New WRA Form Promotes Transparency in Referral Compensation Arrangements

The WRA has developed a new optional form to help real estate firms and agents disclose referral compensation arrangements to consumers. The WRA-DRC Disclosure of Referral Compensation provides a simple, standardized way to inform consumers when compensation may be paid in connection with a referral, without requiring disclosure of the amount.

Referrals are a common part of the real estate industry. A licensee may refer a buyer or seller to another real estate firm because the consumer is relocating, purchasing property in another market or seeking services from a firm with particular expertise. In other situations, consumers may be connected with real estate firms through relocation companies, referral networks, online platforms or other referral sources.

Some of these arrangements involve compensation. A referring firm may receive a referral fee when a consumer works with another firm, or a receiving firm may agree to pay compensation to the referral source. In some arrangements, payment is contingent upon the consumer completing a real estate transaction.

Although these arrangements may be familiar to real estate professionals, consumers may not realize that compensation is associated with their referral.

Why disclose referral compensation?

The purpose of the new WRA form is to promote transparency by helping consumers understand when a financial arrangement may exist in connection with a referral.

Consider a seller who asks a real estate agent for a recommendation for an agent in another community. The referring firm may have an agreement to receive compensation if the seller works with the recommended firm and completes a transaction. The recommendation may be entirely appropriate, but the consumer may not realize that the referring firm could receive compensation.

Similarly, a buyer who connects with a real estate agent through an online referral platform may not know that the agent or firm has agreed to pay the platform a portion of the compensation earned from the transaction.

In both situations, disclosure gives the consumer information about a financial relationship that might otherwise remain unknown.

Disclosure does not mean that a referral arrangement is improper. Rather, it recognizes that consumers benefit from understanding when compensation may be associated with a recommendation or referral.

Written disclosure can also benefit firms and agents by documenting that the consumer was informed of the potential compensation arrangement. This can help reduce misunderstandings and provide a consistent approach to discussing referral compensation with consumers.

How does the new form work?

At the direction of the WRA board of directors, the WRA's forms committee developed the WRA-DRC Disclosure of Referral Compensation over the course of several meetings. The committee's goal was to create a single, straightforward form that could accommodate different types of referral arrangements.

The form includes two checkboxes identifying whether:

• The firm and agent may receive compensation in connection with referring the consumer to another real estate firm or agent.

• The firm or agent may pay compensation in connection with receiving a referral.

The form also provides space to identify the consumer, referral source, receiving firm and date of referral, along with an area for additional information.

The disclosure is informational only. It does not require the consumer to consent to or approve the referral arrangement, and it does not obligate the consumer to work with a particular real estate firm or agent.

The form includes a consumer acknowledgment of receipt, allowing the firm or agent to document that the disclosure was presented.

Does the form require disclosure of the referral fee amount?

No. The WRA-DRC does not require disclosure of the dollar amount, percentage or method of calculating the referral compensation.

The forms committee deliberately focused on disclosure of the existence of potential referral compensation rather than the specific financial terms of the arrangement.

For example, if a receiving firm has agreed to pay a referral source a percentage of the compensation earned from a transaction, the form allows the firm to disclose that it may pay referral compensation without requiring disclosure of the percentage amount figure.

This approach provides consumers with notice that a compensated referral arrangement may exist while keeping the form simple and practical for firms and agents to use.

The form also explains that payment of referral compensation does not, by itself, increase the brokerage fees a consumer may owe under an agreement with a real estate firm. Referral compensation is negotiable and is not set by law.

When should firms use the form?

The WRA-DRC is an optional form, but firms and agents should consider incorporating it into their procedures when participating in compensated referral arrangements.

For outgoing referrals, the disclosure can be provided when the consumer is referred to another firm or agent. For incoming referrals, the disclosure can be provided when the receiving firm or agent begins working with the consumer.

Providing disclosure early in the relationship helps ensure that consumers receive information about the arrangement before proceeding with brokerage services.

The new form does not replace any disclosure otherwise required by Wisconsin law, and firms should continue to ensure that referral compensation arrangements comply with applicable legal requirements.

Where can members find the form?

The WRA-DRC Disclosure of Referral Compensation is available in the WRA Forms Library and will also be available in Transactions (zipForm Edition).

While Wisconsin does not currently have a general statutory requirement mandating disclosure of all real estate referral compensation arrangements other states do, the new optional WRA form gives members a practical tool to promote consumer transparency now.

By making referral compensation arrangements more transparent, firms and agents can help consumers make informed decisions, reduce the potential for misunderstandings, and reinforce confidence in the real estate professionals with whom they work.