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,

• 1/30/08 NYT: Sales of homes fell 26% last year.
• 1/30/08 EFinancedirectory: Home prices are falling nationwide.
• 1/29/08 RealtyTrac: Foreclosures increase 75% in 2007. Comes with a map.
• 12/16/07 SF Gate: 1/5 of foreclosed homes in the SF Bay Area owned by investors.
• 11/27/07 USA Today: Foreclosures to have a profound impact.

For those banks that overextended their risk posture things are terrible:

• 12/5/07: EFinancedirectory: 1/3 of home loans are delinquent.
• 8/5/07: NYT: A nice graphic of the credit bubble, old but useful.

However, there is hope! Investors are beginning to move in to help bail out the banks and distressed homeowners:

• 12/28/07: Washington Post: Article about REO specialists.
• 12/2/07: SF Gate: Article about rehabbers.

• US Census: New Residential Construction
• US Census: Building Permits
• US Census: Characteristics of New Housing
• NAR: Housing & Economic Indicators
• NAHB: Economic and Housing Data
• MBA: Research and Forecasts
• HousingTracker.net: Asking Price Trends

Free:

• WSJ’s Real Estate Journal
• Yahoo Real Estate
• Trulia
• Bankrate

Premium:

• DataQuick
• RealtyTrac
• Altos Research

• Freddie Mac has a foreclosure fraud center and commercial on Youtube.
• Fraud Guides has a bulleted list of red flags.
• 10/25/07: Bankrate elaborates on various schemes. They’ve provided a summary of warning signs.
• 12/7/06: CNN posts an update to the ongoing issue.
• 11/29/06: WSJ’s take.
• 7/7/05: The BBB issued a recent warning on foreclosure scams.
• 6/3/05: The Washington Post covers foreclosure fraud.
• 10/1/98: The DOJ issued a notice detailing how to detect foreclosure fraud.

How can you differentiate between a legitimate and fraudulent deal? Below are some opinions:

• 11/2/07: Jim Watkins is emphasizing the importance of full disclosure and participation of all parties.

This post is to test integration with Google’s Picasa for geo-tagging investment properties.

General References:

• Rachel Dollar’s and the Prieston Group’s blogs focus on mortgage fraud.
• John Maudlin publishes my favorite investing and economic analysis newsletter. He’s had some great discussion of the credit bubble, sub-prime crisis, and mortgage fraud.
• Efinancedirectory.com has a great segment on the housing bubble. I’ve been reading them for several years. They liberally quote from credible sources such as Credit-Suisse.
• Patrick.net is a great resource for housing information specific to the Bay Area, CA.

Specific References:

• Read about mortgage fraud in Miami condos.
• The BBC has a great article with graphical explanations of the subprime mess.
• The FBI’s most recent mortgage fraud report was issued in 2006. There’s a shorter article specific to mortgage fraud updated on 5/2007.
• Countrywide underwriters sued by NY pension funds for mortage fraud.
• FBI opens investigation into 14 banks related to possible mortgage and securities fraud.