OHIO ASSOCIATION OF REALTORS
INDUCEMENTS, REFERRAL FEES AND GIFTS WHITE PAPER
Published by OAR’s Legal Services Group
Introduction
In a competitive business such as real estate, innovative marketing ideas and promotions are often utilized to generate business. These can include offering incentives to buyers and sellers, paying referral fees for leads, or giving gifts to build good will and encourage repeat business. Such ideas, while usually creative, are regulated strictly by Ohio licensing law. In addition, the NAR Code of Ethics and federal regulations may also be applicable. The purpose of this White Paper is to address the legality of such inducements, referral fees and gifts.
Inducements
To attract business, REALTORS oftentimes want to offer incentives to buyers or sellers to utilize their services. Such incentives may range from gift certificates to cash rebates of the REALTOR’s commission. Although many REALTORS believe that such inducements are prohibited under Ohio license law and the NAR Code of Ethics, they are not. However, there are certain requirements that must be met.
NAR Code of Ethics
Standard of Practice 12-3 clearly states that the “offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the REALTOR making the offer.” This Standard of Practice, however, cautions REALTORS that when advertising or marketing such incentives to the public, care should be exercised to assure that there is a clear understanding of the terms and conditions of the offer. Thus, under the REALTOR Code of Ethics, inducements can be offered and marketed to the public.
License Law Requirements
Ohio Revised Code Section 4735.18 (A)(14) prohibits a licensee from “offering anything of value other than the consideration recited in the sales contract as an inducement to enter into a contract for the purchase or sale of real estate.”
This section has been interpreted by Ohio courts as only prohibiting undisclosed inducements to purchase or sell real estate. If an inducement is disclosed in the purchase agreement as part of the consideration, a licensee does not violate ORC § 4735.18. Thus, REALTORS can offer incentives such as a gift certificate, a free home warranty, discount coupons, etc. to a buyer or seller as long as it is disclosed in the purchase agreement.
It should be noted that Section 4735.18(A)(14) only applies to inducements that are offered as an incentive to someone to enter into a purchase agreement. It does not require disclosure of items that are offered to merely entice a seller to enter into a listing agreement or get buyers to attend an open house. Thus, if the seller or buyer will receive the offered item (i.e. the gift certificate) for merely listing their property or attending the open house and no purchase or sale of property is required, disclosure in the purchase agreement is not required.
Like the NAR Code of Ethics, the license law also requires that all advertisements be accurate and not misleading. When marketing inducements, REALTORS must assure that the terms of any offer are clear and that any limitations or restrictions are disclosed. For example, it should be disclosed if there is a time limit or price restriction on the offer. It is also recommended that the dollar value of the item being offered be disclosed.
To summarize, when analyzing whether something that is being offered constitutes an inducement that must be disclosed, REALTORS should ask themselves the following questions:
- Does the item being offered have value?
- Is it being offered to a party to a purchase agreement?
- Will the person only receive the item of value if he enters into a purchase agreement?
If the answer to all of these questions is yes, then the item or money being offered to the buyer or seller must be disclosed in the purchase agreement.
FAQs on Inducements
Q. 1: Can I offer buyers a coupon for a free carpet cleaning or some other type of incentive if they purchase a home through my brokerage? Does the same law apply to inducements offered to sellers?
A. 1: Inducements such as these can be offered to either the buyer or seller if the item being given is recited in the purchase contract. Be careful when advertising such inducements to make sure that any restrictions or qualifications on participation are clearly stated.
Q. 2: Can I offer an incentive to sellers to list with my brokerage if I disclose it in the listing agreement and/or the purchase contract?
A. 2: Certainly anything that is part of the terms of the listing should be included in the listing agreement. However, the duty to disclose the inducement in the purchase agreement is only triggered if the party to whom it is offered has to enter into a purchase agreement to receive the item of value. It does not apply to inducements to list a property.
Thus, if the seller will receive the incentive for merely listing their property with your brokerage, then it does not need to be included in the purchase contract. On the other hand, if the seller will only receive the incentive if he actually enters into purchase agreement, then it must be disclosed in the purchase contract.
Q. 3: Are inducements that are given to attend an open house regulated under Ohio license laws?
A. 3: No. Although these “giveaways” may be inducements, they are not prohibited and do not have to be disclosed in the purchase contract. Again, this is because the license law only covers inducements that are given to a buyer or seller to induce them to enter into a purchase contract. It does not cover inducements that are given to entice someone to attend an open house. Thus, items that are given for this purpose are not illegal and are not required to be recited in the purchase contract.
Q. 4: I want to have a promotion whereby all of my company’s listings are open for a special evening tour. Buyers who attend will have their name placed in a drawing for a “free” trip to Hilton Head. Is this legal?
A. 4: As stated above, inducements to attend open houses are not regulated by Ohio license law. However, if in order to qualify for the free trip the purchase of a home is required, then the inducement statute would be triggered and disclosure would be required. Further, under the NAR Code of Ethics, REALTORS need to be careful when using the term “free”. Standard of Practice 12-1 requires that all terms regarding such a promotion must be clearly disclosed.
Q. 5: Can I offer to rebate part of my commission to a buyer/seller for using my services? Would that be splitting a commission with an unlicensed person?
A. 5: Offering to pay part of your commission to a buyer or seller in a transaction is considered an inducement that must be disclosed in the purchase contract. It would not be considered the illegal payment of a commission to an unlicensed person because the buyer or seller is not being paid for performing activity that requires a real estate license.
Q. 6: Is it an inducement if I reduce my commission to get the seller to accept an offer?
A. 6: Yes. When you agree to reduce your commission you are giving the seller something of value. If this is done to get the seller to enter into a contract, then it must be disclosed in the contract to comply with Ohio’s license law.
Q. 7: Do I have to indicate in the purchase agreement the amount by which I am reducing my commission?
A. 7: According to the Ohio Division of Real Estate and Professional Licensing, it is not necessary to specify the amount of the reduction in the purchase agreement, but you must disclose the fact that the commission has been reduced. However, to avoid disputes, you should have some written agreement with the seller specifying the amount of the reduction.
Q. 8: What if I agree to lower my commission at the time I am taking the listing?
A. 8: The disclosure of a commission reduction only has to be made if it is done to induce the seller to accept an offer to purchase. If the reduction is negotiated at the time of listing, or at any other time outside of the negotiations on a purchase contract, no disclosure is necessary because the reduction was not made to induce the seller to accept an offer.
Q. 9: As a result of an inspection that was done on a property that is “in contract”, the buyer has asked for certain concessions by the seller. The buyer and seller are $500 apart. The other REALTOR and I have agreed to split this cost to get the deal to close. Does this have to be disclosed as an inducement?
A. 9: Ohio’s inducement law technically only covers things of value that are offered to induce the parties to enter into a contract. In this case the parties have already entered into a contract. The parties are instead being offered this payment by the REALTORS to get them to perform the terms of the contract and close. Thus, technically Ohio’s inducement statute would not apply. However, it is still recommended that this agreement be reduced to writing in an addendum to the contract and be submitted to the lender and the title company. This will assure that full disclosure of the terms of the agreement is made.
Q. 10: The seller of a property I have listed wants to offer a cash bonus to a buyer’s agent as an incentive. Does that have to be disclosed in the purchase agreement as an inducement?
A. 10: No. Ohio’s inducement statute only applies to inducements that a licensee offers a party to a purchase contract. Because this bonus is being offered to the buyer’s agent, Ohio’s inducement law does not apply and disclosure in the contract is not required. However, a buyer’s agent who is receiving a bonus from a seller should disclose this fact to the buyer. Including it in the purchase agreement, while not required by the license law, would be one way of documenting such disclosure.
Referral Fees
While referrals are an excellent source of business, REALTORS need to be cognizant of the law in this area. Although referral fees can be paid to other brokers, Ohio license law prohibits payments to unlicensed persons. On the federal level, the Real Estate Settlement Procedures Act (RESPA) places restrictions on such fees between settlement service providers.
Ohio License Law
Ohio Revised Code Section 4735.01 sets forth those acts which require a real estate license if they are done for another person and for a fee, commission or any valuable consideration. Among these is anyone who “directs or assists in the procuring of prospects or the negotiation of any transaction … which does or is calculated to result in the sale, exchange, leasing or renting of any real estate.”
Thus under this section, in order to receive any type of compensation or anything of value for referring a prospect for a real estate transaction, a person must hold either an Ohio real estate sales or broker’s license. This would include the referral of a buyer, seller, landlord, or tenant. Anyone who engages in such activity without being licensed is guilty of a first degree misdemeanor and can be subject to fines of up to $1000 for every day they violate this law.
In addition to the civil and criminal penalties that can be imposed upon a person who illegally receives a referral fee, a licensed broker or agent who pays such a fee to an unlicensed person can be subject to disciplinary sanctions as well. Under Ohio Revised Code Section 4735.18(A)(11) it is a violation for a licensee to pay commissions or fees, or to divide commissions with anyone who is not licensed in Ohio. Such conduct can result in suspension or revocation of one’s license, fines, etc.
An exception to this prohibition exists for persons or entities that are licensed in another state. Under Ohio Administrative Code Section 1301:5-5-06, an Ohio broker can pay a referral fee to a broker licensed in another state for referring prospects to the Ohio broker. Under this section “refer” or “referral” is defined as the introduction or directing of a person by one broker to another broker for real estate brokerage services. The out-of-state broker who refers business to an Ohio licensee cannot perform any acts that require a license in Ohio without holding an Ohio license, i.e. show property, write an offer, etc.
The only exception to this rule is for commercial transactions. Commercial property is defined as anything other than real estate containing 1-4 residential units. Under Ohio Revised Code Section 4735.022, out-of-state brokers/agents can perform acts that would usually require an Ohio license on commercial property as long as they work with an Ohio broker and certain requirements are met. More information on these requirements can be found in the Commercial/Industrial Section of OAR’s website, www.ohiorealtors.org.
To summarize, there are two important rules regarding finder/referral fees:
An unlicensed person cannot legally accept compensation for the referral of sales or leasing prospects and a licensee may not pay an unlicensed person for such conduct.
A referral fee can only be paid to a broker licensed in Ohio or another state.
RESPA
The Real Estate Settlement Procedures Act is a federal law that prohibits the payment and receipt of a fee, kickback, or anything of value in return for the mere referral of business related to settlement services in a federally related transaction. Under RESPA a settlement service is defined as any service provided in connection with a real estate settlement including, but not limited to, the following:
- Origination of a federally related mortgage loan
- Services rendered by a mortgage lender
- Services related to origination, processing, or funding of a federally related mortgage loan
- Title services (including the searches, exams, certificates, and insurance)
- Services rendered by an attorney
- Document preparation, including notarization, delivery, and recordation
- Rendering credit reports and appraisals
- Rendering inspections (including pest and fungus)
- Property surveys
- Settlement or closing
- Services involving hazard, flood, or other casualty insurance or homeowners’ warranties
- Services involving mortgage life, disability, or similar insurance designed to pay a mortgage upon disability or death of a mortgagor if required by the lender as a condition of the loan
- Services involving real property taxes or other assessments or charges on real property
- Real estate broker or agent services
- “Provision of any other services for which a settlement service provider requires a borrower or seller to pay”
Thus, under RESPA REALTORS cannot pay a lender, title company, appraiser, etc. anything of value for referring them business. Likewise, a REALTOR cannot receive a referral fee from such entities to which they refer business. This prohibition would cover anything of value in exchange for a referral, including tickets to sporting events, gift certificates, use of vacation homes, etc.
RESPA is enforced by HUD. Violations can result in criminal penalties that can include imprisonment of up to one year and fines of up to $10,000 for each violation. Each thing of value that is given or accepted is considered a separate violation. In addition to these criminal sanctions, there are also civil penalties that can be imposed.
FAQs on Referrals
Q. 1: Can an agent send out a mailer to past clients offering to give them a $100 gift certificate to a local restaurant as a thank you for referring a seller to the agent? Can a broker who manages a rental property offer a $100 rent credit to any tenant who refers a friend who rents an apartment?
A. 1: The answer to both questions is, no. Under Ohio law only a licensee can be compensated for referring prospects to another licensee. An unlicensed person cannot be compensated in anyway for referring sales or leasing prospects to a licensee. This prohibition applies to all non-licensees, including past clients, current tenants, builders, attorneys, etc.
Q. 2: I have listed property for a builder. He wants to offer a finder’s fee to anyone who sends him a buyer. He would like me to advertise this promotion. Is it legal and can I advertise this fee?
A. 2: In order for someone to legally receive such a finder’s fee from the builder, that person would need to be licensed as an Ohio real estate sales person or broker. Thus, if this finder’s fee is being offered to unlicensed persons, you should not participate in marketing it to the public.
Q. 3: I have a commercial property listed for sale. I have been contacted by a “consultant” who is working with an out-of-state buyer who is interested in purchasing the property. He is seeking a “consulting” fee from me for his services. He is not licensed in Ohio or any other state. Can I pay him?
A. 3: The A. depends on what services he is providing as a consultant. If he is seeking compensation for acts that require a license you cannot pay him since he does not hold any real estate license. Such acts would include procuring the buyer, showing the property, writing and negotiating the offer, etc. On the other hand, if he is performing acts that do not require a license such as architectural or design services, you could legally pay for these services.
Q. 4: Can my brokerage pay a referral fee to a broker licensed in another state? Can I receive a referral fee from an out-of-state broker?
A. 4: Yes. Under Ohio license law you can pay a referral fee to a broker licensed in another state and receive a fee from them.
Q. 5: A broker in another state is offering to send me a referral. The amount of compensation he is seeking is equal to what I normally offer as a “co-op” fee. Is there any limit to the amount of referral fee I can pay?
A. 5: No. The amount of the referral fee is negotiable between you and the other broker.
Q. 6: I got an email from an out-of-state company offering to sell me leads. Can I pay for such leads?
A. 6: Fees for leads or referrals can only be paid to persons who hold either an Ohio real estate license or a real estate license in another state. Therefore, you must verify that this company holds a broker’s license in either Ohio or another state before you compensate that company for a “lead.”
Q. 7: I deal with relocation companies from around the country and send them a portion of my commission. Do they have to be licensed in order for me to pay them?
A. 7: Yes. Under Ohio license law it is a violation to pay or split a commission with an unlicensed person or entity. Therefore, before you agree to split your commission or pay a referral fee to a relocation company, you need to verify that it is licensed either in Ohio or in another state.
Q. 8: My agent was offered a referral fee from an out of state broker. Can he collect that in his own name or does it have to be made payable to the broker?
A. 8: Under Ohio license law, all fees paid in conjunction with a real estate transaction must be collected in the name of the broker. Thus, the compensation paid for the referral must be handled the same as commissions, broker to broker. A referral fee must be paid to the broker, not directly to the agent who made the referral.
Q. 9: I placed my sales license on an inactive status. If I refer one of my relatives to my former brokerage can I receive a referral fee?
A. 9: No. Only a licensee whose license is active can be paid a referral fee for referring prospects to another licensee. An individual with an inactive license (the license is in the possession of the Ohio Division of Real Estate and Professional Licensing) is viewed the same as an unlicensed person and cannot be compensated for a referral. If you want to be compensated for referrals, you must keep your license active.
Q. 10: I am thinking of retiring and closing my brokerage business. I made a referral several months ago to another broker. If the transaction closes after I have returned my license to the Division, can I still collect the referral fee?
A. 10: As long as you had an active license at the time you made the referral, you can still be paid. Therefore, because you were actively licensed when you made the referral, you can be paid even though the transaction closed after you retired from real estate.
Q. 11: Can a lender pay a fee to a real estate broker for referring buyers to the lender?
A. 11: No. The referral fee is prohibited under section 8 of RESPA.
Q. 12: I have season tickets to Ohio State football games. Can I take a mortgage broker who refers me a lot of business to a game as away of thanking him?
A. 12: Because there is a value to these football tickets, this could be perceived by HUD as a RESPA violation if the ticket is linked to a referral of business. Therefore such a practice is not recommended.
Q. 13: Is it a RESPA violation for a real estate broker to rent office or desk space to a lender?
A. 13: No. However, the rent the broker charges the lender must be the general market rate for the office space leased. Any amount charged in excess of the market rate could be viewed as a means to disguise referral payments. Rent cannot be based on the number of referrals or value of business generated from the location.
Q. 14: A mortgage company that I send a lot of buyers to approached me about doing joint advertising. The mortgage broker indicated that he would pay for the ad. Is that permissible under RESPA?
A. 14: While joint advertising is not prohibited, payment of the entire cost of the ad by the mortgage broker could be construed as hidden compensation for referrals you send them. Therefore, you should pay your proportional share of this marketing expense.
Gifts
Gifts are often given by REALTORS to thank someone for utilizing their services or sending them business. Depending on the circumstances, such tokens of appreciation may or may not be legal under Ohio license law.
“Closing gifts” are commonly given by REALTORS to a buyer or seller after the conclusion of a transaction. Such gifts are permissible under Ohio license law.
A gift is distinguishable from an inducement given to a buyer or seller to enter into a purchase contract. As discussed previously, this type of inducement must be recited in the purchase contract. A “closing gift” is not required to be disclosed in the purchase contract because the client would be unaware of the “closing gift” at the time the contract is entered into and therefore, the gift is not a part of the consideration for the purchase contract.
Gifts for referrals cannot be given to a past client or customer for referring a buyer or seller to a REALTOR. As discussed in the preceding section, that is because under Ohio license law a real estate license is required of anyone who receives anything of value for referring a prospect for the purchase, sale, exchange or leasing of real estate.
Finally, “thank you” gifts to vendors who refer business to REALTORS is prohibited by RESPA if the vendor is considered a settlement service provider. This is discussed previously in the section on RESPA. Examples of settlement providers would include mortgage brokers, title companies, appraisers, etc.
FAQs on Gifts
Q. 1: I usually give my buyers a $50 gift certificate to a local restaurant after the closing to thank them for doing business with me. Is that legal?
A. 1: Yes.
Q. 2: Is there a dollar limit on the value of the gift I give my seller or buyer?
A. 2: No.
Q. 3: At Christmas, I send a poinsettia to all of my past clients who referred me business during the year. Is that a violation of the license law?
A. 3: Giving something of value to an unlicensed person for referring a buyer or seller to you could be construed as paying a commission to an unlicensed person. To avoid a potential license law violation, it is advisable that you send the poinsettia to all of your clients who bought or sold a home with you during that year regardless of whether they referred you business.
Conclusion
While inducements, referral fees and gifts can be an effective method of generating business, it is crucial for REALTORS to understand the legal limitations and restrictions on such promotions. In most instances, inducements offered to a party to a contract are allowable as long as disclosure is made in the purchase agreement. Likewise, gifts can be given to the parties after a closing to thank parties for their business. The payment of fees or anything of value for referring business to you is also permissible if paid to a licensed person. Other referral fees are generally prohibited. Being cognizant of the laws in this area is essential for REALTORS to assure compliance and avoid disciplinary action.