For many in the real estate world, especially experienced investors, there’s a constant search for properties with good profit and appreciation potential. There are several ways you might be able to get a jump on these kinds of properties compared to your competition, and one of these is by paying a finder’s fee.
At Fox Financial, we’re proud to assist clients with investment properties and numerous forms of real estate investment throughout the nation, offering properties that often run at 30-50% below market value for cash buyers. What is a finder’s fee, which parties is it paid between, and what are some important factors and red flags you should be aware of when it comes to finder’s fees? Here are several areas to keep in mind.
Finder’s Fee Basics
A finder’s fee, also called a referral fee or referral income, is defined as compensation provided to a person or brokerage that helps facilitate a real estate transaction. In the majority of cases, a finder’s fee will be paid by a real estate agent to the broker or individual receiving it, while the investor pays their real estate agent their standard fee.
Finder’s fees are common in many real estate settings. However, as we’ll go over in more detail below, they are both heavily regulated and not always required.
Fee Amount Ranges and Permissions
In most states, finder’s fees are allowed to be anywhere from 3% all the way up to 35% of the value of a given real estate transaction. Be sure to check your state’s guidelines here if you’re interested in learning more.
Generally speaking, federal and state laws allow licensed brokers to collect finder’s fees for each of these services: Finding a property to the specifications of the client, locating a buyer who is interested in a property, and closing a real estate transaction. In many cases, these fees are used as incentives by real estate agents to encourage their contacts to think of them first when they learn about someone looking for a property.
Not Legally Required
It is important to be aware that finder’s fees are not legally required, and no broker or agent can compel you to pay one. Also, they are not the same thing as a service charge, which also may be found in certain areas of real estate. Finder’s fees may range from specific, contracted agreements between brokers to less official “gifts” from an agent to someone who helped facilitate a deal, which is entirely legal.
There are a few things you should be looking out for when it comes to finder’s fees. The first is if you are asked to pay the finder’s fee directly as an investor – this is highly unusual and possible even illegal. In addition, if someone requesting a finder’s fee can’t explain their role in the transaction or isn’t licensed under state and federal law, you should not proceed.