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Tenant Referral Fees

This article discusses a change from prior advice given to property managers with real estate licenses.

Alabama law says you must have a real estate license to manage rental properties, among other things. There is a specific exception for managers of apartments or complexes. THEY do not need a license.

Other Alabama law says that if you have a real estate license, you can pay commissions or referral fees only to other licensed real estate persons. That includes tenant referral fees. There is no minimum. In other words, even a $10 gift certificate to Burger King is illegal and the licensee can be disciplined for that.

Previous legal department personnel at the Alabama Real Estate Commission indicated they would not file a complaint against a real estate licensee who managed apartments and paid referral fees for those apartment units. That is because, they said, no license at all is required, so it was unfair to put such persons at a competitive disadvantage. They said the exemption indicated a Legislative intent that apartment managers be exempt from such rules, even if the statute did not come out and say exactly that. Their philosophy was called “liberal construction” in order to put into practice the general ideas and philosophy of the legislature.

Now we have a new AREC General Counsel, Starla Van Steenis. She is what we would call a “strict constructionist” in this regard. It is not wrong, it is just a different philosophy from liberal construction. She says that the statute does not exempt licensees from the rule against paying referral fees or commissions to unlicensed persons. Because it is silent in that particular, the regular rules apply. If you have a real estate license and manage apartments or complexes, you cannot pay tenant referral fees. To repeat:

  • You do not need a real estate license to manage apartments or complexes.
  • You must have a real estate license to manage anything smaller, such as SFR, duplex, triplex or fourplex
  • If you do not have a real estate license and manage apartments or complexes, you can pay tenant referral fees for those units
  • If you do have a real estate license and manage apartments or complexes, you CANNOT pay tenant referral fees for those units.

For more information about surprising ways you can get into trouble as property manager (even a self-managing investor) and how to avoid those problems, check out my class on Risk Management for Property Managers.

2 thoughts on “Tenant Referral Fees

  1. I was told, years ago, that you do not have to have a license to manage a 4plex. I’m 80% sure I looked it up and conformed (maybe 15 years ago). I have been looking for the regulation, in the last few minutes, but I haven’t found it yet.

    1. I was told fourplexes and below required a license. I’ve sent an email to the General Counsel of the AREC asking her this question and will clarify the point when I hear from her. I could find nothing in writing on this point, either.

What do you think?