What Real Estate Investors Need to Know About Finder’s Fees

It is acceptable for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a Cibolo rental property investor, the probability is strong that the subject of a finder’s fee will come up. You must be prepared at that stage, so it is essential to understand the finder’s fees. In this article, we’ll review what you can expect if you give or receive a referral and how to recognize the red flags with suspicious or even illegal finder’s fee situations.

Finder’s Fee Basics

A finder’s fee, or referral fee, is a commission paid to an intermediary in a transaction. In real estate, the “finder” is someone who brings two parties together to facilitate the lease, sale, or purchase of a property. Real estate agents give a finder’s fee to encourage their contacts to refer renters, buyers, or sellers to them, and mostly, it is a perfectly legal process.

As stated by state and federal law, a broker or agent can pay a finder’s fee to someone who helped them locate a buyer for one of their listed properties, found a property for a buyer, or otherwise helped them close a real estate transaction. As an illustration, if a real estate agent has a client who is planning to get or lease property in a new state, instead of operating outside of their home state, that agent may endorse their client to a real estate agent in the other state. In exchange for this referral, the agent will charge a finder’s fee since the transaction would not have transpired without their support.

A Typical Finder’s Fee

In most cases, the finder collects a commission in exchange for their referral. This commission or “fee” is regularly a percentage of the deal and is paid out once the sale is complete. In many states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely because the finder’s fees are mostly negotiated directly between the finder and a broker or agent. On the whole, finder’s fees are negotiated and agreed upon utilizing written documents to streamline the process and avoid misunderstanding. But sometimes, there is no written agreement. As another choice, an agent may write a check as a “gift” to the finder to acknowledge their assistance. Though this may seem iffy, it is a perfectly legal practice in the real estate industry.

Red Flags to Watch For

While finder’s fees are both legal and commonly used, there are one or two red flags you need to watch for. In case you are ever demanded to pay a finder’s fee directly to an agent for a referral, the odds are that it is illegal to do so. All finder’s fees must be paid out as part of the closing transaction. You need to have a real estate license to request and receive a finder’s fee in some states. If you are offered a finder’s fee but don’t have a license or are asked to pay a finder’s fee to someone who is not a licensed agent, either action could land you and the other party in some legal trouble. At last, it’s ideal to learn the state and federal laws in your area and follow them as they pertain to the finder’s fees. While some states allow finder’s fees, there are several variations so you should research your own state’s laws before getting involved. Learn more about the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, respectively, aimed at preventing illegal activity in real estate transactions.

Even if you’re an experienced rental property investor or are just getting started, it’s vital to have good information at hand and the right team on your side. If you are in the market for your next rental property, Real Property Management Campanas can help! Our Cibolo rental management experts work with property investors like you to help you maximize both your cash flows and your investment portfolio. To learn more, contact us online or give us a call at 210-797-8805 today!