Finder – a precarious status

Finder – a precarious status

By: Bryan Mashian

Often, parties call a person involved in a real estate deal – who is not licensed as a real estate agent – a “finder” in order to compensate this person. But, to qualify as a “finder”, such person’s entire activities in the transaction must be limited to arranging an introduction between the parties and no more. The threshold for the activities that cross the line between being a mere finder and acting as an agent is very low and sometimes uncertain. Once this line is crossed, the finder is no longer entitled to any compensation as a finder.

Perhaps the courts impose this distinction between a finder and an agent because there are significant legal differences in their respective duties and responsibilities. A real estate agent owes strict fiduciary duties and obligations to the principal. Conversely, a true “finder” does not owe the fiduciary duties of an agent, is not an agent for the principals and does not represent the principals in any capacity.

As an independent party, the finder can act for both parties to the transaction and recover compensation from both parties without disclosing this fact to either. The finder can even purchase the property from a seller without disclosing material information about the property or any secret profit that the finder may recover from the transaction. The finder can introduce a party without disclosing material facts regarding the property.

The absence of any duties may be the impetus for the law not favoring easily characterizing persons involved in a real estate transaction as a finder. So, if the conduct of the “finder” goes beyond simply introducing the parties to each other, the finder will no longer be considered as such. In this case, this person will have to qualify as an agent, together with all the resulting obligations of both agency and licensure. A person who has the right to exercise discretion on behalf of the principal in negotiating the transaction also acts in the capacity of an agent and not a finder.

The finder is limited to bringing the parties together so that they can negotiate their own deal. The finder also may recover compensation for introducing the principal to another finder who in turn introduces the principal to the seller or buyer.

The test of whether the unlicensed person has acted as a “finder” is not based on activities before introducing the parties, but conduct after the introduction. So, a finder may gather extensive information and data before the introduction. Regardless of these activities before the introduction of the parties, the finder will be considered as a mere finder where there is no participation in the negotiations after the introduction.

Finder status is a question of fact. For example, when a real estate broker was given only one fixed price to transmit to the proposed buyer, the court found him to be a finder. In another case, a real estate broker participated in the drafting of an option for the purchase of real property which the court held was sufficient, in and of itself, to deprive the broker of his asserted finder status.

In one case, an unlicensed party submitted a “package” describing the property to several prospective purchasers, took them to inspect the property, consulted public records and advertisements, and conferred with engineers and surveyors. The court held that he was not a mere “finder” and he could not recover a finder’s fee against the seller.

In another case, a broker agreed to pay an attorney one-third of the broker’s commission if the attorney introduced the broker to a prospective tenant for the property listed with the broker. The attorney did not have a real estate license, but he communicated with the broker and the parties regarding the negotiations for the lease and attended meetings where the lease terms were negotiated. The court held that the attorney did not qualify as a finder.

An employee of a mortgage broker spoke to a prospective lender who came into the office in response to an advertisement. She was authorized to communicate the terms and conditions of loans, accept offers, reject offers, transmit counteroffers, pay finder’s fees, and execute notes. The court held that she was an agent and not merely a finder.

The fine line between an agent and a finder is based on whether the finder has engaged in any negotiations for the transaction after having introduced the parties. Whether or not a person has acted as a mere finder, or has performed the functions of an agent, is determined by reference to vague and ill-defined distinctions of fact dependent on the circumstances, and possibly the equities, of the particular case. The determination is made on a transaction-by-transaction basis and it is risky for an intermediary in a real estate transaction to rely on a court upholding a finder status.