Brokers receive and split the fees
The only person permitted to receive compensation — fees — in a real estate transaction or for related services is a licensed broker. [Calif. Business & Professions Code §10137]
A broker may not compensate anyone for real estate-related activities requiring a license who is not employed by the broker at the time of payment and is not licensed by the California Department of Real Estate (DRE). [Bus & P C §10137]
The DRE limits fee splitting to:
- payments between brokers (who then spit the fee with their employees); or
- payments by a broker to their employees, whether licensed or unlicensed. [Bus & P C §10130]
Thus, a licensed agent may only receive a fee or other compensation for acts requiring a DRE license when they are employed by a broker.
Referral fees are allowed between two brokers when the broker receiving the referral fee is not providing another significant service in the home sales transaction such as financing, insurance, escrow, or similar service. [See RPI Form 114]
A buyers broker may arrange a fee-sharing agreement with the sellers broker to document a prospective buyer as their client and record the buyer’s written promise to assure a fee is paid in the transaction. [See RPI Form 105]
Related article:
Fee protection through written consent
Unlike representing a property owner intending to sell their property, no multiple listing service (MLS) rule or sellers broker is concerned with whether the buyer has formally employed an agent to help them locate a property or prepare and submit an offer.
Thus, when undertaking the duty to counsel a potential buyer — and certainly before giving advice, providing information, or commencing efforts to locate qualifying properties — it is prudent and necessary to ask the buyer to enter into a written commitment. [See RPI e-book Real Estate Practice, Chapter 15]
In so doing, the buyer commits themselves to employ and authorize the agent to work with them to locate property as their exclusive agent.
Here, when the client buys property, no matter how or by whom the property is located, the broker and their agent who worked diligently to meet the buyer’s objectives have earned a fee — and it’s collectible.
Typically, a buyers agent uses an exclusive right-to-buy listing agreement when the broker is employed as their sole agent by a prospective buyer. [See RPI Form 103]
Always, however, a fee-sharing agreement is arranged with a sellers broker either through a publication of the property’s availability offering a fee to a buyers broker or by the buyers broker documenting the identities of their buyers as their client. [See RPI Form 105]
It is unreasonable for a buyers broker to expect to receive a fee, no matter who is expected to pay it, for working with a buyer who acquires property located and presented by the broker, unless:
- the buyer has signed a writing containing a fee provision relating to the property; or
- the sellers broker has agreed in writing (or orally) to share their fee with the buyers broker regarding the identified buyer.
Related article:
Brokerage Reminder: The buyer’s listing – a prerequisite to representation
Analyzing the fee sharing agreement
A buyers agent uses the Fee Sharing Agreement — Buyer’s Broker Compensation published by Realty Publications, Inc. (RPI) when receipt of compensation for their services rendered in a transaction depends on sharing the fee due the sellers broker under a seller’s listing agreement. The form allows the buyers agent to document the right of the buyers agent to be paid a fee. [See RPI Form 105]
The Fee Sharing Agreement — Buyer’s Broker Compensation contains:
- Facts: the identity of the seller, sellers broker and real estate or personal property for sale [See RPI Form 105 §1]
- Addenda included: a checklist of a dozen different disclosures, reports and appraisals that may have been conducted during the sale of the property [See RPI Form 105 §2];
- Agreement: the effective date, fee split percentage, and how the fee is to be paid to the buyers broker [See RPI Form 105 §3];
- Client identification: blank spaces for entering the identity of the clients retained by the buyers broker to locate property [See RPI Form 105 §4];
- General provisions: statements that both brokers are licensed real estate brokers and authorized by their clients to share brokerage fees, the sellers broker will enforce collection of the brokerage fees earned under the seller’s listing agreement and disputes will be resolved by mediation [See RPI Form 105 §5]; and
- Signatures of the buyers broker and sellers broker. [See RPI Form 105]
Related article:
Letter to the Editor: Do buyer’s agents have control over their fees?
Broker-to-broker referrals
During their careers, most brokers and agents encounter prospective clients who need brokerage services beyond those the licensee is able to or willing to provide.
These situations often concern the location of property desired or an expertise outside their area of practice. All professions experience this scenario and need to acknowledge the fact.
Here, the prospective client is referred to another broker known to be capable of providing the brokerage service sought by the prospective client.
Thus, the broker or agent licensee making the referral may ask for a fee from the broker who accepts the referral. The referral fee is earned when the prospective client enters into a transaction in which the other broker (the referee) is paid a fee.
However, documentation is needed to ensure collection of the referral fee promised to be paid by the other broker. Here, a broker referral fee agreement is used to evidence the understanding. [See RPI Form 114]
The broker referral fee agreement is designed as a broker-to-broker referral form. It is not to be confused with a finder’s fee agreement as a finder is an unlicensed individual employed for the sole purpose of generating referrals. [See RPI Form 115]
The referring broker will receive no other fees on transactions the referred prospective client enters into through the services of the recipient broker.
Further, the referring broker and their agents undertake no activities after making the referral that create a fiduciary duty owed to the prospective client. Their involvement is limited simply to the referral of the prospective client — nothing more, nothing less. Accordingly, a provision in the referral fee agreement states the referred broker will not participate in any negotiations with or advise the prospective client. [See RPI Form 114 §2]
Although an oral agreement between brokers for a referral is fully enforceable, a documented agreement clearly sets the agreed conditions which are to be met in order to establish when the fee has been earned, and the amounts to be paid.
Thus, the written broker referral fee agreement serves as evidence of the terms agreed to for payment of the referral fee earned, which otherwise might not be recalled or fully clarified in an oral agreement.
Related video:
Analyzing the broker referral fee agreement
An agent uses the Broker Referral Fee Agreement published by RPI when agreeing to receive a fee paid by another broker for the referral of a person who needs the services of the other broker and their agents. The form allows the agent to document the identity of the person referred and the terms for payment of the referral fee. [See RPI Form 114]
The Broker Referral Fee Agreement contains:
- the referring broker, recipient broker and type of client, including a:
- the name, address, phone number and email of the prospective client [See RPI Form 114 §3];
- the real estate involved [See RPI Form 114 §4];
- the compensation amount for the referral [See RPI Form 114 §5];
- when the referring broker’s compensation is earned and payable [See RPI Form 114 §6];
- a mediation provision [See RPI Form 114 §8]; and
- signatures of the referring broker and recipient broker. [See RPI Form 114]
Related article:
Form of the week: Broker Referral and Finder’s Fee Agreements – Forms 114 and 115
Want to learn more about receiving and splitting broker fees? Click the image below to download the RPI book cited in this article.
