The Law On Paying Real Estate Agents Referral Fees For Cash Flow Notes

by John J. Merchant, J.D.

Here is the basic law in all states regarding paying real estate agents referral fees for leads on cash flow notes:

The agent himself is never allowed to accept any money from anyone except his broker. Every dollar the agent takes in must be payable to the broker and go through the broker’s account,
from which the broker pays the agent as agreed upon between themselves.

You, as the cash flow note investor or broker, property buyer or seller, are never really dealing with the agent, although some agents would try to snow the outsider that he or she is the decision
maker.

Now, on referral fees: Agency law deals with the subject of an agent, including a real estate broker and his agents, and generally the real estate broker or agent can ONLY get paid as per his or her signed sales agreement with his or her client, and then he or she has a legal duty to inform the client of every dollar taken in.

Think of it in these terms: You hire an agent (and his broker and company) to sell a house for you. You agree in writing, in the listing agreement, to pay them X percent of the selling price if he/they find you a buyer.

If you learn that they’ve taken money from somebody else, to do something else with your property, might you be a little concerned? Absolutely! First, the agent and his company are supposed to be working for YOU, nobody else! And what exactly might they have been doing for somebody else on YOUR property? Maybe like agreeing NOT to show it until somebody else’s property got sold? Maybe like NOT showing it to a person of a certain racial makeup?

If this happened, you’d have a legitimate complaint about the broker and the agent, and they’d probably both lose their real estate licenses.

Ask the agent some questions about who he is representing, how they getting paid, etc. If the real estate agent is not representing any of the parties, he may have a legal right to take your money if you find a buyer for their note. That could be a very clean deal, and you could pay them something without a problem.

For example, let’s take the case of a sale that the agent and his company handled last year in which the seller took back a note. The agent now remembers the transaction and thinks perhaps the note holder would be interested in selling his note. The agent refers the matter to you. As long as they do not still have some agency duty to their former client, it would probably be all right for her and her broker to accept a referral fee from you.

Remember: Never pay an agent directly on ANY kind of a real estate deal. He can’t legally take ANY money outside that does not first go to and through the broker. If you knowingly do so, you’d be a conspirator in an unlawful scheme and you might face criminal or civil penalties for your part in the deal.

John J. Merchant, J.D., is a retired attorney and note investor in Tacoma, Washington. He stands ready to assist any note seller structure and create his/her own sales transaction and/or an owner’s carryback note so it will be LEGALLY marketable and saleable and not carry with it those explosive qualities that stand ready to kill and maim deals, note buyers or brokers.
phone: 253-503-3886 e-mail: jmer@harbornet.com