As a real estate investor, you may be more than happy to pay a finder's fee to someone who brings you a client or an off-market deal, but proceed with caution. Even if you believe paying a finder's fee is fair and your personal choice, there are legal considerations that regulate how the referral can be structured -- or if it can be done at all. Learn what the difference between a finder's fee and a commission is, the different situations in real estate where a finders fee may apply, and how much is expected.
What is a finder's fee?
A finder's fee is a referral fee paid to a licensee by an issuer for helping facilitate a real estate transaction, such as a real estate seller and buyer connected through a real estate broker who is paid a finder's fee for their efforts in facilitating the transaction. A finder's fee is not the same thing as a true commission, which is a mandatory, agreed-upon fee that's legally required to be paid to a referral agent, Realtor, or employing broker.
It's also not an unlicensed person referring a potential buyer, property, or mortgage to a licensed real estate agent or brokerage, which is a separate legal matter discussed below. Instead, a finder's fee is essentially an optional referral commission outside the typical sale framework. There is no legal obligation to pay a referral fee unless a referral agreement has been signed prior to the transaction occurring.
How a finder's fee works
Finder's fees are generally reserved for and paid by Realtors or brokers, not a real estate investor paying others for leads, like a bird dog. Each state has its own laws that govern whether an unlicensed person can offer or accept finder's fees, but in general, assume it's illegal until you find out the exact regulations for your area. If finder's fees are legal in your state or area, there will be clear stipulations about who can give or receive the referral, the amount of money that can be exchanged, and the way the exchange must be handled.
A few exceptions you might come across outside licensed real estate brokers include certain professions, like attorneys, or a lender who is referring, according to their professional capacity, a maximum dollar amount, or specific situations, such as referring your apartment complex to a renter. If you are found to be breaking the laws paying finder's fees when not legally allowed, you can face monetary fines or the suspension of licenses or other professional standings.
How much is a finder's fee?
Finder's fees typically will be based on the price of the property being referred. Although it can vary drastically, 3% to 35% of a business or residential sale is fairly normal. Commercial real estate is hit or miss, with some real estate professionals offering no finder's fee, while others may offer up to 15%.
Most of the time, it will be a Realtor or broker that collects the fee, which is taken out of closing costs. There are times where a third party, like a referral agent, may be the one to facilitate the transaction and therefore be the one who earned the real estate referral fee, but double-check state guidelines before paying an unlicensed third party. Although not necessary, a finder's fee agreement can be a great thing to establish so everyone is on the same page.
The Millionacres bottom line
Finder's fees are an industry-standard practice in many types of real estate. It's a way to show gratitude to someone who helped make a deal happen when it may not have otherwise. But remember, a finder's fee is not mandatory, so if you're being pressured, that's a big red flag. An investor directly paying a fee is generally a no-no, although there are some workarounds in certain situations. It's a good idea to contact a local expert in referral law in your state before offering or paying a finder's fee in your investment business.