This is always a hot topic and so many people are not aware of  the laws and rules which govern it.

Texas attorneys can represent both sellers and buyers. Given that few attorneys are also brokers or salespersons, they don’t usually represent sellers who need to have a property marketed. The most common situation is an attorney representing a buyer. While the attorney can represent them, it is illegal for a Texas broker to share a commission with an unlicensed person or entity (other than a party to the transaction). Texas attorneys can collect a fee from the client they represent or even the seller if the parties agree (TRELA §1101.651(a) and §1101.652(b)(11) respectively). Listing brokers can reduce their commission so that the seller can pay the attorney directly without violating the Act.

The same rules apply to the referral fees. Brokers cannot pay referral fee (valuable consideration) to unlicensed persons or entities. There is an exception found in TREC Rule 535.20(a) which allows brokers and salespersons to provide gifts of merchandise with a retail value of $50 or less. Such gifts are not considered valuable consideration.

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I found this question in my site logs. Let’s clear up some terms.

Each state is responsible for licensing agents and brokers. Each has its own set of requirements and rules. For example, the Texas Real Estate Commission licenses and regulates salespersons (agents) and brokers within the State of Texas.

REALTORs® are members of the National Association of REALTORs® (NAR). NAR is a membership trade organization rather than a licensing agency.

A number of years ago NAR allowed Designated REALTORs® to establish Limited Function Referral Only (LFRO) Brokerages. LFROs have to be a separate business entity. NAR did not want brokers to commingle their “regular” agents with their LFRO agents. LFROs, like Referral Agents of Texas LLC, are established under NAR rules. Since it is also a licensed broker within the State of Texas, it can sponsor agents. Why is this important? Agents can only receive compensation through their sponsoring broker.

As far as the state is concerned LFRO agents are active agents sponsored by a Texas broker. What limits the agent’s activities is the Independent Contractor Agreement between the agent and the broker. This agreement specifically limits the agent’s actions to generating referrals.

A few states may have different “classes” of licenses with include referral-only agents. When in doubt check with your state regulatory agency for details.

“Are referral fees legal in Texas?” We seem to get this question all the time. There are two kinds of referrals. One comes from unlicensed people and the other from licensees.

Referrals From Unlicensed People

The Texas Administrative Code (TAC) 535.20 limits payment to non-licensed people to $50. Some people will try to skirt the law by purchasing gift cards or paying directly on behalf of the referral source. The rule clearly states, “the term valuable consideration includes but is not limited to money, gifts of merchandise having a retail value greater than $50, rent bonuses and discounts.”

Note that it’s not illegal for the consumer to accept the payment but the payment of consideration exceeding the amounts specified in 535.30 is ground for a licensee to have their license suspended or revoked.

Referrals From Licensees

 The Texas Occupations Code 1101.651 allows brokers to share fees and commissions with salespersons (agents) they sponsor and other brokers. TAC 535.131 clarifies this to include the sharing of fees and commissions with out of state and foreign brokers.

The bottom line is that referral fees paid to non-licensees cannot exceed $50 in cash, goods, services, rebates, etc. Referral fees paid to other brokers are acceptable and subject to the agreement between the brokers.

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Lately, there have been a few online postings that referral fees should be illegal because they add cost to the consumer. I’ve read all the arguments, yet I’m not sure how they arrive at that conclusion.

I could see the argument, if I were to raise my cost to the consumer on transactions where I have agreed to pay a referral fee. While this may happen from time to time, I believe the vast majority of brokers see it as the cost of doing business. I either pay to advertise, farm, or some other means of acquiring new clients or I pay a referral fee to an out of area broker who has a client needing to buy or sell a property in my area.

While I don’t work relocation business, relocation companies collect referral fees from brokers who accept their relocation clients. Why is a broker-to-broker referral any different?

The bottom line is that unless brokers raise prices on transactions involving a referral fee, there is no additional cost to the consumer.

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I found this question in my site logs this morning.

In Texas only active salespersons and brokers can be paid or receive any form of compensation. Compensation is defined as anything of value including commissions and referral fees.

That’s where a Limited Function Referral Only (LFRO) brokerage such as Referral Agents of Texas comes in.

Our salespersons are active agents with the Texas Real Estate Commission. The only difference between our agents and other agents is that our agents cannot practice real estate because of the Independent Contractor Agreement. The only thing they can do is to refer out business. In return, they do not have to pay dues to NAR, TAR or the local association; no MLS fees; and no keycard rental.

See our Frequently Asked Questions for more information on LFROs.

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This is an interesting question. We know that the Texas Real Estate Commission (TREC) has stated that unlicensed assistants can conduct open houses but there are some real limitations. From the TREC Website:

“…care must be taken that the unlicensed person does not “show” the house to prospective purchasers. Commission Rule 535.1(c) makes clear that only licensed agents are allowed to show properties. On the other hand, Commission Rule 535.1(c) also specifically allows a broker to hire an unlicensed person to serve as a “hostess, attendant, or custodian” at homes offered for sale by the broker. The Rules do not define these terms, and such a hostess should be limited to welcoming the visitors. The hostess may register the guests and refer inquiries to a licensee. Clearly, the hostess must not point out features of the home or neighborhood to visitors; however, as is the case with secretaries and receptionists discussed below, the hostess may distribute a flyer or brochure that describes the property.”

Referral agents are licensees so sitting in open houses should not be a problem from a state licensing standpoint. However, that agent would still have to exercise caution because of the agreement with their broker. Our Independent Contractor Agreement is very clear that our agents will not provide brokerage services and may only refer out business to other brokers who do provide brokerage services.

I would suggest that referral agents sitting in open houses conduct themselves as unlicensed assistants and limit their activities to registering guests and passing out information.

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Many of us would like to retire at some point but the real estate industry tends to be very transaction-based and we’re no better than our next paycheck. We spend years growing our sphere of influence and at the end we might find a buyer for it.

Why not continue to earn income from your sphere? In order to do so your license must remain active with the state licensing authority and, for many of us, we will continue to pay dues (National, state, and local), pay for MLS access, etc. This is an expensive business!

Brokerages like ours offer another possibility. Referral Only brokerages are exempt from paying dues, MLS access, and most of the other expenses involved in staying active in real estate. The only cost in Texas is the small fee (about $100) to keep your license active and your 15 hours of MCEs every two years.

We currently sponsor a number of retired agents who are enjoying being able to generate income from the businesses they built over the years.

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We’re pleased to announce that we have completely updated the Referral Agents of Texas Website. The new site runs on the WordPress platform and the Architect Theme from iThemes.