What Real Estate Investors Need To Know About Finder’s Fees
February 23, 2021Whether you’re an experienced investor or just starting out, you’re always on the lookout for properties with the best potential for profits and appreciation.
To get a jump on the competition, many real estate investors pay finders’ fees. By definition, a finder’s fee is the compensation provided to a person or brokerage that helps facilitate your real estate transaction.
Usually, it’s the real estate agent who directly pays a finder’s fee, not the investor. But since most commercial real estate transactions involve paying at least one of these fees, you’re paying for them indirectly as an investor.
Finder’s fees may be common, but they are regulated by law. Let’s examine how finders’ fees work and how you can protect yourself from any unethical charges.
How Much Is a Typical Finder’s Fee?
The “finder” in a real estate transaction is the person who brings both parties together in the first place. In exchange for this matchmaking service, the finder receives a commission from the brokered deal. Fair enough, right?
Also called “referral fees” or “referral income,” finders’ fees usually are a percentage of the real estate deal in question. Most states allow the fees to be anywhere from 3-35% of a transaction’s value.
Real estate agents use finders’ fees as a way to encourage their business contacts to think of them when they know of someone who is looking for a property. The payments can become a lucrative part of their business.
Federal and state laws generally permit licensed brokers to collect finders’ fees for the following services:
- Finding a property that meets a client’s specifications
- Locating a buyer who is interested in a property
- Closing a real estate transaction
You can look at finders’ fees as a form of incentive that keeps the whole real estate investment game going. Investors are looking for the best deals going, and the “finders” help make the best deals happen. At least that’s the premise that has kept the concept of paying these middleman fees going through the years.
What’s Normal for Finders’ Fees?
First, there is no legal requirement to pay a finder’s fee. Although the payments are a common practice in the real estate industry, no one is legally entitled to them. That means that a broker or agent can ask you to pay a fee, but you are not legally bound to do so.
If an agent pressures you by telling you that you have to pay a finder’s fee, it would be best to move on to someone else. For example, a finder’s fee is different from a service charge, which is paid to a person or business in exchange for completing a service.
Finders’ fees usually are paid between brokers, with real estate agents drawing up agreements to streamline the process. A written document can help ensure all parties are clear concerning what the finder’s fee is and who is paying it.
Sometimes there are no contracts, however, and an agent simply writes a check as a “gift” to the intermediary. This practice may seem a bit unusual to a new investor, but it is perfectly legal.
What’s Not Normal—or Even Illegal—for Finders’ Fees?
Here are some red flags to be aware of when it comes to finders’ fees.
- You are asked to pay the finder’s fee directly.
Don’t do it. It is highly unusual and may be illegal in your state. - An individual can’t explain their involvement in the property transaction or who they specifically know who is directly involved with your deal.
In other words, make sure that anyone requesting compensation has played a meaningful role in your transaction. - The individual is unlicensed.
In most states, anyone requesting a finder’s fee must be currently licensed under state and federal law. If an agent pays a referral fee to someone without a valid license, they could have their own license revoked by authorities. - Your gut tells you something is wrong.
If something just feels off about the whole conversation surrounding a finder’s fee, trust your instincts.
Finders’ fees are an accepted way of rewarding individuals who help make real estate deals happen. The Consumer Financial Protection Bureau (CFPB) and The Real Estate Settlements and Procedures Act (RESPA), passed by Congress in 1974, help prevent illegal practices in the real estate industry. However, there are some unethical people out there, and the fees can be a bit tricky to navigate if you are uninformed or unprepared.
Understanding finders’ fees and knowing what percentage you are willing to pay are important aspects of becoming a successful real estate investor. Knowing when to walk away from a shady real estate agent or transaction is a skill you will develop with experience.