Finders’ fees can have a few meanings in real estate, but generally the term refers to the chunk of change a “middleman” in your deal can take. Sometimes they’re gifts, other times it’s a commission or percentage. Usually, real estate agents pay finders’ fees, not investors directly. But it’s also true that commercial REI transactions will almost always involve paying at least one finders’ fee. So what’s an investor mixed up about this concept to do?
Read on, that’s what. Today we’re breaking down everything you need to know about real estate finders fees, what’s normal, what’s not, and even what’s illegal. By the time you’re done, you’ll understand how finders’ fees work and protect yourself from unethical people in the real estate game.
What is a Real Estate Finders’ Fee?
A finders’ fee may is also often called a referral fee (or even “referral income”). It’s a type of commission paid to a middleman of some kind for brokering your real estate transaction. Such fees are indeed commonplace, but they’re also regulated by law. For instance, some states have laws prohibiting paying finders’ fees to “unlicensed persons.” Usually, these types of laws are designed to prevent real estate agents from paying such individuals–not the original customer.
That said, most states have laws that allow intermediaries to request anywhere from 3-35% of the deal’s value. Does that mean you have to pay it? Of course not, but some folks will pay on the high end to get the pad of their dreams, so you can’t really blame these middlemen and women for trying. Hustlers have to hustle, after all.
Real estate agents are the big gatekeepers to the world of finders’ fees. Realtors and agents across the country use finders’ fees to encourage business contacts to remember them if they hear of someone property-hunting.
There are, of course, licensed brokers whom it is absolutely ethical to pay for tips on clients, property types or asset classes, neighborhoods or names of individuals preparing to sell, and of course, individual deals. While the type of conduct one may engage in to secure a lead may vary by state, because again, that’s the level at which this concept is most regulated, finders’ fees are indeed fairly universal to real estate investing. Federal and state law generally permits licensed individuals to collect fees within reason. They may be the reward a licensed broker gets for:
- Locating a property with certain specifications for a client.
- Finding a client/buyer interested in a property.
- Closing a real estate deal.
- Otherwise facilitating a person’s real estate acquisition or sale.
What’s the Point of a Finders’ Fee?
Now that we’re clear about what finders’ fees are, let’s talk about why they still exist in real estate. First and foremost, it’s important to recognize that finders fees are a form of incentive that keeps the entire buying-and-selling economy of real estate humming along for us investors to come in and capitalize on. The finders’ fee is the incentive, essentially, for making a deal happen: after all, that’s what this REI game’s all about–making the best deals possible.
The whole idea is that but for the intervention of your intermediary, the deal wouldn’t have happened. Or at least, this assumption has fueled the continued existence of finders’ fees. Whether this underlying assumption is true in your case is a completely different discussion, but it’s accepted enough in the REI world that the practice continues.
What Should Real Estate Investors Know About Finders’ Fees?
We’re all likely to encounter the finder’s fee, so the best thing to do is be prepared. At the very least, we can come armed with the knowledge of what’s normal and what’s not, even if this is our first ever real estate transaction.
Remember that even if you are new to the game, you can act as if you’re not. Act with the confidence of the knowledge you gain here and anywhere else you study investing strategy. If you don’t yet believe in yourself, it’s a good investing psychology practice to learn to believe in your abilities and brain first. Let’s talk about some of those sticky situations where you’re going to be hit up for money. It’s best to at least not look surprised (unless you’re handed an absurd number), so these tips should help.
What’s Normal With Finders’ Fees
Since finders’ fees help make the real estate world go ‘round, you can absolutely expect to encounter them during the deal-hunting or deal-making process. It’s just part of the game.
Your real estate broker informing you they plan to pay a finders’ fee isn’t unusual. It’s even better if they ask and get your opinion or thoughts.
Ordinarily, these fees are paid between brokers, and real estate agents draw up “Cooperating Agreements” to streamline the referral and payment process. Basically, the agent can pay a broker out according to a pre-existing contract.
Keep in mind there’s more than one “normal” way to pay finders fees. Agents usually make payments, but sometimes if there is no contract, they will simply write a check as a “gift” to your friendly intermediary. This is a perfectly ordinary practice and shouldn’t alarm you. As you can see, most of the time you as the investor don’t make a payment at all.
What’s Not Normal With Finders’ Fees
First of all, you’re never legally required to pay a finders’ fee. It’s a practice in the industry, and nobody is legally entitled to such payments. Not agents, brokers, or anyone else. They can ask, but under no circumstances do you have to pay.
Anyone who says otherwise is generally just trying to hustle you in some form or fashion. So move on and feel free to place such people on your personal blacklist.
Unlicensed middlemen also fall in the “not normal” category. If a person can’t explain their job, how they became involved in the transaction, or who they specifically know involved with your deal, this is a major red flag. Fees paid between brokers and licensed agents are common–after all, it’s good for everyone to pair up customers and properties, and frankly, some people will always have more of one than the other. But you don’t want to pay just anyone: make sure they’re really facilitating your deal in a meaningful way.
What’s Straight-up Illegal
An investor directly paying finders’ fees is bizarre. Sometimes it’s illegal.
You never have to personally pay a fee just because a person says they helped your deal happen. A friend’s referral can actually become illegal if say, you’ve paid that friend for other business referrals and they claim to have facilitated your real estate transaction.
When someone requests a finders’ fee you think is off, don’t pay it. Odds are good it would be illegal in the “friend” situation (unless you’re certain your soon-to-be-ex-friend is an appropriately licensed facilitator under state and federal law). Never pay anything if you’re not sure it’s legal, or if your gut’s just screaming not to.
Finders’ Fees: The Informed Investor’s Way
Understanding both the law around finders’ fees and what you’re personally willing to pay is important if you’d like to define personal boundaries around this matter. You can always choose other real estate agents if your agent’s policies are wrong, unlawful, or just not your style. Knowing when to pay and when to walk away can make you the smartest investor in the room.