Aside from the licensing issues addressed below, fees paid to individuals for referrals would violate Section 8 of the Federal Real Estate Settlement Practices Act (RESPA) of 1974 if the buyer purchases the property with a Federally regulated mortgage loan.
From HUD's web site:
"Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed."
HUD is very particular about the "thing of value" definition to a degree that may surprise some. An example of a prohibited referral fee from HUD's own FAQs is a situation in which a lender might provide customized note pads to a real estate agent with the agent's name and contact information. Sounds innocuous... but the "gift" is fraught with peril.
If the agent were to use the note pads inside her office only... that would be permitted. However, if the real estate agent were to use the notepads to market her services (ie hand them out to potential clients, mortgage brokers, title companies, etc), then the notepads would violate Section 8 since they are considered to defray a portion of the real estate agent's marketing expense. Now that is some very fine hair splitting in almost anyone's book.
Source: http://www.hud.gov/offices/hsg/sfh/res/resindus.cfm (Item 19)
Violations of Section 8 are prosecuted under criminal law. Penalties can run as high as $10,000 and a year in prison. HUD agressively pursues RESPA violations. At present, HUD is examining relationships in which real estate offices rent desk space to lenders and/or title agents. If the real estate office charges prevailing market rent rates, all is well. If the real estate office charges a higher than prevailing rent, then HUD will pounce. Several firms have been charged already.
As a rule of thumb, it is best not to offer anything of value - cash, gift, or promise of mututal service - to avoid potential conflicts with Section 8. The only relationship of which I am aware that would pass HUD's prohibition is a professional relationship for exchange of leads WITHOUT any promise of "tit-for-tat" lead exchange, measurement of the value of the relationship tied to unitys or volume, or similar demands bewtweeen the refferrors.
This is a good question that comes up frequently in the lending world; I suspect that it is an important issue to Realtors as well.
Deep River's response is worth saving and sharing with your office and fellow/sister Realtors. By all means, discard Tom Mcgiveron's advise. I suspect he is not a Realtor or, if he is, has not read our code of ethics.
Please stay away from people who act in this manner. What else might they be involved in? If you are party to an illegal transaction, you could be sued.
Tom, if we don't police ourselves, someone else will. Which would you rather have? I think your reply was a bit harsh and not necessary. She was only asking a question.
Jolie, it's simply the law. Nothing really to discuss in my view. But I appreciate the question.
I do not know New York Real Estate law. (see link below)
In most states it is not legal to pay a referral fee to someone not involved with the transaction. They need to be a DRE licensee. That being said, New York may be different.
OTOH, if this is there primary method of lead generation...ouch.
Now if you want to hear the REAL truth when it comes to some brokers, buckle up. Everyone knows that in our business no one does anything for free, very few people care about collecting Karma points and doing something good for the sake of the good. Honestly, I don't know too many Supers or Doormen in a building that you don't live in that would simply send clients your way. Why would they? It's between you and 10 other brokers who are trying to penetrate a building, rental or sale. Now if one of these agants slips in an envelop to the door man or the super with something in it, and then you have you who is polite and throws a smile, who do you think that door man will send business to? The broker who smiled at them, or the broker who just made their situation a little easier, at-least for that day or that week?
So yes, paying that referral fee is technically illegal, but is it done every day? Absolutely!!! Unfortunately this is how the game is played, don't get me wrong not every agent does this, not every agent needs to do this, but some do and they get enough extra business from this to justify their actions.
I'm actually surprised that out of all the replies you received here, not a single broker told you what can go on behind the velvet rope.
Best of luck to you JOlie.
I always stick to a simple format for my life and business. It's a four word statement - "Mind Your Own Business."
(I asked it under agent 2 agent as well but had no answers) Thanks for your answers so far!