Referral’s are a part of any business, as they should be.

One hand washes the other!

Or how about, “you scratch my back, I’ll scratch yours!”

There are, however, rules and regulations in the Real Estate industry that all of us must follow…

Around this time last year, a man I had met through a past client came to my office for a “sit down.”  He actually called me on the phone and said, “We need to have a sit down.”  He was Italian, and not to adhere to the mafia stereotype, but I wondered if we were going to talk about whacking somebody…

We drank coffee in the boardroom at my office and he told me that he has a friend with five or six properties in the downtown core who is looking to divest himself of his holdings, and sail off into the proverbial sunset by returning back to Sicily and leaving his Toronto life behind him.

He asked me if I would be interested in working with this friend of his and assisting him with the sale of his assets.

Of course I would!  That was a silly question, right?

But here was the catch-22: this man asked me if I would give him a percentage of my commission as a “referral of sorts” when I successfully sold some of these properties.

I knew it was too good to be true.

The Real Estate Council of Ontario has rules and regulations concerning referrals, and as a licensed Realtor, I have to follow them very strictly or I risk losing my license.

I told this man that I would have to check with my manager as to the exact process for handling referrals, but he wasn’t interested in this method.

“An envelope full of green is prettier than the Christmas tree in Time Square,” he said.

Okay, now this seemed a little sketchy.  Once an envelope full of cash enters the equation, I start to consider this a suspicious transaction.

Under the Real Estate & Business Broker’s Act (REBBA), RECO’s Code of Ethics, Section 18 specifically states:

A registrant must disclose any direct or indirect financial benefit received from another person arising from services provided to the client, e.g., a finder’s fee or referral fee.

So technically, I could have paid a “referral fee” to the gentleman in the example above, but I would have to disclose this in the Agreement of Purchase & Sale and receive a signed notice of understanding from my seller.

But the man who was bringing me all this business didn’t like this arrangement.  He asked me why I couldn’t just sell these houses after he introduces and recommends me, and then bring him cash.

Why?

Because while there are a ton of shady Realtors in the City of Toronto, I am not, and will never be one of them.

I’m entitled to write off any “referral fees” paid as expenses against my income for tax purposes, but likewise, this man would have to claim the referral fee as income.  Inclusion of one and not the other would raise red flags at Revenue Canada, so no wonder this man didn’t like the arrangement I had to abide by legally.

In another section of REBBA concerning “Mortgage Finder’s Fees & Referral Fees”:

If, at any time a real estate registrant is going to, or likely to, receive compensation for “directing” prospective borrowers to a lender, FULL DISCLOSURE must be made to either one, or both of the parties to the real estate transaction.

Disclosure to clients must be in writing and clearly set out, not only that compensation may, or will be paid, to the real estate registrant, but the amount and any other relevant details.

Personally, I use one mortgage broker in particular because I know him, trust him, and I’ve always been pleased with his service.

But he doesn’t pay me a referral fee when I send him a client, although many brokers out there do.

The issue is: many Realtors don’t disclose to their clients that they are, in fact, receiving monetary compensation when their clients use a mortgage broker recommended by that Realtor.

Buyers or sellers should specifically ask their Realtor, “Are you receiving a referral fee or any monetary compensation from this mortgage broker you’ve recommended?”

If the Realtor answers, “yes,” then that buyer or seller should question when or if the Realtor was going to tell them that!

It’s a slippery slope, because what if that mortgage broker is not putting these buyers or sellers into the right mortgage product?  They might want to get a second opinion, or perhaps use another broker altogether.  The Realtor, with dollar signs in his eyes, may have his judgement (and integrity!) compromised if he were to recommend sticking with that broker and that mortgage product.

You might sight a conflict of interest with respect to any and all referral fees, but I think as long as it’s disclosed and agreed to by the clients in writing, then that supercedes any potential conflict that may arise.

Referral fees are an integral part of our free market economy, and when used responsibly, they can help forge business relationships that are beneficial and lucrative for many years to come.

But as with any benefit in any industry, there is always the potential for abuse.

If a Realtor recommends a home inspector or a lawyer, the same rules apply.

A renovator, interior designer, or even a home-stager all fall under the same guidelines.

If you recommend a cleaning lady, I’m not really sure if this falls into a grey area or if it’s worth bringing up at all…

But the old adage buyer beware is ever-present in these real estate transactions when third-parties are brought into the mix by the Realtors, and a buyer of a house would be better safe than sorry by asking the tough questions that simply need to be asked.

What if a buyer was having a home inspection performed on a house while a conditional deal was pending, and that home inspector was referred to the buyer by the Realtor?  If a referral fee is part of the transaction, it is possible that maybe the home inspection could come out a little more favorable so as to ease the buyer’s worries regarding the condition of the house.

I’m just saying that buyers and sellers alike need to be aware of some of the rules that Realtors MUST abide by, and understand that not everybody likes playing by the rules.

I have dealt with some of the dirtiest, slimiest, shadiest Realtors in the course of the last five years, and I have reported many of them to RECO as is my right and obligation.

Last week, a client of mine found a condo for lease on Craigslist and brought it to my attention.  The crazy part is – the Realtor who put the ad on the website was NOT the listing agent!  I notified the real listing agent, and we both reported this man (working for HomeLife in Markham, no surprise) to RECO for unauthorized advertising, which breaches part of REBBA.

Caveat Emptor, ladies and gentlemen!

Everybody is out there to make a buck.  But while some people tread carefully as to not cross the line, others stomp all over it…