How to Avoid Illegal Referral Fees
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.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
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.