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,