Finders Fee for Real Estate Investors [What Is It?]

Finders Fee for Real Estate Investors

If someone brought you an investment opportunity and the transaction was successful, you would be paying a finder's fee. This fee serves as commission of the individual who gave you the lead about a residential or commercial real estate but the exact amount varies depending on different factors.

Want to learn more about finder's fee in real estate from how it differs from referrals to how to calculate its exact amount? Check out the rest of this comprehensive blog! Feel free to share this to your fellow investors and real estate agents, too.

What Is a Finder's Fee In a Real Estate Transaction?

A finder's fee is a type of commission paid to an individual who connects two parties during a transaction. In the real estate industry, the finder's fee is typically paid to the person who serves as an intermediary between the buyer of the property (investor) and the seller. 

The finder helps facilitate not only the introduction of the parties involved but also the negotiation and property closing. In exchange for their help, they collect finders fees or a percentage from the total sale amount or they get a fixed rate.

The party who directly pays the finders fee is the one who would benefit more from the transaction. For example, if a real estate investor is looking for a fixer upper that can be flipped to become a rental property or real estate and someone connected him with a seller, he would be paying that finder or broker. This also applies if an investor is looking for a potential tenant to an existing property and or simply looking for the best deals in rental properties.

There may be cases, however, when both parties split the payment for the finder or broker. This is rare, especially in real estate, but there are some transactions with this arrangement.

Finder's Fee vs. Referral Fee

As mentioned, finders fees are paid to a finder after they successfully facilitated a home sale. This is different from a referral fee because it is only paid to someone who referred a buyer or seller but is not directly involved in the whole transaction.

Typically, finder's fees are given during big real estate transactions, while referral fees are only for smaller deals and it doesn't necessarily mean it is a transaction between a buyer and a seller. Referrals in real estate can mean someone referring to a contractor, a title company, etc.

A real estate investor referral fee is also usually a fixed amount while the finder's fees are larger because it is tied to the transaction value. If the purchase price of the real estate costs hundreds of thousands of dollars, a percentage of it would be the finders fees unlike referral fees. 

Another difference is that finders fees are paid after the deal is completed by the potential buyers unlike referral fees. In this aspect, it is quite similar to seller's commission.

Meanwhile, a typical referral fee is paid after the referral is made so they can get their referral income immediately. It is also crucial to clarify that in a transaction with a finder, there are three parties involved — the potential buyer, seller, and finder, while in a referral that requires referral fees it can only be the buyer/seller or the individual who referred the seller).

How Much is a Typical Finder's Fee in Real Estate

Finders fees are either a percentage of the total transaction sale or a flat rate, whichever the parties involved will agree to in the real estate investment game.

In real estate, the typical finder's fee is 1% to 2% of the property's purchase price. But this rate can go upwards depending on the complexity of the transaction, how competitive the market is, and how grand the real estate property is. 

These are not the only factors involved in calculating amount the finder receives in a real estate transaction. The fee can still vary based on other variables.

Factors That Affect Finder's Fees

• Transaction Value: As the value of the transaction goes higher, so is the finder's fee. This is applicable if the finder's fee is a percentage of the transaction value and not a flat rate. This is known by every experienced investor but this is not a mandatory fee paid so that should also be a factored in.
• Transaction Complexity: If the real estate deals happen in a complicated manner and require more time and effort, you can expect to pay a higher finder's fee.
• Location: In areas where the market is competitive and the cost of living is high, higher finders fees are charged, too. Such is how the real estate world works.
• Relationship Between Two Parties: If the finder, real estate agent, or broker has a relationship with the party who would be paying the fee (ex. relative, friend, former colleague), the amount may be lower than that of the standard.
• Industry Standards: Each type of transaction in real estate calls for reasonable finders fees. The fee should also follow federal and state laws, unlike a service charge. This should be the basis for calculation, so it should be researched before making a deal happen.
• Finder's Expertise: Some finders are already experts in the industry, so they may demand a higher amount. Of course, this can still be negotiated if you've been their repeat client. In case the finder doesn't have any credentials and demands high finder's fees, this may be one of the red flags you should be aware of.

Note that there is no standard set of rules in calculating the finder's fee. You may or may not consider the factors above. It will all depend on your agreement with the finder. 

What's Normal and Not Normal in Finder's Fees?

If you're new to paying finder's fees, chances are, you are researching ways to protect yourself. To help you out, here are some normal and unusual things about finder's fees. Let's start off in what you should expect:

• Finder's fees are not legally required. In other words, you are not legally bound to pay a finder's fee, but it already became a common industry practice to do so; thus, in order to see a successful sale, you must consider paying.
• There may be instances when there are no business contracts for this middleman fees. If you don't want to draft a contract and just pay the fee, you can also do so. You can just write a check to the finder or intermediary.

Here's what's not normal for finder's fees:

• Beging required to pay the finder's fee directly. As discussed above, you are not legally required to pay a finder's fee, so no real estate broker, real estate agent, or any individual is legally entitled to require you to do so. If they directly ask for a finder's fee, you are not obligated to pay.
• The intermediary does not have a real estate license. It is a red flag if the person who claims to be the middleman does not have a real estate license, especially if you do not know their involvement in the real estate deal.
• When you think something is off with the finder, there probably is (red flags). If your gut tells you that you should not be paying a finder's fee in the first place, even though the person claiming to be the finder is one of your business contacts, still trust your gut.

What's In a Finder's Fee Agreement With a Licensed Real Estate Agent?

Many real estate investors, real estate agents, and licensed brokers opt to draft a contract even though it is not legally required when paying a finder's fee for their business. If you plan to write a contract or written agreement yourself, here's what you should include:

• Purpose of the Agreement: The first and most important detail to include is the purpose of the agreement. Specifically, what will be the role of the finder or middleman in the whole real estate transaction?
• Parties Involved: The contract should also detail the parties involved, specifically the name of the party who will pay for the finder (the real estate investors) and the name of the finder as well.
• Amount and Calculation of the Finder's Fee: The exact amount to be paid to the finder should also be included in the contract. It should also be clear how this amount would be calculated. Is it a percentage of the sale or a flat rate? This is probably the most lucrative part.
• Payment Terms: The payment terms should include when the paying party or potential buyer would pay the fee to the finder and what obligations the finder should fulfill first with regard to the property before the money gets deposited in their account. That is how finders fees work in a brokered deal.
• Termination: The contract should also include a detailed termination agreement in case the collaboration between the finder and the paying party did not go very well. The compensation provided can be retracted based on any unethical charges of the other party. This should be considered both by old and new investors when entering real estate investing through the aid of a finder.
• Governing Law: To ensure that any disputes between the interested parties regarding the finder's fee agreement and the property can be settled, it is wise to include in the contract which state and federal law would govern it. 
• Confidentiality: This may be necessary for some real estate transactions, especially if the deal is a little sensitive. This confidentiality clause ensures that the finder won't tell anyone about anything regarding the deal.

Summary: Finders Fee for Real Estate Investors and Real Estate Agents

While finder's fee in real estate is not legally required, it has become a common practice to pay the middlemen after every successful transaction. As discussed in this blog, the amount of the finder's fee is typically 1% to 2% of the transaction's overall price. But, it is also common to see finders asking for a flat rate whether they are negotiating a fixer upper or a high-end property.

To ensure that you will be paying the finder's fee correctly, ask for the help of an asset protection attorney or any real estate attorney from a reputable law firm.

If you don't have the budget to pay the finder's fee, we have a simple suggestion — just buy leads from online lead generation platforms. Here at Property Leads, we won't ask you for a huge amount of finder's fee. You only pay for the lead you bought through a bidding system!

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