Finder’s fees are the monies paid to any person or company that facilitates a transaction. As a real estate investor, you’ll find yourself paying finder’s fees from time to time. Often, it’s the real estate agent that pays these fees, but you’ll pay them in a roundabout way, so it’s a good idea to understand how they work. Finder’s fees are regulated by law, so here’s the scoop.
Finder’s Fee Cost
The finder is the person responsible for bringing the two parties in a transaction together. For his match-making skills, the finder gets a commission that’s typically a certain percentage of the transaction price. By law, the finder’s fee can be anywhere from 3-35 percent.
In real estate, a finder’s fee may be paid for finding a property that meets the specifications of a certain client, finding a buyer who’s interested in buying a property or closing a real estate deal. As an investor, you can consider finder’s fees to be an incentive for your “finders” to keep finding the deals you need to keep the whole game going.
What To Expect With Finder’s Fees
First of all, no law says you must pay a finder’s fee. While it’s common for a broker to ask you to pay a finder’s fee, you aren’t obligated legally to pay it. Keep in mind that if someone pushes for you to pay a finder’s fee, you might want to move on to someone else.
A good rule of thumb is to have a contract drawn up that explains everything including what the finder’s fee is (if anything) and who’s responsible for paying it.
What’s Not Normal When Asked To Pay A Finder’s Fee
While it’s completely legal for real estate professionals to ask for a finder’s fee, some instances might seem unethical or even illegal where they are concerned.
For example, as an investor, you should never be asked to pay a finder’s fee directly. If you are, it may be that the asker is receiving funds “under the table,” which can get you in trouble as well.
Also, if someone can’t explain their involvement in the transaction to justify asking for a finder’s fee, move on. They are likely trying to get something for nothing. Make sure you aren’t giving money to anyone who hasn’t earned it.
Lastly, if the person asking you to pay a finder’s fee isn’t licensed, don’t pay it. By law, anyone asking for a finder’s fee must be licensed to conduct real estate transactions in their state.
Finally, if your gut tells you something isn’t right, listen to it and move on.
Understanding the finder’s fee is important to becoming a good real estate investor. Doing so will help you avoid shady deals and succeed honestly.