Working with Wholesalers who are also Rehabbers?
Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes
Working with Wholesalers who are also Rehabbers?
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Specialist · Spokane, WA · Member since 2014 · 97 posts · 38 votes
12yIf he is actually doing it at cost, great. GC fees can be a lot. But it has to be verifiable. Look at it from another angle. The partnership structure and knowing how to manage it throughout the project is a huge part of the deal. If your were a wealthy doctor whose money was making 1.5% and you could hook up with someone who could find the property, put the whole deal together and manage the partnership, get the rehab itself done at a big discount, and get it sold to where you make a very pretty profit...that's a pretty attractive offer.
But again, this person really has to know what they are doing. They have to show you previous projects and partners. And you have to have other Pro's eyeballing the deal until you understand all the intricacies.
I would look at a deal like that with great reservation. And if you don't feel comfortable at this point in your career or with this person, then absolutely walk away. But it is a way to do business that works, keep it in mind as you grow in this business.
19 Replies
It all depends on the deal, how did you find this person? or did he find you?
If he has a great deal and good contractors I would be curious why he is not just getting a hard money loan and keeping 100% the profits. A couple things to watch out for would be
1) Marking up the rehab costs
2) Marking up the cost of the property
- Specialist · Spokane, WA · Member since 2014 · 97 posts · 38 votes12y
Hi @Angelique F. Based on what little detail you give, it isn't necessarily a bad deal, if this person really knows what he is doing and really handles all of the organizing, project management, marketing and sale...there is a lot to a rehab partnership.
But if he does bring all of that, and you can be a "money partner" and he'll show you the ropes as you go. It could be OK. But, and this is a big one, you only want to get into that kind of arrangement with someonw who has a solid track record in the actual contracting work, in partnership management, in marketing. You will need good written agreements and to consult your attorney and accountant.
@Tom Meade has great experience in this type of project. Maybe he'll see this.
Good Luck!
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
That's a good point and kinda makes me think about this in yet another way that doesn't really seem fair. It's almost like he's using the investors funds to fund his deal, and make money on the rehab, and then charge me 50% in the end to do it. Genius! When I asked him why the split should be 50/50 he said he's doing the rehab at cost. I thought his answer would be along the lines of I found the deal, so he surprised me with that answer. I'm so confused.
- Specialist · Spokane, WA · Member since 2014 · 97 posts · 38 votes12y
If he is actually doing it at cost, great. GC fees can be a lot. But it has to be verifiable. Look at it from another angle. The partnership structure and knowing how to manage it throughout the project is a huge part of the deal. If your were a wealthy doctor whose money was making 1.5% and you could hook up with someone who could find the property, put the whole deal together and manage the partnership, get the rehab itself done at a big discount, and get it sold to where you make a very pretty profit...that's a pretty attractive offer.
But again, this person really has to know what they are doing. They have to show you previous projects and partners. And you have to have other Pro's eyeballing the deal until you understand all the intricacies.
I would look at a deal like that with great reservation. And if you don't feel comfortable at this point in your career or with this person, then absolutely walk away. But it is a way to do business that works, keep it in mind as you grow in this business.
that's not an atypical set up at all. Money partner just puts up the cash, operating partner does the rehab at cost, split profit 50/50.
As someone mentioned, he could hypothetically go get hard money and not give up any of the upside. That was a GOOD answer he have you when he said he's doing the rehab at cost. Being new, you just have to make sure that's what actually happens, with no markups or kickbacks from subs etc.
I'm on my phone, but maybe @Patrick T. could link you back to the other thread that discusses JV partnerships.
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
Thank you Mr. Tutwiler for your input. He sent me a spreadsheet of all the properties he's turned for profit. They sold at very decent prices and he is selective about the homes he targets so that's good. For example one of the homes were purchased at 68K, rehab was 40K and it sold for 148K. Those are not bad numbers I guess, but I'm just wondering if I should just work with a wholesaler myself, hire a contractor myself, and make the profit myself? I agree with you in that he is doing a whole hell of a lot of work from start to finish, so is that why he should get 50%, or should he get something like 70/30 since the investor is the one funding the deal? He made 40K on the rehab so I just don't understand why he should walk away with 22K on top of that. Am I thinking about this all wrong?
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
That's right Mr. Meade. Now that makes more sense to me. I should go back to him with.......How about I lend you the money for the purchase at 12%, I fund the rehab, and THEN we split 50/50 when it sells? Now THAT sounds like a deal to me. But see, I answered an ad he placed saying that he had cashflow property's for sale and homes that he will wholesale that need rehab). The ad didn't mention that he was the rehabber as well.
- Specialist · Spokane, WA · Member since 2014 · 97 posts · 38 votes12y
@Angelique F. Here's the link that Tom mentioned.
You are starting to get the idea. If I understand correctly, the 40k rehab would be materials, sub-contractors, permits, inspections, et. al. (none of that is profit to the GC). Also it is fair for the GC to get paid an hourly rate if he actually does labor on the job. A laboring GC still needs to put food on the table. But in this case he doesn't take any profit until the job is done and you get your cut. That way he is motivated to get you paid so he can get paid.
As far as the split goes: assign value where value exists. If this guy is experienced at this, there are investors who will jump. If the numbers on this project are good this could be a great investment (not to mention the learning opportunity and partnering skills you'll build). To be honest I think the GC/Operating Partner is in a position to take a larger cut.
But that's not worth piddling over for now. Do your research and cut a reasonably fair agreement. The knowledge you just gained and the opportunity to build a new strategy is invaluable.
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
Mr. Tutwiler, my head just exploded trying to understand the posts in that link, lol. Sounds like I just need to figure out if his 50% is justified by the (work) he brings to the table, cuz he sure ain't bringing any cash. In the above example of the deal he already did, he walked away with 20K+, and the rehab costs which who knows if those costs were verified. So he's walking away with more than 50% in the end. I don't know, it don't smell right to me so I'll have to do more research on that percentage vs dollars train of thought they were talking about, and see if that will help me make sense of all this stuff, but this has been a great learning experience for me. Thanks!
- Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes12y
My take is, if he gets paid for his work, then you should get paid a reasonable interest rate on your money, profit splits afterward.
As a rehabber with some years of experience, and various "partnerships" to grow my business. I find it is a lot easier to find individuals with money to lend than competent rehabbers who can deliver a quality rehab on budget.
If I could verify this guy is legit, can deliver the product, if I could get 10-12% return on the money before profit split. I would do as many of these deals as he could handle.
- Specialist · Spokane, WA · Member since 2014 · 97 posts · 38 votes12y
@Angelique F. I know it sounds complicated. Take a little time, take a deep breath. This will begin to make sense. And one day you will be analyzing one of my deals.
For now the message you are getting from everyone seems to be that if this fellow is legitimate, he'll be worth every penny and you will do very well to build a long term relationship with him. But we don't know him. So treat him like any lender would treat a borrower - verify his creds and check his background (not hard to do these days).
But once you decide to work with someone try to think and analyze as a collaborator, a partner, when you look at a deal. Not as an adversary. In really good partnerships everybody makes money, including you. Your partners, lenders, contractors, inspectors aren't the enemy. And you're not the only valuable player.
All of that being said: you need to read a lot and get a handle on these concepts with the goal of taking your future by the horns. Your head can hold a heck of a lot more than was in that thread. And that's the idea. Fill your head up. Bigger head, Bigger Pockets!
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
Hi Mr. Schlabach, this guy started out as just the wholesaler. Then I find out he's also the rehabber, and in the end, the self made silent (partner) who walks away with 50%. He's playing too many roles so he can blur the lines. I thought it worked like this: He's the wholesaler and I'm the buyer, I purchase the property and my work with him is done. My job then is to rehab the property and sell it for a profit. He essentially feels he should get 50% of profits by staying involved and acting as the GC and helping to sell the property? The thing I need to find out about is rehab costs. I don't plan to rehab in amounts over 10 to 20K, so what I gotta find out is how much of that money pays for labor and how much for materials. When a contractor quotes you say 20K for the rehab, that should cover labor and materials right?
- Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes12y
Originally posted by @Angelique F.:
Hi Mr. Schlabach, this guy started out as just the wholesaler. Then I find out he's also the rehabber, and in the end, the self made silent (partner) who walks away with 50%.
*He doesnt exactly sound very silent
He's playing too many roles so he can blur the lines.
* If this is how you feel about it, you shouldnt do business with him
I thought it worked like this: He's the wholesaler and I'm the buyer, I purchase the property and my work with him is done.
* Are you saying he is unwilling to to do this? Is that what you want? I have 12 properties right now in the cycle, I would wholesale any of them for the right price, cant imagine a rehabber who wouldnt.
My job then is to rehab the property and sell it for a profit. He essentially feels he should get 50% of profits by staying involved and acting as the GC and helping to sell the property?
* is this a bad thing, if you get 12% on your money plus another 10,000 -15,000 for not doing any work??? Seems a lot easier than running your own rehab project as a new rehabber. Just met with a guy today, first time rehabber, he had hired a gc, quote for a project believe was 15k rehab. After paying 17k, project far from done, gc left, took a bunch of materials... The new rehabber sold the property to a landlord, lost 10k....I can tell many similiar stories, if interested, of first time rehabber with similar experiences. If this guy is good, you could learn a lot, to put you in a better position to be sucessful in future rehabs
The thing I need to find out about is rehab costs. I don't plan to rehab in amounts over 10 to 20K, so what I gotta find out is how much of that money pays for labor and how much for materials.
*there are some very important questions you should be asking but that one is almost irrelevant in the grand scheme of things
When a contractor quotes you say 20K for the rehab, that should cover labor and materials right?
*typically, yes. Hope all goes well with the adventure.
@Angelique F. There is a great Warren Buffett quote that goes something like this
"When a person with money meets a person with experience, the person with the experience winds up with the money and person with the money winds up with the experience "
Sounds like you are already skeptical of this potential partner and the fact that you found him through an advertisement should be cause for concern, usually people that are able to provide impressive returns on capital do not need to advertise, especially in this low interest rate environment where investors are getting far less than 1% in the banks. So I think you should just focus on studying the real estate market joining local REI clubs and find potential partners through networking.
@Patrick T. Its been raining the last couple days...kind of feels like Washington!
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
* is this a bad thing, if you get 12% on your money plus another 10,000 -15,000 for not doing any work??? Seems a lot easier than running your own rehab project as a new rehabber. Just met with a guy today, first time rehabber, he had hired a gc, quote for a project believe was 15k rehab. After paying 17k, project far from done, gc left, took a bunch of materials... The new rehabber sold the property to a landlord, lost 10k....I can tell many similiar stories, if interested, of first time rehabber with similar experiences. If this guy is good, you could learn a lot, to put you in a better position to be sucessful in future rehabs
Sir, there is no 12% on my money. I explained in my first post that he proposes that I pay for Everything. As the wholesaler, he finds the property and I buy the home. As the rehabber, he rehabs the home and I pay for that. So far so good. Now it's time to flip the property and once it sells, he now wants 50%. Do you see where I have a problem with this picture?
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
Thank you Mike S, and I love the quote! Someone from my local REA came to me with a similarly coo coo for coa coa puffs deal, where I pay 50K for 5 homes. The homes are then rented out to rent to own buyers and I collect the rent on all 5 homes. Here I am a brand new investor so why would I want to get tangled up in a mess like that. I'll tell you the quote I like. A fool and his money are soon parted, and boy I must have a sign over my head that reads Fool Approaching. Thank GOD for this website.
- 12yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
Hi Angelique,
I have done numerous JV deals in the past where investors would purchase the property and pay for rehab and we would split all of the profits once the property was sold.
The were the money partner and all other work was done by me.
I did have long term established relationships with these investors tho.
Thanks
- Rental Property Investor · Atlanta GA · Member since 2013 · 122 posts · 83 votes12y
I see. So I guess I'd need to find out what labor costs would be, make sure I'm getting a 30% discount on the wholesale price, make sure his material costs are calculated correctly, then calculate the 50% to see if its fair for the contractor since it should be about equal to his labor cost, right?
Also, can you tell me if I were to calculate rehab costs at say $28.00 per sq ft on say a 1200 sq ft home, does that include labor? If so, how do I calculate the labor portion?
Thanks Mr. Rumora!
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