It is not unusual for agents to offer or request a finder’s fee as part of a real estate investment transaction. As a Warwick rental property investor, the chances are good that the subject of a finder’s fee will come up. If that is the case, you need to be prepared, so it is important to understand the finder’s fees. In this article, we’ll deliberate what you can expect if you give or receive a referral and how to recognize the red flags of unfamiliar 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 will often use finder’s fees to encourage their contacts to refer renters, buyers, or sellers to them, and most of the time, 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 looking to purchase or lease property in a new state, rather than try to work 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 ask for a finder’s fee because the transaction would not have taken place without their help.
A Typical Finder’s Fee
Typically, the finder is given a commission in exchange for their referral. This commission or “fee” is usually 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 generally negotiated directly between the finder and a broker or agent. Most of the time, finder’s fees are negotiated and agreed upon using written documents to streamline the process and avoid misunderstanding. But sometimes there is no written agreement. In its place, an agent may write a check as a “gift” to the finder to acknowledge their assistance. While this may sound 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 few red flags you should watch for. If you are ever asked 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 need to have a real estate license to request and receive a finder’s fee in most 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 is a lot of legal trouble. Lastly, it’s significant to know the state and federal laws in your area and follow them as they pertain to the finder’s fees. While most states allow finder’s fees, there are enough differences that you should research your own state’s laws before getting involved. Get to know the Consumer Financial Protection Bureau (CFPB) and the Real Estate Settlements and Procedures Act (RESPA), a government agency and a federal statute, respectively, that aim to prevent illegal activity in real estate transactions.
Whether you’re an experienced rental property investor or are just getting started, it’s important 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 Providence can help! Our Warwick 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 401-272-3300 today!
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