Referral Fees: Common Scenarios

We all know that word of mouth is a wonderful way to build a business in real estate. One way agents like to encourage that word of mouth is through a little financial incentive. There are some circumstances where this is allowed, but many more where it is not.

In Pennsylvania, “referral” of real estate clients or potential clients to a licensee has been deemed as licensed activity because client referrals “promote the sale, exchange, purchase or rental of real estate.” So, while anyone can technically make a referral, a license is required to collect any sort of fee for the referral. Let’s look at how that might play out.

Scenario #1

Your buyer client purchased a home, and they liked you so much that now they have sent you their next-door neighbor as a potential client. Can you send your original client a $25 gift card to a restaurant as a thank you for sending you business?

NO. A payment for a referral is… well… a referral fee, and can’t be paid to an unlicensed individual. There is no magic spending limit that crosses the threshold to a referral fee, and it doesn’t matter if it’s cash, a gift card or a fruit basket – this would likely not be permitted.

Scenario #2

A broker wants to encourage referrals from past brokerage clients, so they invite every client from the past five years to a family carnival with games and food trucks and give every family a $25 gift card when they leave.

YES. It’s OK to give away gifts – even money – as a business tactic, so long as it’s not directly tied to getting specific client referrals. “I value you and hope to get some number of referrals in the future” is different from “I am giving you this gift in exchange for that referral.”

Scenario #3

You have become familiar with a local estate attorney who now sends you potential sellers when they work with estates. As a thank you, you would like to have an arrangement that for every client they send you, you send them $100. Can you do that?

NO. An attorney is not a real estate licensee, so they cannot be paid a referral fee. It is true that the license law does allow attorneys to handle certain types of licensed activities, but that is different than having a license, so that exclusion doesn’t apply here.

Scenario #4

You have built a relationship with the local theater. They are looking for sponsors for their next program and you would like to place an ad that says, “Mention this ad and I will donate $100 back to the theater if you buy or sell with me.”

NO. This inadvertently creates a referral-type relationship with the local theater, where they are being paid for each patron the theater program sends to you. While there may not be an intention to create that relationship, at the end of the day it is a payment of money in exchange for a real estate transaction occurring.

Scenario #5

You believe in giving back to your community in any way possible, so you decide to take out an ad that says, “I will make a $500 donation to the charity of the client’s choice at closing.”

YES. In this example, the charity is not referring the client, so there is no referral payment being made.

Scenario #6

An agent licensed in a different state sends you a client who will be buying in Pennsylvania. Can you pay that agent a referral fee?

YES(ish). Though referrals fees are limited to licensees, the State Real Estate Commission has indicated that they can be paid to active licensees in other states. That said, the out-of-state broker should check with their own state law to be sure they are not prohibited from either making the referral or collecting that fee.

When it comes to legitimate situations regarding referral fees, remember to always get them in writing, and always work with your broker and send any fees through your brokerage. PAR has the Referral Agreement (Form REF) for your referral needs.

Bonus Scenario

OK … I read all that, but what if I do one of those things in scenarios 1, 3 or 4 and instead of a “referral fee” I call it …

NO. First, it’s the concept that matters (exchanging a thing of value for a client referral), not the name. And second, as we’ve noted in a number of other articles, the PAR Legal Hotline’s position is to get you the right answer and the safe answer, so “how can I get around the rule” is not a question we will entertain. Please speak to your broker and brokerage counsel about any “creative” ideas you may have, as the broker would potentially be on the hook for any disciplinary action if the commission disagrees with your approach.