First, a disclaimer: I am not a lawyer (that lovely acronym “IANAL” so popular on various forums). This post does not constitute legal advice. Seek professional input, etc. etc. I’ve simply tried to do some basic research on my own to get a feel for a puzzling question — Is the practice of “Bird Dogging” Illegal?
Various real estate “gurus”, seminars, investment clubs, websites, blogs, and forums encourage novices to being their real estate career as “bird dogs”. The essential concept is that a finder’s fee is paid by the investor to the finder for providing information about a potential deal.
However, after some extensive Googling, I found a general consensus on various REI forums that finder’s fees are illegal. There is some controversy on specific narrow exceptions:
- 2/4/08 BiggerPockets Forums: What is a Bird Dog? If the fee is contingent on the transaction or the bird dog is performing a regulated action (acting as a middleman) the referral fee is illegal.
- 8/21/07 Realty Times: Federal Law Prohibits Most Payment of Referral Fees to Unlicensed Persons. Federal law (RESPA) governs transactions involving financing by a government agency (FHA) or federally regulated/insured financial institutions. RESPA prohibits the payment of referral fees to unlicensed persons. “Exceptions would be cash transactions (< $1 MM / year / investor), those with seller financing, or ones in which the loan comes from a non-bank entity such as an insurance company.”
- 1/24/07 Inman News: Reward Offer Can Lead to Legal Complications. This is a follow up to the 1/1 posting below. Illegal under RESPA, and legal under narrow restrictions under California state law. (However, RESPA overrides state law.)
- 1/1/07 Inman News Forum: Wanted: Home buyer — $1000 Reward. The consensus of the forum members is that the practice is illegal under RESPA. There’s a follow up reply from some lawyers that confirms this position.
Without a clear answer, it is time to dig deeper:
- RESPA = US Code Title 12, Chapter 27
- RESPA In General - ” RESPA covers loans secured with a mortgage placed on a one-to-four family residential property.”
- Section 8: kickbacks, fee-splitting, unearned fees - “Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan.”
- Section 2602.3 - Definition of settlement service: “includes any service provided in connection with a real estate settlement including, but not limited to, the following: …services rendered by a real estate agent or broker…”
- Section 2607.A - “No person shall give and no person shall accept any fee…pursuant to any agreement…that business incident to or a part of a real estate settlement service…”
Preliminary Conclusions (Work in Progress):
- RESPA covers most real estate transactions — anything that is backed by the government or flows through a bank entity regulated or insured by the government. Exceptions:
- Residential properties > 4 units
- Commercial properties
- All cash transactions — limited to $1 MM per year for each investor
- Seller financing
- Loan from a non-bank entity
- In RESPA covered transactions:
- Licensed real estate professionals (agents, brokers, lawyers, etc.) may pay fees to each other as “affiliated businesses” under the condition that the relationship is disclosed and a fee estimate is provided upfront.
- Licensed real estate professionals may not pay fees to “associates”.
- Unlicensed individuals (private investors, “bird dogs”) may not pay fees to each other because they are performing the regulated action of matching buyers and sellers which requires a real estate professional’s license.
- In non-RESPA transactions:
- We must look to state law.
- In California,
