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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 expected for agents to offer or request a finder’s fee as compensation for a real estate investment transaction. As a Grand Prairie rental property investor, there is a likelihood that the subject of a finder’s fee will come up. If so, you’ll need to be prepared, so it is significant to understand the finder’s fees. In this article, we’ll discuss what you can assume if you give or receive a referral and how to recognize the red flags of 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 the representative who brings two parties together to facilitate the lease, sale, or purchase of a property. Real estate agents offer a finder’s fees to encourage their contacts to refer renters, buyers, or sellers to them, and generally, it is a perfectly legal process.

In accordance with 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 example, if a real estate agent has a client planning to buy or lease property in a new state, in preference to working outside of their home state, that agent may refer their client to a real estate agent in the other state. In exchange for this referral, the agent may charge a finder’s fee because the transaction wouldn’t have happened without their help.

A Typical Finder’s Fee

In general, the finder is given a commission in exchange for their referral. This commission or “fee” is usually a percentage of the deal and is paid out once the sale is complete. In most states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely because the finder’s fees are usually negotiated directly between the finder and a broker or agent. Most of the time, finder’s fees are negotiated and agreed upon using written documents to streamline the process and avoid misunderstanding. But in certain circumstances, there is no written agreement. Instead, an agent may write a check as a “gift” to the finder to acknowledge their assistance. While this may sound 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 plenty of red flags you must watch for. If you are ever obliged to pay a finder’s fee directly to an agent for a referral, there is a chance that it is going to be illegal. Almost all finder’s fees must be paid out as part of the closing transaction. It is needed 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 a lot of legal trouble. Lastly, it’s imperative that you examine and comply with the state and federal laws in your area as they pertain to the finder’s fees. While many states allow finder’s fees, there are plenty of variations so you must research your own state’s laws before getting involved. Become acquainted with the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, respectively, that goal is to stop illegal activity in real estate transactions.

Irrespective if you’re an experienced rental property investor or are simply beginning, it’s important 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 Meridian can help! Our Grand Prairie 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 817-678-8787 today!

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