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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 normal for agents to offer or request a finder’s fee as a portion of a real estate investment transaction. As a Weber County rental property investor, the odds are that the subject of a finder’s fee will come up. If that is the case, you must be ready, which is why it is critical to understand finder’s fees. In this article, we’ll explain what you can assume if you give or receive a referral and how to recognize the red flags with irregular 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 use finder’s fees to encourage their contacts to refer renters, buyers, or sellers to them, and on the whole, it is a perfectly legal process.

As mentioned 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. To give an example, if a real estate agent has a client looking to acquire or lease property in a new state, rather than try to work outside of their home state, that agent may pass on to their client to a real estate agent in the other state. In exchange for this referral, the agent will demand a finder’s fee since the transaction would not have transpired without their help.

A Typical Finder’s Fee

Commonly, the finder is offered a commission in exchange for their referral. This commission or “fee” is often a percentage of the deal and is paid out once the sale is complete. In other states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely since the finder’s fees are typically negotiated directly between the finder and a broker or agent. In most cases, finder’s fees are negotiated and agreed upon using written documents to streamline the process and avoid misunderstanding. But sometimes, there is no written agreement. Alternatively, an agent may write a check as a “gift” to the finder to acknowledge their assistance. Even though this may look iffy, it is a perfectly legal practice in the real estate industry.

Red Flags to Watch For

Despite the fact that finder’s fees are both legal and commonly used, there are a small number of red flags you need to watch for. If you are ever forced to pay a finder’s fee directly to an agent for a referral, the chances are 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 other 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 significant legal trouble. At last, it’s critical to figure out the state and federal laws in your area and follow them as they pertain to the finder’s fees. While most states allow finder’s fees, there are plenty of differences so you should research your own state’s laws before getting involved. Get to know the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, correspondingly, that aim to prevent illegal activity in real estate transactions.

Whether you’re an experienced rental property investor or are just getting started, it’s beneficial 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 Northern Utah can help! Our Webber County 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 801-546-1770 today!

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