As the real estate market continues to cool, many REALTORS® are turning toward unique methods to attract new business and income. Recently, we have been alerted to some new takes on referral fee arrangements. While a referral fee is not a new concept in the real estate field, REALTORS® are inventing new ways to engage in referral business, some of which may be unethical or even illegal. Here are some things to consider when engaging in business involving referral fees.
All referral fee arrangements must comply with federal law and state law. Under federal law, if a transaction involves a federally related mortgage loan (which includes most home purchases), you cannot give or receive any fee, kickback, or thing of value pursuant to a referral agreement or understanding whether written or oral. (Real Estate Settlement Procedures Act, 12 U.S.C. § 2607(a).) Virginia law includes a similar provision which provides a real estate agent shall not pay or receive, directly or indirectly, any kickback, rebate, commission, thing of value, or other payment pursuant to a referral agreement. (VA Code § 55.1-1009.1(A).) Both federal and state law contain carve-outs for referral agreements between real estate licensees, which allows real estate licensees to give and receive referral fees among each other. Virginia REALTORS® provides a standard form (Form 800) for referral agreements between licensees.
As REALTORS®, one of the greatest resources you have is tapping into current and former clients for new business. However, clients and customers cannot be the recipient of anything of value in exchange for the referral of business. “Anything of value” includes, but is not limited to, money, gifts, services, and in-kind contributions. Often, agents inquire about sending gifts to former clients that refer new business to the agent, or entering former clients into raffles and other games of chance in exchange for a referral that results in a completed transaction. These arrangements may be clever, but the law does not allow for these activities.
If you are interested in drumming up new business through current and past clients do not fret. You can still utilize clients as a resource for new business, but you cannot enter referral arrangements that involve an exchange of anything of value with non licensees. While you cannot pay referral fees to clients, you can engage with them in creative ways such as asking for follows on your social media pages or advertising live-stream events.
Please listen to a recent episode of Caveat REALTOR® Podcast for more information on this topic.