In real estate, referral fees are a natural and necessary part of the landscape. It is essential to clearly understand the disclosure requirements for consumers when this happens.
Although REALTORS® have vast and varied experience, no one is an expert in everything. Responsible professionals must recognize their limitations and refer consumers to a more knowledgeable professional in that specific field. This process is met with a referral fee paid to the referring brokerage from the brokerage receiving the referred client if they can facilitate a successful result.
Let’s take a look at that process.
Who can receive a referral fee?
As with all commissions or fees earned in the trade of real estate, only the brokerage can receive a referral fee. In Alberta, only brokerages can trade in real estate, and the REALTOR® is registered to the brokerage as their representative.
Although the REALTOR® is undoubtedly the one who is seeking the right professional to refer their consumer to, the referral can only be sent by the brokerage and paid to the brokerage and never to the REALTOR® directly. Any direct payment to the REALTOR® in this regard would be considered secret profit and possible conduct deserving of sanction to accept it.
Due diligence requirements
REALTORS® are professional licensees in Alberta and members of the Canadian Real Estate Association, which requires professionalism and expertise that the courts have come to recognize.
It is incumbent on a professional REALTOR® to use reasonable due diligence when referring a consumer to a professional in a different field or geographical location. At a minimum, this means that whomever the professional is, the REALTOR® must take reasonable steps to ensure that the individual they are referring the consumer to is qualified to act in the capacity to which they are being referred. For example, a quick search of the real estate licensee database in the province where a client is being referred will ensure that the individual accepting the referral is licensed to trade. Additionally, experience working with this individual in the past may help inform about their qualifications in working in a certain discipline or property type the consumer is looking for help in.
A good resource is to speak with the broker of an office where you are looking for a qualified REALTOR® in a specific discipline since the broker knows their REALTORS® the best.
Brokerage referring a client to another brokerage and expecting a fee.
So, you have found the perfect professional to help the consumer; what is the next step?
As the privacy of personal information is a top priority, a REALTOR® needs to seek the consent of the individual they are referring to send their private information to a third party for the referral. This step requires a discussion with the consumer to ensure they:
Although there is no requirement to disclose the amount or method of calculating the referral fee, it could be disclosed upfront to avoid potential confusion down the road.
Brokerage receiving a client from another brokerage and paying a referral fee.
When a brokerage receives a client by way of referral, and a successful result for the client triggers the payment of a referral fee, what is required of the brokerage before sending the payment to the brokerage who sent the referred client to them?
The legislation is relatively silent on this, except that the brokerage must "take reasonable steps to ensure the person is authorized to carry out the activities for which the referral is made." Apart from that the brokerage sending the payment is essentially paying the other brokerage out of the fee they earned from the transaction so there are no additional restrictions or requirements for disclosure or consent.
The only point of warning for the brokerage I would give is never pay the REALTOR® directly. Only the brokerage can earn a fee, and the brokerage will pay the REALTOR® under their agreement. Paying a REALTOR® directly instead of the brokerage could land the brokerage sending the payment and the REALTOR® receiving the payment in hot water with the regulator.
Referring other non-real estate professionals with or without a fee
Not all referrals are made to other real estate brokerages. Consumers frequently seek the help of their trusted REALTOR® to help them find a qualified home inspector, condo document reviewer, appraiser, electrician, plumber, or any of the other hundreds of professional disciplines interacting with real property. In such situations, the same basic principles above apply with a few notable exceptions.
If the referral fee is not the result of a trade in real estate, it could be paid directly to the REALTOR®, such as a gift card from a home inspector, but the possibility of the referral, as well as what information being shared must be disclosed to the consumer in writing and in advance of the referral being made, not after it is paid. Additionally, a REALTOR® should never provide less than three to five possible options for qualified referral partners for each specific referral to ensure the consumer can make their own choice while still gaining a professional recommendation from their REALTOR®.
It is important to note that mortgage brokers licensed under the act can be provided as a single referral partner since they will work with multiple lenders to find the best mortgage for the client. This differs from mono-line or bank-employed mortgage specialists who only provide products for a single lender.
Finally, the REALTOR® must make reasonable efforts to be confident that the individual or company they are referring a consumer to is licensed or otherwise qualified to provide the services they are being referred for.
The best interests of your client are always the highest concern, but it is essential to understand the proper way to be transparent and compliant with the legislation when a referral fee can be earned. In tandem with the best interests of your client and transparency, the receipt of a referral fee is a win-win-win situation for the referring brokerage, the client, and the party receiving a new client.
Provincial Practice Advisor
Bryan has many years of experience in the real estate industry including over 10 years as a former broker in the Edmonton Region.
Email: email@example.comPhone: 403-209-3619