How much equity should i give a wholesaler?

Question

Hey Everyone,

I have a question that I do not have an answer to.

I am currently working with a wholesaler that finds me great properties, better than any other wholesaler i know. They are great multi-family properties and fit all my criteria. The issue is that he does not want money anymore, he wants equity in every deal moving forward.

1. How do i go about structuring this?

2. What amount of equity (percentage wise) should i offer him?

I am the one putting the money, time, risk etc. to purchase this property, so i'm wondering whats fair?

Thanks

JD Martin · Answer

I think the first question you have to ask yourself is whether or not you want a partner - if you don't want a partner, then your relationship has run its course if he is unwilling to accept payout.

If you do want a partner, then you need to have some kind of legal structure to handle the partnership; how do you handle losses? Individuals that want to sell or be bought out? Expenses? ETC.

From my end, I'm puzzled why he would want equity instead of just increasing the costs to you for finding the deal. I would guess he either wants to be a real estate investor and doesn't have any cash of his own or he is getting what he perceives to be too small a cut for finding the deal. If I were a wholesaler, and I was getting you great deals and felt that the payoff was too low, I would just increase my fee or knock you off the list.

Troy Albers · Answer

if you don’t need/want a partner, don’t do it. Other than finding additional deals, he/she more than likely doesn’t bring much to the table. Pay him for his work finding the deals and trudge forward. If your good to him and you close on deals, he’ll be good to you and bring you more deals. Typically partnerships just complicate things.

JD Martin · Answer

Then you might first consider offering him a bonus or a higher finder's fee before turning him into an equity partner. If that isn't going to work, and you want to keep the relationship alive, you may find you want to create a separate holding company/LLC for those deals he brings forward, structure your partnership around that LLC and have him be responsible for some of the front end costs, including those involved with setting up the partnership. If you are going to create a let's say 75/25 split, where his responsibility is bringing suitable deals as his equity, you probably wouldn't want your part of the equity to be greater than 75% - i.e. if he brought a unit worth $100k, you wouldn't want to be all in (your purchase+rehab) for more than $75k, such that if you had to liquidate the LLC (let's say just this one unit), you sell for $100k, he gets his "fee" (the $25k in equity from the house value) and you are made whole as if he never brought anything to you in the first place. But that's a gross simplification and still short-changes you because (in this example) he gets all the profit while you took all the risk. In reality, using those numbers above, you'd probably not want to be all in for more than $50k so you at least took an even split if liquidating.

Partnerships get complicated. I wouldn't do it outside of a separate entity LLC with the wholesaler. You have to think of everything that goes into it, from design choices, capital deployment, managing costs/payments (you should get paid for managing the rehab, just as he gets paid for bringing the deal), liquidation, etc. Let's say he is married and is getting a divorce and his wife wants half of his assets - do you pay her out from the LLC or is he forced to liquidate? Do you have to buy his shares or do you have the option of selling? Can the junior partner force a sale? ETC.

Michael J. · Answer

The only reason they would take the extra risk of partnering in Lew of a fee is they expect a much higher payout from the deal. From your perspective you don’t gain any more value than just buying through a wholesaler.

IMO I wouldn’t want to partner on a deal from a wholesaler unless their equity was not much more than their fee would be and no more risk on my part and I couldn’t buy it outright.

Charles Carillo · Answer

@Daniel Daskaloski

What size properties are they finding for you? The percentage really depends on how large the properties are.

If you setup a JV partnership, all partners need to be active. I would speak to your attorney and see how they would structure it.

Daniel D. · Answer

Thank you for replying.

1. Do I want a partner? No. I have one partner that handles the construction/management part of all my properties, that's why hes my partner, because he offers something i cant. I dont want someone that just gets equity for finding a property and not putting any work or risk in it. But on the other hand i dont want to lose these properties.

2. I do understand if there is a partnership we would need to structure something on who does what.

3. I never actually had any issues with money he made on our previous deals. What ever the fees were, I gladly paid. Sometimes higher than i wanted, but he gets me good deals so i dont mind.

Daniel D. · Answer

4 Family and up mostly. This last one now that he wants to start getting equity is 8+ units and from this one moving forward he just wants equity.

How much equity should i give a wholesaler?

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