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

Real Estate Agent with Face Mask Holding Sold SignIt is natural for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a Suffolk rental property investor, there is a high chance that the subject of a finder’s fee will come up. Assuming this is the case, you need to be ready, so it is ideal to understand the finder’s fees. In this article, we’ll discuss what you can expect if you give or receive a referral and how to recognize the red flags with uncommon or even illegal finder’s fee situations.

Finder’s Fee Basics

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

As per 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. For instance, if a real estate agent has a client who is intending to acquire or lease property in a new state, instead of trying to work outside of their home state, that agent may transfer their client to a real estate agent in the other state. In exchange for this referral, the agent may ask for a finder’s fee since the transaction would not have happened without their service.

A Typical Finder’s Fee

Mostly, the finder gets a commission in exchange for their referral. This commission or “fee” is typically a percentage of the deal and is paid out once the sale is complete. In several states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely because the finder’s fees are normally negotiated directly between the finder and a broker or agent. In general, finder’s fees are negotiated and agreed upon utilizing written documents to streamline the process and avoid misunderstanding. However, sometimes there is no written agreement. Rather, an agent may write a check as a “gift” to the finder to acknowledge their assistance. While this may seem iffy, it is a perfectly legal practice in the real estate industry.

Red Flags to Watch For

Even though finder’s fees are both legal and commonly used, there are numerous red flags you have to watch out for. If you are ever asked to pay a finder’s fee directly to an agent for a referral, there is a probability that it is illegal to do so. Most 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 many 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 legal trouble. At the end of the day, it’s important to understand the state and federal laws in your area and respect them as they pertain to the finder’s fees. Even though some states allow finder’s fees, there are enough differences that you should research your own state’s laws before getting involved. Acquaint yourself with the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, correspondingly, that potentially avoid illegal activity in real estate transactions.

Regardless if you’re an experienced rental property investor or are just planning to begin, it’s advisable 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 Hampton Roads can help! Our Suffolk 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 757-395-4274 today!

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