The following questions about referral fees were recently asked of the Legal Hotline:
Does an individual receiving a referral fee have to be a licensed broker, or can the person just have a sales license?
Wis. Stat. § 452.19 limits the payment of referral fees, finders fees and commission splits to Wisconsin real estate licensees and persons regularly and lawfully engaged in real estate brokerage in another state. The referral fee may be paid to a person with either a broker or salesperson license. Before paying the referral fee, it is prudent to verify that the person holds a license and thus is eligible to receive the referral fee. Wisconsin real estate licenses may be confirmed using the Department of Regulation and Licensing (DRL) Licensee Lookup at webdrl.state.wi.us/replmain/cred_holder_query.
It is not necessary that a licensee be currently employed by a broker to receive a referral fee. Pursuant to Wis. Stat. § 452.14(3)(f), any referral fee received by an employed salesperson (whether licensed as a broker or a salesperson) in connection with a real estate transaction may be received only through the employing broker. A non-employed or inactive salesperson, however, may make a referral and directly receive a fee.
A licensee has received a referral request from an agent in Illinois. He is requesting a referral fee on a listing in Wisconsin. Can a Wisconsin licensee pay an Illinois agent a referral fee?
Yes, if the person is licensed in Illinois and regularly and lawfully engages in real estate practice in that state. Wis. Stat. § 452.19 allows Wisconsin licensees to pay a fee or a commission to persons "lawfully engaged in the real estate brokerage business in another state, a territory or possession of the United States, or a foreign country."
An agent is considering mailing to past clients and customers an offer of dinner for two at a local restaurant in exchange for referrals. Is this practice allowed?
No, it is illegal to pay referral fees, or to give items of value in exchange for referrals, to non-licensees. Wis. Stat. § 452.19 limits the payment of referral fees, finders fees and commission splits to other licensees.
An agent is currently selling commercial real estate. The agent is considering going "inactive" but would like to keep his license and receive referral fees for any business he may direct to a broker. Does the agent need to have his license under a broker? Does the agent need to pay his annual license fee? How does the agent keep his license active?
The agent may receive referral fees if he keeps his license active with the DRL. To do this, the agent must regularly complete continuing education and pay the biennial license fees to the DRL. The agent may not provide brokerage services if he is not affiliated with a broker, but he may receive referral fees.
Is it permissible to pay a referral fee to a non-profit organization for a closed referral? An agent says he is soliciting non-profit organizations for their referrals, promising to pay a 25 percent referral fee to the charity as a donation. Is this legal?
No, it is illegal for the agent to pay a referral fee to the non-profit organization unless it is being paid to a licensee. Referral fees may only be paid to real estate licensees per Wis. Stat. § 452.19. If, however, the agent was offering an incentive to a member of the organization who will be a buyer or seller, it could be structured as a legal party incentive. Incentives may be offered to sellers and/or buyers to induce them to sell or purchase real estate. Seller or buyer incentives can be offered in any amount as cash or as an item of personal property such as a home warranty plan, a savings bond, a gift certificate, an appliance or a donation to the charity of their choice. Such party incentives must be clearly documented in advance - prior to closing. The parties must have a clear and thorough understanding of the terms and conditions of the incentives. This advance documentation of the party incentive is necessary to establish that the incentive is not a fee-splitting arrangement with a non-licensee, which would be illegal under Wisconsin law.
An agent would like to send out an advertising flyer, which would offer a spot in a drawing for a $150 gift certificate for every name given to him that leads to a successful closing. Is this legal?
Two issues are raised in the suggested scenario: illegal payment of referral fees to non-licensees and possible illegal lottery issues.
First, the agent cannot pay referral fees to non-licensees. Although this is not the outright payment of a cash fee, it appears that each person is receiving something of value in exchange for giving the name of a prospect. The § 452.19 prohibition against paying fees to non-licensees would seem to apply here.
In addition, the drawing may be an illegal lottery under Wis. Stat. §§ 945.04(5) & 945.02. A contest is generally defined as a lottery if one must give consideration to enter, and the award is determined by chance. Consideration is anything that brings a financial or commercial advantage to the promoter, with some exceptions (send in a coupon, visit the store, etc.).
For example, if a contest were held by a broker putting the name of every licensee who showed one of the broker's listings in a drawing for a vacation trip at the end of the year, it would arguably be an illegal lottery. The agents' showing of the broker's listings would be consideration to the broker, and the drawing would be random and by chance. Similarly, the names of prospects would be of value to the agent and thus would constitute consideration.
Can a referral fee be paid to an agent who is not a REALTOR®?
Yes, it is not necessary that an agent be a local REALTOR® association or WRA member to receive a referral fee.
A broker has spoken to a FSBO seller who has just passed the real estate test, but has not yet applied for her license. If the seller lists the property, she would like a referral fee from this new broker. Can she receive a referral fee?
No, because a referral fee may be paid only to a licensee. She cannot list the property or enter into a referral fee agreement until she actually has her license. The broker could offer to pay the seller a party incentive when she actually gets her license and lists the property.
An agent ran across an article by a real estate speaker about a VIP club that offers points in exchange for current addresses and phone numbers or referrals. If the referred person later works in a transaction with the agent running the club, he would take 10 percent off the commission for each earned point. Is this legal?
Not all programs found in national magazines will be legal in Wisconsin. Wis. Stat. § 452.19 limits the payment of referral fees, finder fees and commission splits to Wisconsin licensees or practicing licensees in other states or countries. This program would arguably violate § 452.19 because the non-licensee is receiving benefits in exchange for the names of prospective buyers or sellers.
Is there a form for referral fee agreements?
The negotiation of referral fees should be on a transaction-by-transaction basis and should be reduced to writing to assure enforceability. See Legal Update 02.01 regarding referral fees agreements at www.wra.org/LU0201, and the checklist for referral fee agreements at www.wra.org/LU0212.
Editor's note: The DRL became the DSPS in 2011. Information above may not be current.