It is normal for agents to offer or request a finder’s fee as earnings for a real estate investment transaction. As a Minneapolis rental property investor, there’s a strong likelihood that the subject of a finder’s fee will come up. Once you come across this, it’s crucial to understand finder’s fees. In this article, we’ll address what you may encounter if you give or receive a referral and how to recognize the red flags of unusual 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 regularly use finder’s fees to encourage their contacts to refer renters, buyers, or sellers to them, and mostly, 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 obtain or lease property in a new state, as opposed to trying to do it outside of their home state, that agent may introduce their client to a real estate agent in the other state. In exchange for this referral, the agent may demand a finder’s fee, considering the transaction would not have taken place without their aid.
A Typical Finder’s Fee
Commonly, the finder is granted a commission in exchange for their referral. This commission or “fee” is ordinarily a percentage of the deal and is paid out once the sale is complete. In numerous states, a finder’s fee can be anywhere from 3% up to 35%. The amount varies widely because the finder’s fees are commonly negotiated directly between the finder and a broker or agent. On the whole, finder’s fees are negotiated and agreed upon in written documents to streamline the process and avoid misunderstanding. But sometimes, 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 appear 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 need to watch for. If you’ve ever asked to pay a finder’s fee directly to an agent for a referral, the possibilities are that it is illegal to do so. Almost 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 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 in serious legal trouble. Finally, it’s essential to comprehend the state and federal laws in your area and obey them as they pertain to the finder’s fees. While multiple states allow finder’s fees, there are plenty of variables that you should research in your own state’s laws before getting involved. Familiarize yourself in 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 vital 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 Viking can help! Our Minneapolis property 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 612-442-8850 today!
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