Referral Fees Reconsidered
How would you respond to this? Old high school friend (haven't seen him since grad 92!) asks for a referral to another area. I set him up. He interviews other agents as well, but decides to go with the referred agent. Yesterday I get the message below. Check in with the referred agent. Papers are signed, photos taken, etc etc. It's going on the market next week. This is the message I got from the friend:
"I appreciate your referral Bob. Because I want to ask ****** to sell my place and help me find another one, I have asked him to lower his commission. He said he is unable to as he intends on providing you with a finder’s fee. Is the finder’s fee something you are willing to decrease or forgo so he can help me out with more than a 1% discount?" (Note: he has received a 1% discount already).
Answer
The “secret” finder’s fee or referral fee is a little bit of a problem. It wasn’t so much of a problem in 2,500 BC in Mesopotamia; they chopped off the hands of these agents. However, life has progressed and that’s a little over the top as a remedy today.
Secret fees are still not permitted, and that extends to finder’s fees and referral fees. That money coming back belongs to the Principal. Most of the time, either a Listing or BRA will be in place which will make a note of what’s to happen. But, specific disclosure is actually required. Whether it’s 50 points from a Bank which you will redeem on a toaster out of their catalogue, $500.00 from a mortgage broker or 25% of one end on a million dollar sale, which would be $6,250.00, you have to tell. In fact, you have to tell ahead of time, not after the fact.
Price is something which must be disclosed. That’s the case all the time. In these types of situations, the first agent contacted often begins a search. You can do that search for free (for a friend) or you can do that search for a price. Without a specific signed document you still have “implied agency” and all the fiduciary duties apply. So, you have to use your own due diligence and find a good Agent whom you wish to recommend. By the way, you could be sued if you did a lousy job on the referral.
The key fiduciary duty here is “accounting”. This means that the Agent collects the money, delivers ALL of the money and then the Principal pays the Agent. That’s been the law for about 4,500 years, it’s not new, but it is overlooked.
When questioned, this referral Agent is obligated to disclose the referral fee. This is indeed the Principal’s business. It’s not private.
So, when we come back to the Principal, they are the ones who get to decide whether indeed any referral fee is to be paid to you.
You will, of course, appreciate that the entire referral fee business has not really been subjected to much scrutiny. It doesn’t appear to have been abused in the real estate business. However, substantial abuse was recently discovered in the legal profession with tens of thousands of dollars being paid out to “Facebook lawyers” who had never been to Court but advertised in a fashion as if they did.
I think that you will soon find that this will be another topic for the media and the rules will be changed in order to make the entire process more transparent to the Consumer. An astute Consumer really wouldn’t need any changes to be made. The law protects them now.
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