It is usual for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a Glendale rental property investor, the possibility is strong that the subject of a finder’s fee will come up. If so, you have to be ready, so it is necessary to understand the finder’s fees. In this article, we’ll talk about what you can anticipate if you give or receive a referral and how to recognize the red flags of irregular 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 usually utilize 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 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 instance, if a real estate agent has a client who is intending to buy or lease property in a new state, instead of attempting to operate outside of their home state, that agent might recommend their client to a real estate agent in the other state. In exchange for this referral, the agent may request a finder’s fee since the transaction would not have occurred without their assistance.
A Typical Finder’s Fee
Regularly, the finder receives a commission in exchange for their referral. This commission or “fee” is normally 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 since the finder’s fees are typically negotiated directly between the finder and a broker or agent. For the most part, finder’s fees are negotiated and agreed upon utilizing written documents to streamline the process and avoid misunderstanding. But occasionally, there is no written agreement. As an alternative, an agent may write a check as a “gift” to the finder to acknowledge their assistance. While this may seem 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 a couple of red flags you need to watch for. In the event that you are ever requested to pay a finder’s fee directly to an agent for a referral, the odds are that it is illegal to do so. All 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 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 legal trouble. Ultimately, it’s essential to understand the state and federal laws in your area and follow them as they pertain to the finder’s fees. While other states allow finder’s fees, there are enough variations that you should research your own state’s laws before getting involved. Become more familiar with the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, correspondingly, that goal to prevent illegal activity in real estate transactions.
Regardless of whether you’re an experienced rental property investor or are just planning to start, 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 Vision can help! Our Glendale 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 818-233-8789 today!
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