Real Estate investors vs Wholesalers
Real Estate Agent · Richmond, VA · Member since 2019 · 18 posts · 9 votes
I have been attending many meetup groups in my area. Several of the meetings are predominately wholesalers. One subject came up that has been troublesome. The topic is when a wholesaler is unable to convince a seller to discount their property the stance on this by wholesalers is to reach out to their realtor partner and send the seller to them. If the agent sells the home they are expected to pay the wholesaler a commission. Sometimes this is masked as a "marketing" fee or under some other name. In some cases I hear the wholesaler may be getting a small fee for each referral even without closing on a deal.
Everything I am hearing from long time brokers here including those who teach at the local association is that is a no-no. Both parties must be licensed agent in order to get a commission and using fees or other descriptions to disguise it is not proper.
Thoughts?
@Mike Rosback I agree with you that it's definitely not permitted to pay any sort of significant finders fee to an unlicensed wholesaler. I don't understand how some wholesalers can spend thousands on marketing, guru courses, etc. but won't simply get a real estate license. Without joining Realtor associations and the MLS, it's really not that expensive or hard to get a license. Many non-MLS 'referral brokerages' are under $100/yr and still allow off-MLS transactions or referrals from MLS deals. I feel a 'marketing fee' would need to be completely separate from the sale to be considered allowable. If it's based on a closed sale, they need to be licensed to get more than $50-100 depending on state.
I've got a win/win referral agreement with a licensed friend similar to what you mentioned, but it works since we both have licenses. He's a licensed Realtor with a flat fee MLS brokerage. He runs a sizable house flipping company with his own and investor capital and that operation is his primary focus/business model. He lists his finished flips on the MLS, but he doesn't care to list other people's houses. He spends a small fortune on off-market advertising, has an acquisition manager, project managers, designers, etc on staff, so monetizing everything he can is important. He'll wholesale deals here and there when he gets something under contract that isn't in his target area or that doesn't fit the model he has. However, he'll also come across sellers that have distressed houses that are paid off or otherwise not urgent to sell so they don't need to take the discount, they simply don't have the money to fix up the homes to sell retail. He'll talk me up as his 'go to' Realtor and I'll list the properties on the market to sell them for more than he can pay to flip. The buyers I find are often non-investor types that are handy, buying for themselves and they need more house than they can otherwise afford, so they buy and fix it up themselves out of necessity rather than investment focus.
He's a super upstanding and ethical guy (who is also licensed!), often it'll be "look Mr. Seller, I can only pay you $125k for it to work for me, but I really think you could get $160k on the market, net of $145k+ after costs of sale since you really only need a roof and XYZ to be a great home. Would you like $125k now to be done with it or could you wait a couple months to potentially get $140-145k?". When he gets them under contract to wholesale, he's also being honest about the process of being licensed, putting his own money down to ensure he'll follow the contract, and he typically finds a buyer or buys it himself. But he'll recognize the sellers that would likely be better on-market and offer them a solution. I wouldn't call him a 'wholesaler' but he does wholesale.
I pay a healthy referral for these seller leads because he's put so much into getting to that meeting, he's already set a baseline with his aggressive offer and a timeline that it can take a few months to sell a distressed house for top dollar. I'll also pay a smaller referral fee when those sellers need to buy something else. Then when I sell it for a net of anything over his base offer, sellers are thrilled and my friend who found the deal gets some marketing capital back. He gets to monetize leads that would otherwise be 'dead' and I get a couple leads a year that basically are handed to me ready to go.
I wish more wholesalers would get a license and hang it with a non-MLS referral brokerage so I could work with them and pay referrals. But wholesalers with no license? Sorry, I can't help you there.... I'm not one to worry about reporting unlicensed activity, but I don't get involved in it myself either. Not worth the risk to my license.
@Mike Rosback I agree with you that it's definitely not permitted to pay any sort of significant finders fee to an unlicensed wholesaler. I don't understand how some wholesalers can spend thousands on marketing, guru courses, etc. but won't simply get a real estate license. Without joining Realtor associations and the MLS, it's really not that expensive or hard to get a license. Many non-MLS 'referral brokerages' are under $100/yr and still allow off-MLS transactions or referrals from MLS deals. I feel a 'marketing fee' would need to be completely separate from the sale to be considered allowable. If it's based on a closed sale, they need to be licensed to get more than $50-100 depending on state.
I've got a win/win referral agreement with a licensed friend similar to what you mentioned, but it works since we both have licenses. He's a licensed Realtor with a flat fee MLS brokerage. He runs a sizable house flipping company with his own and investor capital and that operation is his primary focus/business model. He lists his finished flips on the MLS, but he doesn't care to list other people's houses. He spends a small fortune on off-market advertising, has an acquisition manager, project managers, designers, etc on staff, so monetizing everything he can is important. He'll wholesale deals here and there when he gets something under contract that isn't in his target area or that doesn't fit the model he has. However, he'll also come across sellers that have distressed houses that are paid off or otherwise not urgent to sell so they don't need to take the discount, they simply don't have the money to fix up the homes to sell retail. He'll talk me up as his 'go to' Realtor and I'll list the properties on the market to sell them for more than he can pay to flip. The buyers I find are often non-investor types that are handy, buying for themselves and they need more house than they can otherwise afford, so they buy and fix it up themselves out of necessity rather than investment focus.
He's a super upstanding and ethical guy (who is also licensed!), often it'll be "look Mr. Seller, I can only pay you $125k for it to work for me, but I really think you could get $160k on the market, net of $145k+ after costs of sale since you really only need a roof and XYZ to be a great home. Would you like $125k now to be done with it or could you wait a couple months to potentially get $140-145k?". When he gets them under contract to wholesale, he's also being honest about the process of being licensed, putting his own money down to ensure he'll follow the contract, and he typically finds a buyer or buys it himself. But he'll recognize the sellers that would likely be better on-market and offer them a solution. I wouldn't call him a 'wholesaler' but he does wholesale.
I pay a healthy referral for these seller leads because he's put so much into getting to that meeting, he's already set a baseline with his aggressive offer and a timeline that it can take a few months to sell a distressed house for top dollar. I'll also pay a smaller referral fee when those sellers need to buy something else. Then when I sell it for a net of anything over his base offer, sellers are thrilled and my friend who found the deal gets some marketing capital back. He gets to monetize leads that would otherwise be 'dead' and I get a couple leads a year that basically are handed to me ready to go.
I wish more wholesalers would get a license and hang it with a non-MLS referral brokerage so I could work with them and pay referrals. But wholesalers with no license? Sorry, I can't help you there.... I'm not one to worry about reporting unlicensed activity, but I don't get involved in it myself either. Not worth the risk to my license.
Hey Russell!! Thanks for responding so quickly and with such detail. Much appreciated.
I like the arrangement you have with the other agent/investor. Sounds like a great plan. Since I'm no trying to build my business these types of ideas could be very helpful. I am currently working with an investor without a license. I am trying to recruit wholesalers but based on what these meetups are telling them it makes it much more difficult. Especially since there are some agents who will work with them and give them large fees after closing. I do not plan on doping anything to jeopardize my license.
As to why the wholesaler works without a license he stated he did not want to work under all the rules and regulations that we work under. Another investor is actually married to an agent. My thought is that is the best possible arrangement to have where a married couple can split the job up since they have the same goals for their family. I imagine that could work almost as well with other relatives as well.
@Mike Rosback I hear that excuse as well of not wanting to be bound by the ethical rules of being a Realtor. Honestly to me it just seems to be a cop out unless someone actually plans to be unethical. I know several successful wholesalers who are licensed agents and run large wholesaling companies. The only disclosure requirements are to let parties know you're licensed and to not be unethical. I've never seen that disclosure of 'agent interest' to be an issue at all. I honestly find it easier to deal with agent/owner listings from the buyer side than those who are listed by agents for owners who may not understand real estate. I'm sure some will disagree with me, but I feel like having a license and being bound to be ethical is far more valuable to credibility than the downside of simply needing to disclose you're licensed. Some brokerages are quite strict on what deals are allowable and many of the big names don't allow wholesaling at all. I can't wholesale with EXP, they don't want the liability. But that's not a Realtor guideline or state law. That's a brokerage level limitation, not based on license. The friend of mine I mentioned is with a flat rate brokerage who's part of the MLS. Anything that is legal by state law is permissible with his brokerage so he's never had an issue.
Having a spouse with a license could definitely help on the paying of referral fees to the licensed agent, but it still makes me skeptical of the unlicensed brokerage of real estate. Many claim they are selling the equitable interest in the contract not the property itself, but when the email has pictures and stats of the property that would likely be a tough point to prove in court.
I'm on several wholesaler lists and would definitely consider buying the right deal from one. I'm not just a huge fan of the industry as a whole since it's flooded with lots of newbies who really don't have any business being involved in real estate transactions with no skin in the game, no investing knowledge, and no penalties if they screw a buyer or seller over.
@Russell Holmes good to know about Exp rules. I have been approached by several Exp'rs to switch. I prefer to have less controls placed on my business by my brokerage and more freedoms to pick and choose. Abiding by all state rules and regulations is great and of course maintaining ethics is crucial. I do tend to see many wholesaler as "bottom feeders" but also see many that are highly ethical. Not sure why some reject the licensing route.
So with Exp you are not permitted to be involved in wholesaling at any level including being a partner in an LLC that wholesales as a part or all of its business?
@Mike Rosback I agree with Russell, no unlicensed party can receive a finders fee, marketing fee, referral fee, or any other fee name they choose to bring buyer and seller together or from a licensed agent. That licensed agent who pays an unlicensed party is risking losing their license in doing so.
Wholesalers claiming they don’t want to have to be under all the rules and regulations of a licensed agent is crap. Like Russell states, if you are honest and ethical, then get your license to wholesale, it is required in most if not all states anyways if you plan to market a property to buyers you do not already own (on title records).
@Mike Rosback you're correct, EXP and most other national 'big name' brokerages don't allow wholesaling. Buy it first and close again later and it's not a problem. Assigning of contracts like most wholesalers do adds a lot of liability for big name brokerages since nothing is on the MLS and much of it rests on the ethics of the agent, far too much to monitor for the big names. There are plenty of small flat rate brokerages that allow assignments and it's legal (with a license) by FL law. EXP's wording is along the lines of Realtors not playing 'middleman' in a transaction that isn't listed on the MLS. They want all listings to go on the MLS and then if the agent is a transaction broker representing both sides there are clear cut guidelines.
@Will Barnard thanks for your insight! What you and Russell have stated appears to be the way it is. I've discussed with my brokers and other brokers who teach at the local association and they all talk the same line. There's no way I want to risk my license or my brokers license but it is frustrating to see other agents that do not have the same ethics standards or at least the same knowledge on how to act.