By: Thomas S. Tripodianos Published: February 2012

New York law regarding referral fees for sale of Real Estate

Question. Builder (Residential Developer) builds and sells a home to Resident (Individual). Builder then agrees to pay Resident a referral fee if Resident refers a prospective buyer (Prospective Buyer) to Builder to build and sell a new home to Prospective Buyer. Is Builder legally allowed to pay Resident the referral fee if Resident is not a licensed real estate broker?

Answer. No.Under New York law a person may not be paid a referral fee (a.k.a. "kickback") unless they are a licensed real estate broker. This specifically excludes a broker or other person from paying to someone who is unlicensed a referral fee, commission or other compensation for services, help and/or aid rendered in facilitating the sale of real property.

The purpose of the license requirement is to protect the public from inept, inexperienced or dishonest persons who may aid in the perpetration of a fraud. Due to the license requirement, an unlicensed person will not have legal standing to bring or maintain an action to enforce any such agreement.

A referral fee must be in relation to a transaction where the dominant feature of that transaction is the purchase or sale of real property. Therefore, if real property is the dominant feature of the deal, an unlicensed individual cannot evade the license requirement under the guise of a finder's fee. However, a finder's fee may be paid to an unlicensed person when real property is only an incidental part of a transaction, such as in the transfer of a business. Understand that just because it's called a "finder's fee" or "incentive" doesn't make it so. Each transaction must be independently reviewed.

Another scenario that has come up is where Builder (who is not licensed) offers a new car with the purchase of a new home. There is no unlicensed third party involved here. This is really two transactions though; one is the sale of the house and the second is the sale or gift of the car. This transaction does not violate real estate licensing laws however, it does raise certain tax implications such as sales tax on the vehicle and the amount of money attributed to the real estate transaction for purposes of calculating taxes.

Referral fees are also illegal under federal law in certain circumstances. The Real Estate Settlement Procedure Act (RESPA) prohibits referral fees to unlicensed persons involved in a real estate transaction that involves a federally regulated mortgage loan, such as those financed by a government entity, or a financial institution that is insured by the federal government. Thus, the large majority of real estate transactions are subject to federal law, and subsequently, RESPA.

The issue of whether Resident may assert a claim against Builder for breach of contract to recover the referral fee would require that Resident: (1) must be a duly licensed real estate broker and (2) must have been a licensed broker at the time the cause of action arose. Because Resident was not properly licensed, Builder is prohibited from paying such a fee under state law and likely RESPA as well.

The foregoing, under both New York and federal law, does not preclude licensed real estate brokers from entering into referral fee agreements with one another. These agreements are most common when a seller-client is leaving the area and the agent refers them to another agent in the new area to which they are moving in exchange for a fee of the final commission.

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