Recently, we have seen an increase in the number of inquiries regarding Limited Function Referral Offices (LFROs). An LFRFO is a separate entity owned and operated by a REALTOR® which is solely engaged in referring clients or customers to the REALTOR®’s brokerage company. The benefit of an LFRO is the Designated REALTOR® is exempt from paying size formula dues for the referral licensees working under the separate entity. The National Association of REALTORS® highlights four key points when creating and operating an LFRO.
- First, the licenses of the referral agents must be held by an entity separate from the brokerage firm, and all referrals must be made to the associated brokerage firm on a substantially exclusive basis.
- Second, the referral licensees CANNOT engage in listing, selling, leasing, managing, or appraising real property. This also means referral agents cannot have MLS access.
- Third, Designated REALTORS® operating an LFRO are required to identify in writing all licensees in the referral firm. This information is sent to the local association and must be done at least annually.
- Fourth, if a referral licensee engages in any real estate activities requiring a license other than exclusively referrals, the dues exemption is automatically revoked for that licensee. Upon revocation, the licensee may be placed with the associated brokerage firm, or the licensee may sever ties with the firm. If the exemption is revoked, dues for the current fiscal year may be imposed, and the association may impose discipline as a violation of a membership duty or Professional Standards sanctions.
To set up an LFRO in Virginia, the REALTOR® must first create a separate entity and register with DPOR just like for any new firm. A “separate entity” means a legally recognized business and includes all of the possible structures for that business permitted under Virginia law. Next, the REALTOR® must register the new entity with a local association and designate the entity as an LFRO. If there are any changes to the status of a licensee associated with a referral firm, the Designated REALTOR® must notify the local association of the change within three days.
Remember that once an agent is designated as a referral agent under an LFRO, that agent can ONLY refer clients and customers and CANNOT engage in other licensed activity.
If you have any questions regarding LFROs, please contact the Virginia REALTORS® Legal Hotline.