It is reasonable for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a St. George rental property investor, the odds are good that the subject of a finder’s fee will come up. Then, you have to be ready, so it is imperative to understand the finder’s fees. In this article, we’ll analyze what you can expect if you give or receive a referral and how to recognize the red flags of unusual or even illegal finder’s fee situations.
Finder’s Fee Basics
A finder’s fee, or referral fee, is a commission paid to an intermediary in a transaction. In real estate, the “finder” is the one who brings two parties together to facilitate the lease, sale, or purchase of a property. Real estate agents will often use 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.
On the word of 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. Let’s say, if a real estate agent has a client wanting to buy or lease property in a new state, instead of try to work outside of their home state, that agent may hand over their client to a real estate agent in the other state. In exchange for this referral, the agent may inquire for a finder’s fee since the transaction would not have been able to carry out without their involvement.
A Typical Finder’s Fee
Commonly, the finder is given a commission in exchange for their referral. This commission or “fee” is generally 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 usually negotiated directly between the finder and a broker or agent. More often than not, finder’s fees are negotiated and agreed upon using written documents to streamline the process and avoid misunderstanding. However, at times there is no written agreement. As an alternative, an agent may write a check as a “gift” to the finder to acknowledge their assistance. Although this can seem to be 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 a lot of red flags you need to watch for. If you are ever requested to pay a finder’s fee directly to an agent for a referral, the possibility is that it is illegal to do so. Nearly all finder’s fees must be paid out as part of the closing transaction. You must have a real estate license to request and receive a finder’s fee in certain 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. Finally, it’s important to be aware of the state and federal laws in your area and adhere to them as they pertain to the finder’s fees. While most states allow finder’s fees, there are several variations that you should research your own state’s laws before getting involved. Find out the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, commonly, that seek to discourage illegal activity in real estate transactions.
Irrespective of whether you’re an experienced rental property investor or are just a beginner, 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 Southern Utah can help! Our St. George 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 435-673-4242 today!
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