Referrals are a great way to generate business, forge relationships and earn extra income.  Because of these benefits, real estate agents are generally more than happy to pay a referral fee to another licensee following a successful closing. Unfortunately, problems may arise with the referral if the originating brokerage and receiving brokerage are not on the same page regarding the terms and conditions under which the referral is made. And, in the event the parties do not properly document their agreement or if the receiving brokerage does not thoroughly read the agreement before accepting the referral, the receiving brokerage may be contractually obligated to terms by which they did not intend to be bound.

Where are referrals coming from?

Nowadays, referrals are not just received from friends and family, current or former clients or franchise-related parties. With technology at our fingertips, real estate agents receive referrals from completely unknown entities via online referral groups, cold calls and websites that offer services matching consumers with local real estate professionals.

Problems with accepting referrals from an unknown entity

Problems generally occur when referral fee terms are ambiguous and/or unilaterally imposed. In other words, when the terms of the agreement are not clear or are dictated by one party, disagreements may arise regarding the parties’ intentions on details such as who, what, when, where and how.

Among the issues currently faced by agents across the nation, are disputes arising from their acceptance of referrals from unknown entities seeking to impose boilerplate terms and conditions. Without negotiating the conditions upon which a referral fee will be paid, many agents find themselves facing a scenario in which: (1) the referral fee being imposed is for the agent’s own former client; (2) the agent is contractually obligated to pay the referral fee when the agent was not involved in the transaction (i.e. the referred client was looking for, and utilized another agent, in the referred agent’s brokerage); (3) the agent agreed to be held personally liable should their broker fail to pay the referral fee; and (4) jurisdiction over any dispute is held by a court located outside of Arizona.

Understand your rights and obligations

To avoid referral fee disputes, it is imperative that agents thoroughly review the terms and conditions of any referral fee agreement before agreeing to accept the referral. In reviewing the terms and conditions, the agent and broker should ensure that each is willing to agree and abide by the terms. In the event the agent and/or broker do not understand any of the terms, they should seek clarification prior to signing the agreement. Similarly, if there are terms that the agent or broker are not willing to agree to (e.g. consenting to a jurisdiction other than Arizona), they should seek to negotiate those terms.

Finally, agents should never verbally agree to a referral fee. Rather, the agreement should always be documented in writing and closely reviewed prior to execution.

About The Author

Nikki J. Salgat, Esq.

Nikki J. Salgat, Esq.

Nikki J. Salgat, Esq. is Associate Counsel at the Arizona Association of REALTORS®. Please note that this post is of a general nature and may not be updated or revised for accuracy as statutes and case law change following the date of first publication. Further, this post reflects only the opinion of the author, is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.