It is typical for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a Thetford rental property investor, the chances are good that the subject of a finder’s fee will come up. If so, you must be prepared, so it is important to understand the finder’s fees. In this article, we’ll share what you may encounter 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
A 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 provide 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.
According to 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 instance, if a real estate agent has a client aiming to buy or lease property in a new state, instead of traveling 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 appeal for a finder’s fee because the transaction would not have been possible without their assistance.
A Typical Finder’s Fee
Most of the time, 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 most states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely because the finder’s fees are frequently negotiated directly between the finder and a broker or agent. As a rule, finder’s fees are negotiated and agreed upon applying written documents to streamline the process and avoid misunderstanding. However, at times there is no written agreement. As another option, an agent may write a check as a “gift” to the finder to acknowledge their assistance. Even though this can seem to be iffy, it is a perfectly legal practice in the real estate industry.
Red Flags to Watch For
Even though finder’s fees are both legal and commonly used, there are numerous 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, there is a chance 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 major legal trouble. Ultimately, it’s critical to be aware of the state and federal laws in your area and comply with them as they pertain to the finder’s fees. While several states allow finder’s fees, there are sufficient differences that you should research your own state’s laws before getting involved. Discover the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, commonly, that aim to prohibit illegal activity in real estate transactions.
It doesn’t matter if you’re an experienced rental property investor or are just a beginner; it’s necessary 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 Beacon will assist you! Our Thetford 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 603-448-8808 today!
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