Disclosure of referral fee agreement to prospective buyer or seller

QUESTION: If a prospective buyer or seller is referred by one broker to another broker to represent the prospect in buying or selling real estate, and there is an understanding between the brokers that the referring broker will receive a referral fee in exchange for the referral, must the referral fee arrangement be disclosed to the prospect?

ANSWER: Yes. NC Real Estate Commission Rule 58A.0109(b) provides that a broker “shall not receive, either directly or indirectly, any commission, rebate, or other valuable consideration of more than nominal value for services which the licensee recommends, procures, or arranges relating to a real estate transaction for a party, without full and timely disclosure to such party.” “Full” disclosure would include a description of the compensation, which in many cases likely would be expressed as a percentage of the compensation paid to the broker to whom the referral is made. Disclosure would be considered “timely” under the Rule if it is made “insufficient time to aid a reasonable person’s decision-making.” In our view, the disclosure ideally would be made at the time of the referral, but in any event it should be made before the prospect enters into an agency agreement with the broker to whom the referral is made.

Article 6 of the REALTOR® Code of Ethics also imposes disclosure obligations on agents who receive any financial benefit for recommending real estate products or services. However, real estate referral fees are specifically exempted from this obligation. This is an instance where the licensing law imposes a greater duty on brokers than the Code of Ethics.

We do not think that the broker to whom the referral is made (i.e., the agent who will be representing the prospect) is legally or ethically required to disclose to the prospect the existence of the referral fee agreement.

Having said that, a buyer or seller clearly has the right to know about any referral arrangement. Although the Real Estate Commission Rule places the disclosure obligation on the agent who will receive the referral fee, we think the best practice is for listing agents and buyer agents to disclose any referral arrangement to their seller or buyer prospects before entering into a listing agreement or buyer agency agreement. This will enable the seller or buyer to make a fully informed decision about entering into a binding contract.