Real Estate Investing Basics

How to Avoid Illegal Referral Fees

Expertise:
193 Articles Written

In most states referral fees paid to investors (non-Realtors) are illegal. However, the government rarely enforces this and most people pay referral fees anyway. I’m not sure what the penalties are, but I’m sure they are minor and i’m certain these would be a slap on the wrist.

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That said, today I’m going to show you my latest deal and how I legally paid a referral fee. You see, in my area I am known as the “subject-to” guy. I let everyone I meet know that I love subject-to’s and that’s pretty much the only type of deal I want to do.

It still amazes me the number of investors who refuse to learn how to do sub-2 deals, or who think they are difficult – but that’s ok because it helps me make an awful lot of money.

Well, recently, I had an investor come to me and they had a subject-to deal that they didn’t want, and they wanted to give it to me for a small referral fee ($500) – which is a deal, since most fees are in the $1,000 to $1,500 range (which is still a good deal if you’re making $30,000 per property).

So what did I do?

First, I of course evaluated the deal to make sure the numbers worked and it would cash flow and make me money. Next, I did not pay the person the $500 referral fee. Instead, I simply had them assign the subject-to contract to me for $500, just like a regular wholesale deal.

Now, there are a few things to know when doing this. First, I always require people to use my subject-to contracts. It has all of my clauses in there to protect myself, and since most people have no idea how to do a subject-to deal, their contracts are usually generic and not worth the paper they’re printed on.

In addition, you will want to have the person use your other documents in the sub-2 deal. (For example, the affidavit of liens.) And again, they will simply assign all of these documents to you.
But perhaps you’re asking yourself “what if the other investor doesn’t agree to this,” right?

Well, to put it simply, they will. Everyone loves money and everyone loves to get paid. More importantly, most investors have no clue how to do a subject-to deal so they will be happy to get money from a deal they were going to just toss in the trash.

Also, they’ll get a free learning experience from you since you’ll be showing them how to do a sub-2 deal. But don’t be afraid this will create competition for you, because it won’t. Most folks love to wholesale and never do anything else, and you will build up a steady group of people who will wholesale you sub-2 deals.

So, from now on, to get your referral fees, simply have investors assign the contract to you for the amount of the fee. This is an easy and legal way to pay investors to bring you deals.

    Stacy Kennedy
    Replied about 9 years ago
    Jason, that was a great article. It’s true about referral fees…no one seems to enforce it, but it’s always best to do things legally. Thanks for the idea on how to tow the line.
    Jason @ REI Capital
    Replied about 9 years ago
    Referral fees are always something to be very careful about. One wrong move and an illegal action can put you out of business.
    Mobile Mike
    Replied about 9 years ago
    WOW THANKS, I will remember this but of info. I pay out more than my fair share in referal fees and I never new they were illegal. I will remember this for my future deals. Well then again I am buying personal property so it may not apply to me.
    Brooks
    Replied about 9 years ago
    My state (Alabama) is pretty clear that you have to have a license to collect a fee when dealing in real estate. I’m not really sure how most typical bird dogs get away with collecting their fee. Is it only the person without a license collecting a fee that is breaking the law? Is the person paying the fee also breaking a law (whether unknowingly or not)?
    Jason @ REI Capital
    Replied about 9 years ago
    What if you pay an individual a marketing fee as an independent contractor for helping you better your business? I believe the licensed individual paying the fee is liable since the responsibility to “know better” would be placed upon them. If you are not licensed the powers that be may turn their nose up as they just “didn’t know better” since they are not licensed…
    Brooks - TheSouthernInvestor
    Replied about 9 years ago
    I actually have a real estate license so I can collect all the fees I want 😉
    Brooks - TheSouthernInvestor
    Replied about 9 years ago
    I actually have a real estate license so I can collect all the fees I want 😉
    Brooks - TheSouthernInvestor
    Replied about 9 years ago
    Jason, Yes, you’re correct. -Marketing Fee to help better a business. -Or a “Consulting Fee” which is pretty popular in my area. I have never heard of any ‘power’ coming back asking questions, etc.
    John Roberts
    Replied about 9 years ago
    This is a very organized way to make sure you don’t get on bad footing and be tagged for asking illegal referral fees. And as what you said about being the “subject-to” guy in your area, I’m pretty impressed at the depth you have achieved in this kind of deal.
    Jere
    Replied about 9 years ago
    So how does one go about doing a subject-to deal? Im interested. Lancaster, PA
    Jason @ REI Capital
    Replied about 9 years ago
    You need the right contracts and the right seller. I’ve found building trust and making the end result a win win along with full disclosure will yield some great deals. If you can show the seller that a subject to deal truly benefits them than it is a no-brainer. I’m not sure of a great step by step guide to actually doing it… Let me know if you find one.
    Diana Brafford
    Replied about 9 years ago
    Great post Jason! Although it is infrequently enforced it is good to understand how to work within the laws of referral fee’s. Subject-to’s are definitely an interesting way of investing. I think most people shy away from them because there is a great level of creativity involved. Like you mentioned in your response to Jere full disclosure is key and making the seller understand that the situation can be a win-win. Kudos to you for having success in this area! You mention using all your own contracts. Do you have any suggestions for someone who is trying to create a contract for their own subject-to, or is it a case by case situation?