How to Avoid Illegal Referral Fees

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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.

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.

About Author

Jason R. Hanson is the founder of National Real Estate Investor Month and the author of “How to Build a Real Estate Empire”. Jason specializes in purchasing properties “subject-to” and has purchased millions of dollars worth of property using none of his own cash or credit.

11 Comments

  1. 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.

  2. 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.

  3. 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)?

  4. 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.

    • 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.

  5. 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?

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