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Soliciting Prospects and Paying Referral Fees

Topics:

"After the Fact" Referral Fees
Using Telemarketing Services to Obtain Prospects
Obtaining New Tenants Through Referrals from Other Tenants

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"After the Fact" Referral Fees

Demands that licensees pay "after the fact" referral fees are often a major irritant for licensees. Licensees tell the Real Estate Commission (GREC) that these demands come both from other licensees and from unlicensed persons. For most licensees an "after the fact referral fee" has come to mean paying a third party a part of the commission even though the licensee believes the third party was not the source of the referral to the licensee. The party referred to the licensee may be a prospective seller, a prospective buyer, or a prospective tenant. The third party referral firm is usually an "affinity group" (appearing in the marketplace in the 1990s) or a "relocation company" (a part of the marketplace since at least the 1960s).

The Players and the Law

Frequently, the prospective sellers, buyers, or tenants have purchased an individual membership in a licensed "affinity group" that promises to locate a broker for the member when the member wants to buy, sell, or lease property. In exchange for purchasing the membership, the "affinity group" usually promises the member a reduction in the commission charged or a rebate of a portion of the commission charged. The "affinity group" may also promise better prices on such other goods or services as home furniture or mortgage loans.

"Relocation companies" are the other primary source of referrals of such prospective sellers, buyers, or tenants. Unlike "affinity groups," "relocation companies" do not sell individual memberships. "Relocation companies" work for the most frequent originating source of such prospects, their employers. The "relocation company" usually promises the employer that it will provide the firm's employees a "managed move." That "managed move" includes a variety of services such as referrals to a member of their broker network to provide real estate brokerage services, referrals to moving companies, and referrals to mortgage brokers. The employer (or employee) may receive either a rebate of some fees paid or a discounted fee for the service used.

Georgia's license law allows the "affinity group" or the "relocation company" to collect any part of the commission to which the parties agree if it holds a real estate license in some state and is not engaging in any real estate brokerage activity other than the referral of prospect. Georgia's license law also allows the "affinity group" to pay a part of its commission to any principal involved in the transaction provided (1) the principal is acting in that capacity and not performing any real estate brokerage activity and (2) the payment is disclosed to all parties. Thus, one can view the payment of part of the commission to a principal (the buyer, seller, or tenant who is not performing real estate brokerage activities) as essentially a reduction in price of services. [See O.C.G.A. §§ 43-40-9 (e)(3) and 43-40-25 (a) (12)(17) (35) and Substantive Regulations 520-1-.07 (7) and 520-1-.10 (4).]

After What Fact?

After a licensee meets prospective purchasers and shows them property? After a licensee enters into a buyer brokerage agreement with a prospective purchaser? After the principals enter into a binding contract? After the principals close the transaction?

Licensees frequently say they do not mind paying a "reasonable" referral fee if they "know about it in advance." That is certainly a "reasonable" position. But does it reflect the "real world" of real estate brokerage?

How many transactions close without the need to modify some major or minor provisions of a contract? Do licensees say "the deal is off" when the discount or interest rate changes between the time of contract and closing? Do licensees say "the deal is off" when the seller changes his mind at closing about whether he will leave an item of personal property that he promised to leave in the contract? Do licensees say "the deal is off" when a parent of first-time home buyer demands changes in the agreement? Generally, "No;" most of the time the agent makes every effort to appease the parties so that the transaction will close. Not infrequently that appeasement process includes renegotiating the licensee's fee.

Thus, in some respects an "after the fact referral fee" is just another problem to cope with to get the transaction to close. Yet, they differ from the usual problems in at least two ways. First, "How could a fellow licensee do this to me?" It is one thing for an unlicensed person who does not understand the business to make demands that may upset the transaction, but quite another for a fellow licensee ("who ought to know better") to do so. This first difference most often comes when the transaction includes a principal with a membership in an "affinity group."

Second, the source of the trouble often comes from a party that has not always been directly involved in the usual real estate transaction, the principal's employer. The employer may have promised the employee a variety of benefits to make the move. However, the employer expects to fulfill that promise only if the employee follows the firm's relocation policy to the letter. This second difference most often comes when the transaction includes a principal whose employer has engaged a "relocation company."

In addition, "after the fact referral fees" problems may arise from the source of most closing problems, the failure to communicate. Some brokers have entered into contracts with relocation companies and failed to tell their affiliated licensees about it or failed to explain adequately to their affiliated licensees the scope of the contract. Often these contracts provide that any employee from a firm served by the "relocation company" has certain criteria the employee must follow to qualify for relocation benefits. Since the broker has contracted with the "relocation company," a referral fee must be paid from the commission earned even though the affiliated licensee does not know the terms of the contract with the "relocation company."

Why Doesn't the Real Estate Commission Do Something?

The license law gives the GREC little authority to involve itself in matters related to fees. Compensation for all real estate brokerage services are matters of contract between or among the parties. Therefore, the GREC is very reluctant to involve itself in matters related to the fees licensees charge for their services. However, the license law does address "after the fact referral fees" in several ways.

If the referring company is not licensed, then the licensee must refuse to pay the referral fee and may file a Request for Investigation with the GREC. The GREC will investigate and take appropriate action in Georgia or assist the real estate regulatory agency in another state in taking appropriate action [O.C.G.A. §§ 43-40-27 (d) and 43-40-30].

If a licensed referring company threatens to deny benefits to the party being referred in order to force payment of a fee to the referring company, the licensee may file a Request for Investigation with the GREC. Such a threat to deny benefits by the licensed referring company may constitute dishonest dealing [O.C.G.A. § 43-40-25 (a) (25)]. (Such a threat by an unlicensed employer would not be a matter over which the GREC has jurisdiction.)

Finally, if a licensed referring firm:

a. seeks to induce the party being referred to alter the real estate licensee's fee without the licensee's prior written consent [O.C.G.A. § 43-40-25 (a) (34)],

b. fails to obtain the agreement of the party being referred to refer that party to another licensee [O.C.G.A. § 43-40-25 (a) (35)], or

c. fails to inform the party being referred that the referring license will be compensated for the referral [O.C.G.A. § 43-40-25 (a) (35)],

then the licensee receiving the referral or the party being referred may file a Request for Investigation with the GREC. Enforcing these prohibitions depends on the GREC's ability to gather evidence that can meet the requirements of the courts, not always easily available.

Is There a Realistic Solution?

Yes, but like most solutions to business problems, the best answers are not in the law but in the marketplace. In order to address "after the fact referral fee" problems effectively, licensees should bear in mind several points:

In other words, demands for "after the fact referral fees" may be just another temporary headache that will require a period of adjustment. The industry faced similar adjustments with the introduction of the Real Estate Settlement Provisions Act (RESPA) in the 1970s and the advent of buyer's brokerage and the Brokerage Relationships in Real Estate Transactions Act (BRRETA) in the 1990s. However, because "after the fact referral fees" have such a direct impact on licensee income, they also have a direct emotional impact.

Where does the solution lie - where most economic solutions lie - in the marketplace. Most licensees reject the option of simply refusing to pay "after the fact referral fees." (If no contract exists requiring the payment of the fee, the firm attempting to claim a referral fee would probably be hard pressed to sustain an action in court to collect.) Licensees by nature seem to want to achieve a negotiated settlement in which all parties benefit appropriately. They also recognize that a hard line approach of refusing to pay may cause their customers and clients to suffer. (If no fee is paid, an unsuspecting customer or client may lose benefits.)

But at least two other solutions exist in the marketplace. First, licensees can do a better job of qualifying and educating their customers and clients. At first contact with a new prospect, the licensee should ask whether the prospect is a member of an "affinity group" or whether the prospect's firm has a relocation program. The licensee can then decide to work with the prospect or not to do so depending on the actual compensation package.

Second, remember that just as the selling or listing licensee wants to build a satisfied customer base, so do affinity and relocation companies. Thus, they have little interest in frequent disputes about "after the fact referral fees." To avoid such problems, they are trying to do a better job of educating their customers and clients. In addition, they want to work with the selling or listing licensee. Toward that end the selling or listing licensee who has a demand for an unreasonable "after the fact referral fee" should attempt to negotiate the matter with the "affinity group" or "relocation company." If the firm's response is not satisfactory, the Employees Relocation Council, a trade association of "relocation companies," may provide some help. At their web site ( www.realestatecoalition.org ) they have created a page on which a licensee can file a complaint about a fee and have it addressed by the executive officer of the member firm.

To learn more about this issue, visit Internet web sites that address it (for example, www.onerealtorplace.com or www.realestatecoalition.org ).

The information contained in this article is believed to be current and accurate. The GREC staff reviews the contents periodically and updates it when appropriate. If you have questions or comments about this article, you may contact us at grecmail@grec.state.ga.us . Last reviewed August, 2006.


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Hiring a Telemarketing Services to Obtain Prospects

Marketing techniques can sometimes result in unintentional violations of the law. The Commission often has inquiries from licensees who want to use telemarketing services to identify prospects who may be interested in selling, buying, or leasing property. The licensees state that the telemarketing firms do not hold a license in the states out of which they operate because those states' laws do not require licensure for such activity.

However, Georgia requires that both such firms and their individual telephone operators must have a real estate license in order to engage in such prospecting activity. Even though a telemarketing operation makes no representations in behalf of the licensee and only identifies persons who want a licensee to contact them, such activity constitutes procuring prospects.

The license law defines a broker as a person who among other things "assists in procuring prospects for the listing, sale, purchase, exchange, renting, lease, or option for any real estate." Therefore, telemarketing firms and their operators must hold real estate licenses in order to contact members of the public for identifying prospects for a real estate licensee. Similarly, an assistant may not telephone members of the public in behalf of a licensee unless the assistant holds a real estate license.

Before undertaking a telemarketing technique, an affiliated licensee should discuss the proposed activity carefully and fully with his or her broker. The broker in turn may want to explore the legal implications of that activity with legal counsel in order to avoid unintentional violations of the law.

The information contained in this article is believed to be current and accurate. The GREC staff reviews the contents periodically and updates it when appropriate. If you have questions or comments about this article, you may contact us at grecmail@grec.state.ga.us . Last reviewed August, 2006.


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Tenant Referrals

Many owners of multi-family complexes attempt to maximize occupancy by paying referral fees for new tenants to current residents. Such owner originated and paid programs generally do not violate provisions of the license law. However, they do have the potential for license law violations in at least two circumstances.

First, if the owner of the multi-family complex is a real estate licensee, such owner cannot pay a referral fee to an unlicensed tenant. The Official Code of Georgia Annotated Section 43-40-25 (a)(17) prohibits a licensee from paying compensation to an unlicensed person for performing the acts of a licensee. Since procuring prospects (referring prospective tenants) is an act of a broker, a licensee cannot pay compensation to an unlicensed person for such an act.

Second, the owner of a multi-family complex may ask the broker to pay the referral fees for new tenants to current tenants. As noted in the proceeding paragraph, a broker may not pay part of his management fee as a referral fee to unlicensed parties. Thus, the broker must take care to avoid even the appearance that the broker (rather than the owner) is paying such fees. For example, advertisements should expressly state that the owner, not the broker, will pay the referral fee. In addition, the owner, not the broker, should pay such fees.

The information contained in this article is believed to be current and accurate. The GREC staff reviews the contents periodically and updates it when appropriate. If you have questions or comments about this article, you may contact us at grecmail@grec.state.ga.us . Last reviewed August, 2006.


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