We pay 2x the commissions for quality referrals. Do you?

Question

New Jersey (Monmouth county, Ocean County, Middlesex county)....I have a question.... I am now paying my Wholesalers and Realtors that bring me great deals commissions/referral fees twice... Why not if it is great deal... I give them their desired rate when I close a property they bring us and when we re-sell it we pay them again (even if they are not involved in the re-sale). If they brought us a great deal why not... Does it eat some of my profits? Absolutely! for the short term but it keeps the flow of great properties coming.... Your thoughts

Steve Vaughan · Answer

Why not - exactly Account Closed.  I like to let the listing agent have both sides of a house I'm buying (if the offer isn't countered) because I go solo.  When we close, I just remind them if they see anything else like that one, to please let me know!

Account Closed · Answer

@Patrick Liska

Those were examples so thank you...

30 years in REI has told me over and over "pay those that bring you deals very well".... We do the 50-50 splits on Re-habs as well. We are not only our own bank on many of our deals but we are heavy structural contractors (not just paint and carpet guys) in house re-habbers as well... We have outside investors also should we be working on multiple projects at once. It is a shame we are turning away money as the deals just are not as sweet and plentiful as they were 2-5 years ago.

Account Closed · Answer

@Patrick Liska

Let me clarify... If a Realtor brings me a property that is a great deal and we close on it they would get their normal commission from the seller (usually 3-6%). I then offer them the same commission again on the back end when we re-sell the property after it is re-habbed.  Most of our homes are sold before they are finished and we get our buyers from a number of sources beyond that of what a local Realtor might be able to provide so a realtor could make up to 10% or even 12% on a single deal. The Realtor still gets a commission of the re-sale even though they might not have brought us the buyer...

If a wholesaler is involved it works the same. (although with Wholesalers I have structured their fees many ways) but as one example. A wholesaler charges me a 5000.00 finder fee on a property that he/she brings to me and we close on. I then Re-hab the property and re-sell it. The Wholesaler receives an additional fee (up to 5k) in this case as again I have my properties sold without Realtors so I can afford to pay the wholesaler after it is re-sold even though he/she did not bring us the buyer...

Hope that helps

Patrick Liska · Answer

As long as you can still make the money on the deal why not spread it and make your team happy. I am a general contractor  myself, but this one of mine is in another state, 3 hours away, so I am letting her run it, 28,000 to buy, 30,000 to fix ( her estimate, I think it will be 40) and will sell around 95. Won't make a ton of money after the split, but this is my first deal like this with her and I figure it's a good one to see how she does. Turn around in about 3 months, I figure where else are you going to make about 10,000 in 3 months return on your $. If I see she isn't running it right I know contractors in the area that I can get in there to finish it, so I have a backup.

Mike H. · Answer

I don't think he's saying he's paying the closing costs twice.

It sounds like he's decided to simply double the wholesaler's fees when they bring them a good deal.  So if the wholesaler wants 5k, then he's giving them 10k total. 5k up front and 5k on the sale.

The thinking, based on how he's framing it, is that the wholesaler will be more likely to give him the best deals because the wholesaler is going to get paid double what he would get paid for bringing it to another investor.

Interesting idea. I guess what that might tell the wholesaler is that he's not charging enough and he may just start raising his fees.

What if his fee is 20k? Are you going to give him 40k? Basically, it sounds like you're just sticking to the rule that pigs get fed and hogs get slaughtered. So if there's a lot of room in the deal, why not give the wholesaler more to incent them to bring you more deals?

Makes sense to me. I'm sure the wholesalers love you.

But how has that affected your profit margins? And how much has it increased your deal flow?

Patrick Liska · Answer

Ok, so in the case of the wholsaler, they would get $10,000 in fees ( coming and going) - but that is with no realtor. I see nothing wrong with that, you are doing better than paying the realtor fees especially if you are doing this in NJ. A $200,000 house will run you $12,000 in realtor commission. So you made out better. On the other hand if you are giving your realtor a little more on top of their commission, that just keeps them coming back to you when they find a home. The Realtor themselves do not make that full 6% commission, if they work for a real estate company, I know mine makes 60% of that 6% and the rest goes to the company ( depends on what the realtor negotiated as their % they get). I do the same with my realtor as I mentioned before, they make the money from the seller and myself if I sell. I see nothing wrong with sharing the $ a little if it is a way to bring you more. I just signed to buy a flip, I am the Money part, my realtor is handling the re-hab, we are splitting the profit 50-50, think she will come to me with more houses? Guarantee it.

Patrick Liska · Answer

Let me see if i have this right, you pay the closing costs when you buy a house ? i have never done that, my Realtor knows they will make the commission from the seller then and if i sell, i give it to them to sell and make a commission. If i hold the property, they will be managing it. so they know when i look to buy a house that they will make money on it either way with me, and they know that, so they come to me when a property they think i will buy comes up. If you are still making money on the property after spending that money, and you are happy with it and the way its going, why not, there is nothing wrong with that then. you are making money and they are making money, so they will bring you more properties.