I am a real estate wholesaler in Delaware and I advertise on craigslist: "Investor pays $500 per property lead that closes". So bird dogs bring me a bunch of leads, and if i wholesale one of those, i will pay them since they brought the lead to me. Someone informed me this may not be legal. I have been reading on the web and this forum but surprisingly can't find a clear answer. Is paying a bird dog commission based on the purchase of real estate illegal? And if so, why is it illegal? Also, what to do about it?
If you were a licensed real estate agent then I would say yes. Because you are not then no it is not illegal. However I would have a contract written up (operating agreement or Joint Venture) with said Bird Dog.
You need to read Your state licensing laws. But generally, my understanding is, as non licensed person, it is illegal to Receive it, but I don't generally see that it's illegal to Pay it. I could be wrong, but I believe it's sort of like doing contracting without a license, when one is required; illegal for the contractor, but not for the owner (as far as licensing laws go, not permitting requirements).
To make matters complicated, I actually have my NJ real estate license as I used to live there. Now I live in Delaware and only invest and deal with properties/bird dogs in Delaware. I may ask a real estate broker as well. Thank you for sharing your thoughts, more are welcome!
Paying it is a cost of acquisition paid out of closing, if it's not disclosed on the HUD or settlement statement then it is a violation, it also throws your tax filings off, it throws the depreciation off, it causes tax issues and violates settlement procedures.
The birddog gets nailed for collecting it under the conditions mentioned.
Why not put your birddog in your LLC, a limited member or employee and pay them for work accomplished, close in the LLC name and declare the cost on your books.
There are usually viable alternatives to achieving a mission legally and ethically with just a bit more attention and effort. :)
The way to do it legally is to pay per lead not pay per closed deal. Set a minimum standard that the lead has to meet. This would start with providing correct contact information for the seller. You can add criteria - minimum home value, geographical criteria or what ever you want.
Pay them $50 per lead whether you buy the house or not - as long as it meets your criteria. If you buy 1 house for every 10 offers then its the same as $500 per deal and wont trigger any license requirement.
Bird dogs like it because they get their money quicker and never have to worry that they are getting cut out.
Have a simple contractor agreement with your bird dogs that spells it all out. Clean and tidy.
I'd say Ted that sounds simple enough, and paying for leads is okay, but in reality, there is the matter of the quality of a lead, that can be very difficult to define even with parameters stated. Those numbers could be much higher, you could have 25 leads and get one transaction.
It's really going to boil down to experience and ability to identify good leads for a particular investor, knowing what they really want and will bite on. You'll also find investors that may not be interested in buying another property for six months, you may not know that until you present a lead.
Just as in your business, you don't want your leads resold, if a buyer rejects a lead, what does the birddog do with it, just eat it or move on to others.
I agree the concept solves some issues with the license matters and settlements, but in reality that may be harder to do, fairly. I could think of a hundred reasons not to buy a property and it would be pretty hard putting all those issues in a clearly understandable agreement.
Best way is to put your birddog inside your LLC and have them conduct the work inside the principal entity that will be buying. :)
@Bill Gulley :
Unsold/rejected leads are the bane of the leads business. Finding other ways to monetize those leads is the key. If a seller lead is not good for one buyer - it could be perfect for another. The only way to make it work is to have a large network of investor/buyers. You can also make the leads one price for exclusive and another price for non-exclusive.
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