Finders fee percentage for bringing in investors?
Accountant · Member since 2018 · 64 posts · 16 votes
What kind of percent would be fair to command for bringing investors to the table for deals?
4% first million, 3% next million, 2% next million, 1% thereafter?
What duration would you hold those percentages for (to avoid getting backdoored after a single small deal)? 2 years? 10?
Nobody is going to intro a heavy investor and have them put $100k on one deal, you get paid, then do a $10m deal a month later and get nothing.
The appropriate fee is 0%. It is illegal to pay a finders fee, commission, or fee by any other name to someone for bringing an investor to buy a security (which is what investing in a passive real estate deal is).
There are two exceptions to this. The first is that a commission can be paid to a licensed broker/dealer, so if you have the proper securities licenses and are employed by a broker/dealer you can be paid a commission. Typical buy side is 4-6%. You don’t see many broker/dealer transactions in the syndication space for multiple reasons that could fill a whole other post.
The second exception is you can be paid a fee to make an introduction. But the introduction can not be contingent on the introduced investor actually investing, nor can it be tied to how much they invest. So this introduction isn’t worth much. I would pay $0 for it.
If you are part of the general partner team you can raise capital and be paid for it either with salary or a profit share in the deal. But you have to be careful because regulators could examine if you had any other duties besides raising capital, and if you don’t it could be found that your compensation was actually a disguised commission, which is illegal. This is a case by case situation and nuances matter. So get good legal advice before proceeding.
The appropriate fee is 0%. It is illegal to pay a finders fee, commission, or fee by any other name to someone for bringing an investor to buy a security (which is what investing in a passive real estate deal is).
There are two exceptions to this. The first is that a commission can be paid to a licensed broker/dealer, so if you have the proper securities licenses and are employed by a broker/dealer you can be paid a commission. Typical buy side is 4-6%. You don’t see many broker/dealer transactions in the syndication space for multiple reasons that could fill a whole other post.
The second exception is you can be paid a fee to make an introduction. But the introduction can not be contingent on the introduced investor actually investing, nor can it be tied to how much they invest. So this introduction isn’t worth much. I would pay $0 for it.
If you are part of the general partner team you can raise capital and be paid for it either with salary or a profit share in the deal. But you have to be careful because regulators could examine if you had any other duties besides raising capital, and if you don’t it could be found that your compensation was actually a disguised commission, which is illegal. This is a case by case situation and nuances matter. So get good legal advice before proceeding.
That is actually illegal. The sponsor would need to put you on the GP (general partnership) and also give you some other responsibility besides simply bringing investors to the table.
@Anders Jax You want to add value that would make an investor always want to go through you. Think about it this way, sellers on Amazon can easily make a sale on Amazon then direct those customers to their own website afterward. Amazon, however, offers buyers more protection by going through their platform along with fast shipping. What can you do to add value that will make your investors want to always deal with you?
If you performed the due diligence for your investors and they can trust it, then that is what you can bring the table. If all you are trying to do is introduce people with money to the person with the deals and try to take a cut for that introduction, your business won't last long once you run out of investors in your network. Most investments would be toward an LLC, so even if you wrote a contract that says that you take a fee for any investment an individual makes with you, the contract would only be valid with that LLC. Once they have a new project under a new LLC, that contract wouldn't apply anymore.
If you have a lot of investors, then you can start your own LLC and never introduce your investors to the other party. You collect what you need from your investors, then fund the deal through the LLC. The other party will never know who your list of investors are that way.
As others have mentioned, you need to get a part of the GP to raise capital. I've seen anywhere for 15% to 40% of the GP allocated to equity raising. But ultimately it is up to the GP. They may give you a proportion of the GP equal to the amount of money you raise, less than the amount of money raised, a salary, or something else. But the key point is that you must be a part of the GP.
Thanks for the replies.
I am working with someone who is a licensed broker dealer so thats not an issue.
What I am interested in is say I make an introduction including pitchdeck and analysis that nets a first investment of $200k, then over the next year $2m, the next year another $4m.
What fee structure would be fair to charge, and what duration? I.e. I think I should get paid for a certain amount of time after the introduction, so that they dont do a tiny deal, then huge ones and I get paid just off the tiny one.
I was thinking a 2 year period of full fees and then gradually reduce down to zero after another 2 years, so that I get paid off the investors I introduce for a meaningful period of time
Thanks for the replies.
I am working with someone who is a licensed broker dealer so thats not an issue.
What I am interested in is say I make an introduction including pitchdeck and analysis that nets a first investment of $200k, then over the next year $2m, the next year another $4m.
What fee structure would be fair to charge, and what duration? I.e. I think I should get paid for a certain amount of time after the introduction, so that they dont do a tiny deal, then huge ones and I get paid just off the tiny one.
I was thinking a 2 year period of full fees and then gradually reduce down to zero after another 2 years, so that I get paid off the investors I introduce for a meaningful period of time
This is between the real estate agent you work for and the clients. You, without a license, are not supposed to be a party to such negotiations.
Might be state specific, but in general it would only be lawful for the real estate agent to pay you hourly or salary, and the scope of what you can do without crossing the line into "selling" real estate without a license will be a very narrow one.
If you want to be the real estate agent, then I'd suggest getting your real estate agent license.... think of the dumbest real estate agent you've ever met: if that person can pass the little test, you can certainly pass it too right?
And, really, there's no reason to try to reinvent real estate agent commission structure when the total number of years under your belt as a real estate agent is zero. Before you respond with "but I won't want to be a real estate agent," consider that in both your OP and in this post you are merely describing much of the job of a real estate agent ("market and bring a buyer to the table") but proposing a unique commission structure. You can't really say "I don't want to be a real estate agent, instead what I want to is [proceed to describe a bunch of things generally requiring a real estate agent license]."
@Anders Jax people we work with are usually between 1-3%, but at the end of the day its what you're willing to pay for, or what you're willing to take. I personally think 3% is high though.
@Anders Jax people we work with are usually between 1-3%, but at the end of the day its what you're willing to pay for, or what you're willing to take. I personally think 3% is high though.
What about the duration of time Chris? After the first deal are you allowed to work with those investors without paying the finders fee? Or do you continue to pay them for subsequent deals w those investors?
@Anders Jax 12-36 month timeframe, sometimes with also contains a no fee agreement after certain amount of deals/dollars from that company/investor. Also, sometimes will involve a step-down for that company/investor in fees received/paid after a certain amount of deals/time/dollars raised.
End of the day it's about what your leverage is, what can the deal support, and what are you willing to pay/get paid. I also wouldn't overlook rolling fee into the deal or accepting a certain % of GP.
@Anders Jax Can you describe exactly the type of deal you are envisioning? Why would they be adding additional increasing amount of funds to the same project?
@Anders Jax 12-36 month timeframe, sometimes with also contains a no fee agreement after certain amount of deals/dollars from that company/investor. Also, sometimes will involve a step-down for that company/investor in fees received/paid after a certain amount of deals/time/dollars raised.
End of the day it's about what your leverage is, what can the deal support, and what are you willing to pay/get paid. I also wouldn't overlook rolling fee into the deal or accepting a certain % of GP.
Thanks Chris.
All the fees would be rolled in to the deal, and Im proposing doing that as LP dollars. Do you think its fair to ask treatment as an LP? The way I see it, its cash I’d otherwise be taking, which I am investing in the deal, so that’s more analogous to LP contribution than GP.
Im expecting the deals to net roughly 60/40 in favor of the LP. It will also be a sticking point Im sure, as they want to structure it roughly 8% pref 80/20 until 11%return, 60/40 until 14% and 40/60 thereafter, which seems unusually generous to GP.
@Anders Jax Can you describe exactly the type of deal you are envisioning? Why would they be adding additional increasing amount of funds to the same project?
They wouldnt. But they might raise a fund, or if they raise 10 projects from an investor, I would be open to reducing my fee as they hit certain amounts of funds raised per investor.
@Anders Jax If you are raising the money and rolling you "fees" into the deal I would always push for GP side instead of LP. Usually GP money has no hurdles, and you also get a % of the hurdles that is going to the GP on cash flow and sale, so you would make a much better multiple on your money as a GP instead of an LP.
In terms of a waterfall structure, it's so subjective, but I prefer to not take more than the investor unless it's a higher threshold, and I only do 2 hurdles max to just simplify things. Ex. 6% pref, 80-20 to 12, 65-35 over that (stated as investor-sponsor share over hurdle). However, it's just on preference and who their investors are. But I'll tell you one thing if they can't raise the money on those hurdles, I can almost guarantee they'll change up the hurdles and fees before losing money on a deposit and other costs to run a deal. It's all a negotiation and what sponsor/investors are willing to take. And conversely, someone in a 1031 who owes a lot of money and desperately needs a deal may accept more sponsor favorable terms to get their money in tax deferred...
It's all about who's got the leverage.
@Anders Jax At the end of the day if you aren't adding some sort of value, investors have no reason to go through you. You should stop thinking about finders fees, and start thinking what value can I bring besides introductions.
Think about it another way, if I was already planning to invest in a deal, but knew that the company was giving out finder's fee, what prevents me from telling my friend to introduce me to them so he can collect some money? This can be easily exploited, so what company would want to offer this?
@Anders Jax At the end of the day if you aren't adding some sort of value, investors have no reason to go through you. You should stop thinking about finders fees, and start thinking what value can I bring besides introductions.
Think about it another way, if I was already planning to invest in a deal, but knew that the company was giving out finder's fee, what prevents me from telling my friend to introduce me to them so he can collect some money? This can be easily exploited, so what company would want to offer this?
You know that happens in real estate home sales right? Someone knows an agent and uses them as the buyer agent and so they split the fee 50/50 with the sellers agent instead of sellers agent getting 100% of the fee?
Anyway, they are LOOKING for investors, and investors dont know they exist. So the value I am adding is finding them potentially tens of millions in funding. Thats a lotta value if you ask me.
@Anders Jax If you are raising the money and rolling you "fees" into the deal I would always push for GP side instead of LP. Usually GP money has no hurdles, and you also get a % of the hurdles that is going to the GP on cash flow and sale, so you would make a much better multiple on your money as a GP instead of an LP.
In terms of a waterfall structure, it's so subjective, but I prefer to not take more than the investor unless it's a higher threshold, and I only do 2 hurdles max to just simplify things. Ex. 6% pref, 80-20 to 12, 65-35 over that (stated as investor-sponsor share over hurdle). However, it's just on preference and who their investors are. But I'll tell you one thing if they can't raise the money on those hurdles, I can almost guarantee they'll change up the hurdles and fees before losing money on a deposit and other costs to run a deal. It's all a negotiation and what sponsor/investors are willing to take. And conversely, someone in a 1031 who owes a lot of money and desperately needs a deal may accept more sponsor favorable terms to get their money in tax deferred...
It's all about who's got the leverage.
Thanks Chris but Im not sure how you are getting to GP being the better investment. If the cash flows are split in a waterfall structure like you indicated, a majority of the cash flows would go to the GP.
GP has to pay out the hurdle essentially. Dont even start earning until after the pref.
So are you thinking of some type of deal where the GP takes a yearly management fee percentage? Otherwise Im not sure how taking the GP side could earn more.
They will in fact be managing the sales and marketing of the property, and taking a nice 13% to do so, but I dont think I can take the fees and roll it into owning part of that management fee.
Otherwise in a normal deal, I am under the impression GP would find an investment, offer say an 8 pref, 80/20 til 12% then 60/40 thereafter, and the GP would hire a management company who takes say 5% to manage the hotel. In that case, the GP would never make more than the LP.
@Anders Jax Gp side has their own money invested as well. So say you made $50k raising money, you would roll that in as GP capital. Depending on the structure, you're money invested doesn't enter into the waterfall structure (why would GP take splits on their own money?), so you make 100% of the cash flow and sale proceeds on your money OR it is treated as LP money going into a waterfall structure and you're the same as LP.
On top of that, whatever percent you negotiated of the GP side, would be the percentage of profits that the GP side is getting from the waterfall structure/fees.
So you get a cut of the GP and you make the same or better returns on your money than the LP side.
When you enter into GP side you have to negotiate also what percentage of fees you get, you might get a portion of the asset management/property management fee (side note 13%?! Thats a rip off if I've ever heard one!), might get a percentage of other fees like acquisition (but they're paying you to raise so they might say no to that), if theres construction management fee, disposition fee, refinance fee, etc.
We only structure our deals with acquisition fee (1-3% of purchase), asset management (1-2% of net revenue), and the waterfall structure.
@Anders Jax Gp side has their own money invested as well. So say you made $50k raising money, you would roll that in as GP capital. Depending on the structure, you're money invested doesn't enter into the waterfall structure (why would GP take splits on their own money?), so you make 100% of the cash flow and sale proceeds on your money OR it is treated as LP money going into a waterfall structure and you're the same as LP.
On top of that, whatever percent you negotiated of the GP side, would be the percentage of profits that the GP side is getting from the waterfall structure/fees.
So you get a cut of the GP and you make the same or better returns on your money than the LP side.
When you enter into GP side you have to negotiate also what percentage of fees you get, you might get a portion of the asset management/property management fee (side note 13%?! Thats a rip off if I've ever heard one!), might get a percentage of other fees like acquisition (but they're paying you to raise so they might say no to that), if theres construction management fee, disposition fee, refinance fee, etc.
We only structure our deals with acquisition fee (1-3% of purchase), asset management (1-2% of net revenue), and the waterfall structure.
Well interestingly airbnb/short term rental property management companies charge like 25% of revenue which seems insane. But these are going to be multi family all short term rental, so I really think it should be closer to a hotel managemen percent, maybe 5-7% including management and sales/marketing. Cuz you can just use a third party app like bookerville or liverez which makes everything pretty much automated, and Ive talked to really good marketing firms who charge like $1500 a month, which if you had 10 properties in a building, thats $1600ish per property per year, which is probably 1-2% of sales, max.
They wont be putting in much of their own money, maybe 3-5%, and I dont think I can demand 4% of their investments as well, just 4% of the money I raise, rolled into the deal, so basically I can buy say $40k of equity in the deal, and in that case, the LP/GP split will favor LP so thats where I want to be
@Anders Jax I'm not familiar with hotel structure, but if you take 10% of GP, but GP is only 5% then you would get .05%. Even if it's less you're still getting the same or better returns as the LP because of the waterfall structure and you're getting whatever percentage of GP that you've negotiated.
If the GP, regardless of heir percentage of ownership, makes $1,000,000 mil from the different fees and waterfall structure. If you are 10% of the GP portion (not 10% of the deal) then you make an extra $100k over and above what you make on your money in the deal.
@Anders Jax you'd have to be part of the GP to get paid. Each GP structures deals differently.
Show the analysis to the investors but ultimately everything goes through you so you are investing with the investor's funds and then turning around and sharing profits with them. You might take a 2 point spread with private financing deals. Ex. Privately finance a property for someone who has a significant downpayment. Charge them 8% then give your investors 6%. Keep the 2% spread. On a $200,000 private loan this is $300+ a month for you with no out of pocket money. Do 8 deals and you are bringing in $2500+/- a month for years. Use an attorney to draw up all the paperwork.
Generally, the parties or party responsible for raising capital are given a percentage of the GP. I've seen as little as 10% to 15% and up to 40% of the GP allocated towards raising capital. If the allocation is 30% and you raise 50% of the capital, then you should get 15% of the GP.
This is a very interesting thread with some misguidance. One of the most valuable things that you can offer your investors is deal flow. Hundreds of millions of dollars even billions of dollars have been made on Wall Street, in Private Equity, and in the world of commercial real estate off of simple introductions.
Yes you should get paid for bringing investors to the table. Nothing moves without investment capital. One of the most valuable services that you can offer is introducing high value investors to clients that need them. Those that understand the value and importance of your role will have no problem with paying you.
It is all about how things are worded. You can actually end up getting paid on both sides. You can get paid for introducing investors to clients that need capital. You can also be paid by your investors for bringing them deal flow.