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What Is The Difference Between A Referral Fee And A Finders Fee?

Originally Posted: August 17, 2010

John A. Viteritti

  |   10 Comments · Print Article

If an attorney wishes to employ one or more real estate licensees, the attorney must hold a NY State real estate broker's license. (freelanceswitch.com)

Southampton - What is the difference between a referral fee and a finders fee in a real estate transaction?

Under NY State Law, a person may not be paid a referral fee who does not hold a real estate broker's license.

An exception is an attorney licensed to practice law in the State of New York. They may perform any function that a licensed real estate broker may perform without a real estate broker's license.

What is also true is that a referral fee may not be paid directly to an associate broker or a licensed salesperson. (www.deztech.com)

They are not, however, automatically licensed real estate brokers. If an attorney wishes to employ one or more real estate licensees, the attorney must hold a NY State real estate broker's license. However, they are not required to take any qualifying courses as are non-attorneys. They are required to renew their broker's license every two years as is any other holder of a real estate license, but are not required to take real estate continuing education courses.

The reason that attorneys are required under these circumstances to hold a NY State real estate broker's license is because real estate agents who hold either an associate broker's license or a salesperson's license must have a NY State licensed real estate broker as a sponsoring, supervising broker.

What is also true is that a referral fee may not be paid directly to an associate broker or a licensed salesperson. The fee must be paid to their supervising broker who will in turn pay the agent who has earned the fee. In short, referral fees must pass from broker to broker. Fees paid to vendors, sellers, and buyers or any other unlicensed person in return for referrals are considered kickbacks and are illegal.

A finder's fee is a different matter. The finder does not hold a real estate license, either as a broker, an associate broker, or a salesperson.

The finder must have introduced the party to the broker who subsequently purchased the property through that broker or the broker's agent. The agreement between the broker and the finder must be in writing, the property must transfer, and the finder must not have participated in any way in the negotiations that led to the purchase. In other words, the finder must not have performed any activities that require a real estate license.

The courts are wary of attempts by persons claiming to be finders who are are in fact attempting to circumvent the license requirements of the State of New York. In fact, courts look unfavorably upon any attempt to deny compensation to a real estate agent who has performed his or her responsibility according to the terms of a contract entered into with a client, and, unlike finders, those contracts, as stated in a previous article, need not be in writing nor must the property necessarily have transferred. There are circumstances when both these circumstances must be satisfied in order for the real estate agent to be entitled to payment, but they are not automatic.

In a case where a person claiming to be a finder sued for a fee in the amount of $35 million, the court held that the activities performed required a real estate license. Consequently, the court denied the claim.

May a broker pay a referral fee to a person from another state? Yes, as long as that person has met all of the requirements of his or her state to receive such payments.



John is a St. John's University graduate, licensed Real Estate broker, lecturer, teaches real estate license classes at LIU, NYU, and Cook Maran Real Estate School, and is a well-respected consultant to the real estate industry. www.johnaviteritti.com


Guest (NY) from NY says::
I was wondering if someone gave me a rental lead because they couldn't work as they moved out of state and no longer had their salespersons license sponsored by a broker, am I legally entitled to give them some sort of fee? By the way, there is nothing in writing... Thanks in advance!
Nov 11, 2011 8:21 am

Guest (Ernest) from New York City says::
Considering the Appeals Court decision in Futersak v. Perl. May I as a licensed New York broker still pay a finder's fee to people who do not make their living in real estate?
Jun 13, 2011 2:41 am

Guest (Guest) from New Orleans says::
you are an instructor of real estate in NY how in the world do you not know this about rebates and Redfin and Zip. and rebates in general in NY State??
Sep 18, 2010 7:13 pm

Guest (Guest) from riverhead says::
John, you're welcome. Redfin (rebate company) and Zip have both been operating on Long Island, providing rebates to home buyers. The DOJ theory is that if it benefits consumers and fosters competition in the real estate industry, it's a good thing. Hard to argue with that mindset.
Sep 17, 2010 4:43 pm

Guest (Guest) from Author says::
Thank you for referring me to the DOJ website. I see your point. It includes a copy of a letter dated 2/6/08 sent by the DOS to the DOJ which quotes RPL 442 and states that the rebate permitted by the DOJ doesn't "run afoul of the statute." I have sent an inquiry to the DOS regarding this matter. Very interesting. Thank you.
Sep 17, 2010 12:59 pm

Guest (Guest) from riverhead, ny says::
Please go to the department of Justice real estate website. It lists all of the states in which rebates to buyers or sellers are permitted. In New York, rebates to buyers are permitted, provided full disclosure is offered to all parties, and it appears on the HUD 1 at closing. It is not a kick back, it is a legal rebate of commission.
Sep 17, 2010 9:22 am

Guest (Guest) from Author says::
Riverhead Guest Thank you for your comment. My reading of Sections 442 and 442-e of Article 12-A of the Real Property Law of the State of NY, (License Law), would seem to contradict that. I think what you are referring to are HUD RESPA requirements regarding mortgages.
Sep 16, 2010 4:08 pm

Guest (Guest) from riverhead, ny says::
Hi, John- along the lines of your article, it might also be noted that rebates (from a broker to a buyer or seller) are legal in New York state, provided that the rebate is disclosed to all parties, and appears on the HUD-1. The buyer or seller need not be licensed in order to receive a rebate.
Sep 16, 2010 10:27 am

Guest (Guest) from Author says::
Thank you for your comment. In NY State in order to be permitted to receive a commission or a referral fee the person receiving must be licensed at the time of earning and the time of payment.
Sep 15, 2010 9:37 am

Guest (Guest) from New Orleans says::
Some good points here. I had a referral from a licensed agent two years who subsequently let their license expire. I ended selling the people that were referred and this agent wanted to be paid. But since they weren't licensed any longer I couldn't pay them.
Sep 15, 2010 8:10 am

 

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