this form. Among those consequences are that the agent that used the unapproved form is required to pay all commissions to TREB and the agents’ broker must pay TREB Commission to TREB as well.
Using unapproved forms or attempting to draft a real estate referral agreement is a bad idea. Real Property Transfer Agreements are complex and extensive , and it is easy to make a mistake that can be overlooked. At its essence, a referral agreement is a contract, and if a real estate agent contracts with a client without consent of the associated broker, the contract is construed as a contract with the agent’s broker. It is then up to the broker to decide the appropriate disciplinary actions. This can lead to the sale being lost in the middle of negotiations, and causes disruption to the deal.
Advice for real estate referral agreements
To effectively utilize and manage real estate referral agreements, its important to maintain open lines of communication with the partner or third-party broker in each deal and to document everything. Drawing up written agreements can help to avoid disputes.
Ask Questions During the Deal-Making Process
After obtaining a referral for a prospective buyer or seller, be sure to ask questions about their objectives and timelines so that you can connect the client with the right professional. While some real estate professionals might even prefer to administer their services virtually, others will need to meet the prospective client in person.
Communicate with the Client Before Closing Deals
Before closing on a deal, it’s also important to let the client know to whom you will be referring them and who will be handling various elements of the transaction. It’s best to have clear rules so that if the client does end up interacting with the third party, they’re not automatically expecting a reduced fee.
Be Clear About How Commissions Work
Moreover, brokerages may have different policies for how they handle the commissions and fees arising from referral agreements. Be sure to communicate these policies to your clients as well as your partner brokers.
Clearly Outline When You’ll Get Paid
The language of the referral agreement needs to be clear to avoid any confusion regarding when the referring party can expect to be paid their fee, including in the case that the deal falls through after it’s in progress. Be sure to dot your "I"s and cross your "T"’s when it comes to legal terminology so that there’s no ambiguity.
Handle Disputes Without Delay
If a dispute does arise out of nonpayment or another issue, be sure to handle it right away. If you need to take the matter to court, your job is much easier if you’ve kept clear communications with your partner and have everything in writing.
Examples of real estate referral agreements scenario
To illustrate the benefits and potential challenges of real estate referral agreements, we can look at a few case studies where they have played a crucial role in successful transactions.
During the mid-2000s housing boom, an upwardly mobile couple was eager to relocate to a larger home. Not having the time or the energy to scout for a new property, they relied on their trusty real estate agent, Agent A. The couple had been working with Agent A for years and felt comfortable with him. "Agent A knows all about us and our preferences," they thought. Agent A was happy to oblige, but knowing the couple would be moving outside of the area where he typically operated and the market being hot, he reached out to Agent A1, his partner in Rainbow Mortgage with whom he had collaborated on other deals. He advised them that any of the business produced could be split, and that he would dividend them out of the deal if they really wanted to use him. The couple was excited because they and the mortgage company had streamlined processes, and they trusted Agent A. The couple thought a large portion of the money saved would allow them to buy a home closer to their employment so they were excited to spend their savings. But in the proposal, there was little mention of dues, special assessment notifications, pet restrictions and not knowing the county restrictions. The couple was so focused on finding the right house, they never thought to ask. They were unaware that paying dues was a mandatory requirement and that such obligations could be up to $300.00 a month. They also did not ask about the property. What type of home would they be buying – a townhome, a condo, or a single-family detached? And what about pets? Although the couple did not own pets , they were considering getting a dog. Would they be able to do so in their new home? The couple put an offer in on the proposed house. When they found out it was located in a community, they were thrilled. And when they discovered about the dues and the number of restrictions both financially and by type (e.g. no pets, nor BBQ), they were devastated. They were planning to move there within the next few weeks, so the closing date loomed. As agents, A and A1 had not savvily engaged in the real estate process and were befuddled with how to prevent the deal from crashing down. They called a meeting with the couple to find out where the failure occurred. No blame was placed, and all agreed it was a miscommunication. As A and A1 had already spread the word of the deal and were bound by mutual agreement to divide the commission and not disclose the arrangements to disinterested third-parties, the couple did not know what to do. After understanding the mechanics of having to undo their offer and re-do their offer, the couple needed to move their closing date back a few weeks. Agent A was not going to receive all of the commission he was expecting. And Agent A1 was going to give up much more than he was initially expecting. Disappointed, but understanding that neither had the extra cashflow to cover the difference, they quickly figured out that they would have to ask the sellers if they would be willing to lower their purchase price to make up the difference. Not happy about sight unseen news, the sellers were not willing to do so. But the couple, trusted that everything was ethical, closed. They understood that even though they contracted for $300K, the actual deal went through at $275K and that the sellers were agreeable to closing the deal.
