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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 typical for agents to offer or request a finder’s fee as payment for a real estate investment transaction. As a Chubbuck rental property investor, there is a possibility that the subject of a finder’s fee will come up. If that is the situation, you’ll need to be all set, so it is critical to understand the finder’s fees. In this article, we’ll go over 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 agent who brings two parties together to facilitate the lease, sale, or purchase of a property. Real estate agents will normally use finder’s fees 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 planning to buy or lease property in a new state, instead of 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 demand a finder’s fee because the transaction wouldn’t have proceeded without their support.

A Typical Finder’s Fee

Normally, the finder is given 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 other states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely since the finder’s fees are commonly negotiated directly involving the finder and a broker or agent. In many 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 appear to be iffy, it is a perfectly legal practice in the real estate industry.

Red Flags to Watch For

Although finder’s fees are both legal and commonly used, there are several red flags you must watch for. If you are ever obliged to pay a finder’s fee directly to an agent for a referral, it is likely to be illegal. The majority of the finder’s fees must be paid out as part of the closing transaction. It is required 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 to research the state and federal laws in your area and obey them as they pertain to the finder’s fees. Since many states allow finder’s fees, there are several variations that you must research your own state’s laws before getting involved. Learn about the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, respectively, whose objective is to stop illegal activity in real estate transactions.

Whether you’re an experienced rental property investor or are just getting started, it’s imperative 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 Pocatello can help! Our Chubbuck 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 208-234-1000 today!

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