- 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 and NYU, and acts as a consultant to the real estate industry. www.johnaviteritti.com