7 Ways to Legally Pay Property Scouts
Hi, Dolmar here. The fact is, Property Scouts (or many people call them “bird dogs”) have been one of my best secret weapons in multiple markets I'm doing deals in for years now—routinely landing me leads on property deals that aren't on any of my competition's radar.
They send me leads, I cherry pick the deals, and they get paid nicely for the service. It's a beautiful arrangement.
Today I want to shine a light on 7 ways you can legally compensate them, so you can stay safely out of any legal ‘hot water' (it burns!) that many investors find themselves ignorantly swimming in. So let's run through them.
A Quick Background…
I remember so well that late night (yeeeears ago now) when I whipped up my first Craigslist ad looking for anyone who might want to get paid a little for sending me a solid tip on a property I might want to buy. My real estate deals tap was bone dry, and I figured this was just a crazy idea—a long shot really.
The next morning, after getting the kids breakfast, I checked my email and was blown away. Not only were several actual people asking to become Property Scouts for me, but one of the Scouts already had 3 good property leads for me.
To find good deals, a consistent source of property leads is critical. And thanks to my crazy little experiment, I suddenly had more leads than I could easily manage by myself—dozens of them—all coming from other people's time and resources.
Within a month, I closed a deal from one of my new scouts.
The second month I closed seven.
Mind Kinda Blown.
That was then, this is now.
Yes, I'm still using Property Scouts to bring me leads in multiple markets all over the U.S. But I've refined and upgraded the process of finding and managing scouts into a legit Property Finder Program—systems and automation for teaching them how to find the property leads I'm really interested in, managing their leads online, and lots more.
Since that time I've had kind of a personal mission to help my fellow real estate dealmakers ‘see the light' and start tapping into the little-understood resource of Property Scouts as a steady source of property leads.
But…How Do You Pay Them?
Over many years of doing this now, one thing I've realized is that many people shadowing my footsteps with this don't really understand how to go about paying your Property Scouts without accidentally dipping their toes into some legal hot water.
Truth is, there's lots of ways you could compensate your Scouts—many are totally legit and 100% legal, while some are…not so legal. Clearly we all want to know how to do it right, so let me just demystify it for you right now.
FACT: Regulation on compensating Property Scouts is most often governed by state real estate commissions and therefore will vary a bit from state to state.
While I do a good bit of business outside my own area, I don’t do deals in every state and don’t pretend to be a legal expert in any of them. However in most states, legal experts seem to say pretty consistently that it is illegal to pay an unlicensed individual any form of “commission” contingent upon the purchase of a property.
Now some will say this is illegal on the level of bandit signs, jay walking or driving 55 mph in a 50 mph zone – in other words, rarely enforced but technically illegal nonetheless. In other states, certain real estate agents or state board workers regularly watch for violations and you’re at greater risk for a “cease and desist” on your Property Scout Program or maybe even legal action with a monetary penalty attached.
Regardless of how high or low you feel the legal risk might be in the area or areas in which you plan to invest, I say just play it safe and keep things completely above board. You can easily compensate your property scouts without paying them a “commission”, but the wording and execution of your property scout compensation is key.
Here are a handful of payment structures that I’ve either used or seen other investors use. Some methods are free upfront with payment on the back-end, others pay upfront. You can choose whichever makes best sense for you. Please carefully read through each model and carefully consider the model that’s best for you.
Also, please consult your attorney before making a final decision.
7 Ways to Legally Pay Property Scouts:
1—Pay Before the Sale
With this structure, you pay a flat “marketing fee” or “photographer’s fee” only for leads that have a very good chance of turning into a deal. You’d make the payment when the offer is accepted or at some point before closing.
Positives: No payment until the deal is nearly done; may help you steer clear of commission laws in some states.
Negatives: Requires careful wording and execution, potential legal issues, last minute circumstances may mean deal doesn’t close, even though you’ve already paid your property scout’s fee.
2—Contingent Upon Sale (Non-Principal)
This is the simplest, most convenient form of payment, but also the most likely to get you in trouble in most states. With this structure, you’d set a flat fee – $1,000 or more for best response – and simply send your property scout a check after closing for leads on properties that you purchase. This very much resembles a commission and should not be used unless you’re sure it is legal in your area.
Positives: Simple, convenient, no payment until the deal is done.
Negatives: Potential legal issues, as it could be deemed paying a real estate commission to an unlicensed individual. Check your state real estate code.
3—Contingent Upon Sale (Principal)
This is very similar to the above structure, in that you’re paying only for deals that actually close. But there is one key difference: Your property scout is actually a “principal” in the transaction. This is accomplished by establishing an Option Agreement between you and your property scout. He/she will actually receive a check not from you, but from the title company after closing.
Positives: You pay nothing unless the deal is done. Also no fear of paying an inappropriate “commission” to an unlicensed individual since your property scout is now a part of the transaction with you, with equitable interest in the property.
Negatives: Requires knowledge on how to use Option Agreement, may seem complicated to a scout if not explained properly.
With this approach you’re using magnetic car signs as a strategy to generate leads. But the signs go on your property scout’s car rather than your own. By placing magnetic “I Buy Houses” magnets on their car, they essentially become moving bandit signs for your business.
You could compensate them with a $50 gas card monthly, and quickly dominate a market with an entire fleet of property scouts doing this. You would set up a toll-free phone line and give each scout a unique extension so you could track individual leads to them.
Positives: Can quickly dominate a market with your presence.
Negatives: Requires an up-front financial investment into signs and gas cards; no way to guarantee scouts are keeping your signs on their car.
This works best with property scouts who have an interest in learning real estate investing. You can train them to make offers on properties themselves, and then simply assign the contract to you at a higher value, receiving compensation as an “assignment fee” on the settlement statement at closing. You could then turn around and wholesale the deal or purchase the property.
Positives: Requires no payment out of pocket; opportunity to educate.
Negatives: More thorough training necessary. May conflict with state commission laws. (check with your state’s real estate code)
Here, you’d essentially bring the property scouts on as employees, pay them a small amount on a regular basis, then give them a bonus when you close a deal.
Positives: Pretty straightforward; may help you avoid commission laws.
Negatives: Costs you money up front, more things to consider with contracts and employee law and general employee overhead.
Here, you’d pay a small amount – between $2 and $10 – on a per-lead basis depending on how much info the property scout submits. For example:
The bottom line is there are creative, legal ways to structure a property scout program regardless of the state (or states) in which you choose to invest. But nothing else matters if you’re operating illegally, so before implementing any of the program structures above you’d be wise to consult with a real estate attorney.
Every real estate investor should have a relationship with a great attorney in the area (or areas) you invest. But if you haven’t established this relationship or you are on a very limited budget, you could use LegalShield. Personally, I don’t have any firsthand experience with them. But I believe it costs something like $30 or so per month for a small business, with a certain number of attorney consultations included in the package.
No, not literal carrots. I'm talking about incentives. And this final strategy isn't so much an alternate method for paying your Property Scouts, but more a way to ‘plus' the whole experience for your scouts and make them even more eager to score solid leads for you.
No matter which program structure you choose, keep in mind that creating an attractive, rewarding program is key. If what you’re cooking doesn’t make mouths water, then why would anyone want to eat it?
So get creative. Put yourself in your property scout’s shoes, and design a program that would make you want to find property leads if you were a property scout. The most successful property scout programs I’ve observed include strong compensation plans, along with bonus incentives or fast cash options.
Which investor would you rather find deals for?
No question, right? I've seen investors offer everything from $500 to $10,000 per deal. I’ve seen bonus incentives from free gas cards to a Jaguar XK8 convertible! Bottom line, get creative and don’t be the $500 guy.
Some Solid Gold Carrot Ideas:
An effective property scout program can really amp up your real estate investing endeavors. When setup and run well, it should require very little of your time on a day-to-day basis, and will likely end up as one of your highest-ROI lead generation strategies.
BUT—while not complicated, the details do matter here, and nobody wants to get their well-oiled Property Scout lead machine brought to a hard stop by a legal gaffe like this.
But use what I've shared here as a solid guide, and you should be golden.
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