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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 usual for agents to offer or request a finder’s fee as a portion of a real estate investment transaction. As a Horseshoe Bay rental property investor, there is a strong chance that the subject of a finder’s fee will come up. If so, you need to be ready, so it is imperative to understand the finder’s fees. In this article, we’ll analyze 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 the person who brings two parties together to facilitate the lease, sale, or purchase of a property. Real estate agents are using finder’s fees to encourage their contacts to refer renters, buyers, or sellers to them, and in general, it is a perfectly legal process.

As per 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 who wants to buy or lease property in a new state, as opposed to trying to work outside of their home state, that agent may turn over 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 emerged without their help.

A Typical Finder’s Fee

In most cases, the finder gets 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 usually negotiated directly between the finder and a broker or agent. In general, finder’s fees are negotiated and agreed upon using written documents to streamline the process and avoid misunderstanding. But there is a time that there is no written agreement. Rather, 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

While that finder’s fees are both legal and commonly used, there are many red flags you must watch for. If you are ever instructed 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 should 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 legal trouble. In the end, it’s critical to understand the state and federal laws in your area and obey them as they pertain to the finder’s fees. While certain states allow finder’s fees, there are plenty of variations so you should research your own state’s laws before getting involved. Learn the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, correspondingly, which work at eliminating illegal activity in real estate transactions.

Whether you’re an experienced rental property investor or are just getting started, it’s essential 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 Highland can help! Our Horseshoe Bay 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 830-637-7880 today!

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