Yes, paying a real estate referral fee can be legal in Texas, but who receives the fee is critical. Texas generally permits referral compensation between properly licensed real estate professionals, while paying cash or other valuable consideration to an unlicensed person for referring a prospective buyer or tenant is generally prohibited. Texas Real Estate Commission (TREC) rules also regulate how sales agents receive and pay compensation.
What Is a Real Estate Referral Fee?
A real estate referral fee is compensation paid to someone for sending a potential client, buyer, seller, landlord, or tenant to a real estate professional. For example, one licensed real estate agent may refer a prospective homebuyer to another agent and receive a portion of the resulting commission.
TREC describes a referral as part of a license holder’s commission paid to another person for sending a client to the license holder. The person receiving the referral fee generally must have an active real estate license when the referral is made.
Can a Licensed Agent Receive a Referral Fee?
Generally, yes. Licensed Texas real estate professionals can participate in referral arrangements, provided the arrangement complies with the Texas Real Estate License Act and TREC rules.
A sales agent, however, generally cannot independently receive compensation from a transaction. TREC Rule 535.3 provides that a sales agent may not receive a commission or other valuable consideration except with the written consent of the sponsoring broker or the broker who sponsored the agent when the compensation was earned. A sales agent also generally cannot pay compensation to another person without the sponsoring broker’s written consent.
Can an Unlicensed Person Receive a Cash Referral Fee?
Generally, no. TREC specifically states that a license holder may not offer or pay cash to an unlicensed person for referring a potential buyer or lessee. The referral itself can constitute an activity requiring a real estate license when valuable consideration is expected.
The unlicensed person receiving the cash may therefore be considered to have engaged in unlicensed real estate brokerage. The licensed professional who offers or pays the prohibited referral compensation may also face disciplinary action.
Is a Small Gift Allowed?
Texas rules provide a limited exception for certain gifts. Under TREC Rule 535.20, merchandise with a retail value of $50 or less is not considered valuable consideration for purposes of the rule.
TREC explains that a $50 gift card redeemable only for merchandise, such as one for a restaurant or department store, may be permissible. A bank-issued card that can be converted to cash is different and is not permitted as a referral reward. Cash, rent credits, and similar financial benefits are also generally prohibited for referrals made by unlicensed persons.
Can a Broker Pay Another Broker?
Yes. Referral arrangements between active licensed brokers and agents can be lawful. TREC’s rules specifically recognize cooperative brokerage or referral arrangements between active licensed real estate professionals.
However, the professionals should ensure that the referral agreement is properly documented and that compensation is paid through the appropriate brokerage structure.
What About Referral Fees Paid to Foreign Brokers?
Texas provides an exception involving certain foreign brokers. TREC Rule 535.131 permits a Texas license holder to compensate an unlicensed person from a foreign country or state that does not require a license for the relevant brokerage activity, provided that the person otherwise complies with the law of that foreign country or state and practices there as a real estate broker.
Because this exception depends on the foreign jurisdiction’s licensing laws and the person’s activities, it should not be assumed to apply to every referral involving someone outside Texas.
What About Referral Fees From Service Providers?
Referral compensation involving mortgage companies, title companies, inspectors, and other settlement-service providers creates additional concerns. TREC rules restrict certain fees and payments involving service providers, and federal law may also apply.
TREC specifically warns that accepting referral fees or kickbacks from settlement-service providers can violate the federal Real Estate Settlement Procedures Act (RESPA).
Therefore, a real estate professional should not assume that a referral payment is lawful simply because both parties agree to it.
What About Referral Businesses?
Texas also recognizes a Limited Function Referral Office (LFRO), a specialized real estate brokerage business focused on generating referrals. TREC states that an LFRO must have a business-entity brokerage license, and an active sales agent sponsored by that licensed entity may make referrals on behalf of the brokerage. Referral fees must be paid to the sponsoring broker.
What Are the Consequences of an Improper Referral Fee?
Improper referral payments can create licensing and disciplinary problems. An unlicensed person may face consequences for performing activities requiring a real estate license, while a licensed professional may face TREC discipline for paying or receiving prohibited compensation.
Conclusion
Paying a real estate referral fee is legal in Texas in many circumstances, particularly when compensation is exchanged between properly licensed real estate professionals through compliant brokerage arrangements. However, paying cash or other valuable consideration to an unlicensed person for referring a prospective buyer or tenant is generally prohibited.
Limited exceptions exist, including certain merchandise gifts worth $50 or less and qualifying referrals involving foreign brokers. Referral arrangements involving settlement-service providers can also trigger federal restrictions.
Anyone considering a referral-fee arrangement should verify the licensing status of the recipient, document the agreement properly, and review applicable TREC and federal requirements before making or accepting payment.
