What you need a real estate license for

If you ask 10 agents what an unlicensed person can or can’t do when it comes to real estate, you will get 10 answers. I don’t have a perfect answer either. But here’s a quick overview of some generally accepted guidelines as well as the murkier areas. To be clear: I'm not a lawyer and do not treat the below as legal advice.

What real estate agent’s can’t do

We’ve already discussed that real estate agents can show you real estate they don’t own and provide you advice. Every state has hundreds of pages of laws on real estate agents, but there are a few larger themes to know.

Collect commissions personally or market as a brokerage

I addressed payments in an earlier post on how real estate agents are paid. The real estate brokerage collects all commissions, not the real estate agent. Agents are typically not allowed to receive these payments directly.

For real estate listings, any agreement is typically between the seller and the brokerage, not the agent. And agents cannot present themselves as the company marketing a property. They must advertise their brokerage affiliation clearly in each marketing piece.

Receive kickbacks for settlement services or fail to disclose referral relationships

There is a rule called the Real Estate Settlement Procedures Act or RESPA. It stops agents from getting paid for business sent to mortgage and title companies. But a broker or agent can own a mortgage brokerage or title company. However, they must disclose the relationship. And they cannot require a client to use the associated entity. A good example is Realogy. It is the owner Coldwell Banker but also operates a title group called Title Resource Group. Some companies track the ratio of brokerage customers who use these associated services. This ratio is the attach rate. These companies aim to achieve high attach rates without forcing customers to use affiliated services.

Realogy, the owner of Coldwell Banker, owns a network of title companies but can’t require clients to use them. Source: Title Resource Group.

Discriminate against protected classes

There are two components of what is popularly known as fair housing. The first is The Fair Housing Act itself. It protects certain classes (race, color, religion, national origin, sex, handicap, familial status) from discrimination. The second part is usually a local/state law that can cover age, nationality, gender/identify, marital status, sexual orientation, and others. There is a lot of nuance to fair housing and discrimination, but the quick overview is an agent cannot discriminate against any of these groups, called protected classes. This are sometimes different from the laws for non-agents. In some markets, private landlords or owners may be exempt from fair housing laws. As an agent, it's best practice to simply provide the same high level of unbiased service to all clients.

This can sometimes create confusion. Not all social groups are protected classes.  For example, a student may think it’s against the law for an agent to say an owner doesn't want students renting a unit. But if students aren't a protected class, this is okay.

Operate in states where they are not licensed

Licensing is at the state level, so if you have a license in one state it does not mean you can operate in another. As I've discussed, you would need to use reciprocity or get a new license/brokerage to serve clients in other states. Many agents simply refer clients to agents with licenses in other states to capture a commission in a state they're not licensed in.

What an unlicensed person can’t do

Get paid for closing a real estate transaction

Most laws require a real estate referral or commission to go to a brokerage. If you are paid for a closed real estate transaction and are unlicensed, you are probably breaking real estate license law.

Most things in real estate related to an actual property except marketing and paperwork

If you have to answer a question about a specific property or open the door and show it, you probably need a license. Unlicensed assistants work with real estate agents to provide pre-screened information to clients. This means an unlicensed person can create advertising materials. But the property owner or agent will need to be involved with the content. And the person creating any materials cannot be paid based on the real estate commission.

It's sometimes okay to receive a commission rebates or tenant referrals

Commission rebates on a home you buy or a reward for referring a tenant to your building can be legal. Some states do forbid one or both, but they often are allowed within reasonable amounts. Some states set maximum dollar or transaction count. This way what is supposed to be a one-time referral for a friend doesn't turn into a workaround for a real estate license.

Resident referrals like this $1,000 incentive for Stuytown tenants in NYC are usually considered okay. Source: Stuytown.

The gray areas 

Providing unbiased data on real estate

Often agents won't tell you if a neighborhood is safe or not. This is because of concerns around steering in fair housing. They think that it may imply they don't like an area because of who lives there. This is tough because many clients do want unbiased date on safety. Many real estate portals like Trulia provide information on where crime occurs. To date,  it's been generally accepted that unbiased third-party data like this is okay. This has also held true with assessing real estate in an automated way. For example, the Zestimate is an automated valuation model based on a formula. In general, there hasn't been a successful push to stop these Zillow from publishing these without a license.

Trulia showcases data-driven crime heatmaps. While many agents won’t provide crime data for concerns out of fair housing, automated approaches like this have been fairly common. Source: Trulia.

Charging a flat fee for subscription marketing

Charging a monthly subscription for customer leads has not usually required a license. This is less a law and more a practice that does not seem to get questioned. Zillow charges agents monthly subscription fees for its Premier Agent marketing service. Apartments.com charges over $1,000 annually for sponsored apartment listings. In other cases, title and mortgage companies might sponsor monthly events that get around transaction-based kickbacks. It's hard to tell how the laws will treat these structures longer-term. But for the time being, charging non-performance subscriptions has been a standard way for online platforms and service providers to make money in real estate without being licensed.

Penalties for breaking the rules

There are a lot of places that you can get in trouble for breaking real estate laws. In a way, this makes the penalties for many infractions particularly unclear. It's hard to find good data on penalties for real estate infractions. And the majority of complaints are submitted by agents and brokerages, not consumers. This is because you have to understand the rules to know if someone is breaking them. In 2019, there were 1,772 total complaints filed with the Texas Real Estate Commission. That is under 1 complaint for every 200 homes sold. And only 6% of those complaints involved "unlicensed activity".

Only 110 complaints were made to the Texas Real Estate Commission about unlicensed real estate activity in 2019. Source: TREC.

Here is a quick overview of the bodies that oversee real estate laws. There are many more places to look but this is a good starting point:

  • State real estate licensing bodies: also sometimes called licensing or professional regulation entities, these enforce the activities for licensing. Often their main teeth are fines and suspending/revoking licenses. It's worth noting that in some states practicing real estate without a license is a felony.
  • HUD: The US Department of Housing and Urban Development fields complaints related to fair housing. 
  • CFPB: The Consumer Financial Protection Bureau handles complaints and penalties for RESPA and related financial issues. 
  • Realtor Association Branches: local Realtor associations handle issues between Realtors in arbitration as well as ethics breaches.
  • Other state, local, and federal bodies: there are countless other entities that can get involved in legal issues related to real estate. This often occurs when there are issues related to zoning or taxes.
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