Wholesale JV -- Investor Fronts Marketing Costs

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Wholesale JV -- Investor Fronts Marketing Costs

Matt Schelberg
Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes

I recently met with a wholesaler over coffee to discuss the types of properties I am looking to purchase for my rental business. I was expecting a straightforward wholesale arrangement, but the wholesaler proposed an interesting JV agreement that I'd appreciate feedback on. The wholesaler is not currently marketing in my farm area, so he proposed that I front 75% of the direct mail marketing costs in exchange for first right of refusal on deals. Summary of the agreement:

  • Wholesaler would obtain the marketing list and prep the handwritten direct mail pieces.
  • Wholesaler would handle all of the calls, negotiating, and getting the property under contract.
  • Wholesale fee would be determined by a formula based on the cap rate. The higher the cap rate, the higher the wholesale fee.
  • If I decline a deal, I get a percentage of the wholesaler's fee if he sells to somebody else (probably 25-30%).

What I like about this:

  • I have a full-time job and don't have time to set up my own marketing and acquisitions team. This effectively subs out my acquisitions.
  • The wholesaler's incentives are in line with mine and with the 25% share of marketing costs, he has significant "skin in the game."

What I don't like about it:

  • I am spending money on marketing but not building up my own brand. Worse, I am building a competitor's brand in my own farm area -- all the mail pieces will have his brand and contact info.
  • The wholesaler would be to take any referral business or referral leads generated from the mail campaign. (Having no experience with direct mail I do not know how many deals can be expected through referrals. Perhaps the number is so small it is insignificant and I'm not losing much.)
  • Trust issue. This wholesaler has two years of RE experience (including flips, which is a positive -- he knows how to estimate rehab costs) but only a few months of wholesaling experience. He is established at the local REIA, but I've never worked with him before. There is a chance he could bungle leads or get busy and ignore them.

What other negatives am I missing? Any feedback would be greatly appreciated! Thanks.

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
12y

I suppose that if the arrangement works for you and accomplishes your objectives, there's nothing wrong with it. The biggest drawback might be that a lead comes in that he doesn't tell you about and keeps it for himself or flips it to someone else without giving you your first right.

To mitigate a couple of your "don't likes", perhaps you should have the marketing go out under your own brand with a phone number that you control. You then have calls to that number forward to the wholesaler. If the arrangement no longer works for you, you turn off the call forwarding and sever the relationship without losing momentum (your agreement should spell out the conditions under which you can do this).

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  • Carolina E.
    Investor · NW Indiana · Member since 2012 · 833 posts · 197 votes
    12y

    How would you know if he not selling deals that he got with your marketing budget. He could be selling them to other buyers and not letting you in on them because he would get a bigger profit that way.
    Also, if you do buy a deal from him, how much would you pay him? I would think you'd get a discount for paying for some costs.

    1Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    12y

    I suppose that if the arrangement works for you and accomplishes your objectives, there's nothing wrong with it. The biggest drawback might be that a lead comes in that he doesn't tell you about and keeps it for himself or flips it to someone else without giving you your first right.

    To mitigate a couple of your "don't likes", perhaps you should have the marketing go out under your own brand with a phone number that you control. You then have calls to that number forward to the wholesaler. If the arrangement no longer works for you, you turn off the call forwarding and sever the relationship without losing momentum (your agreement should spell out the conditions under which you can do this).

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    2Reply
  • Matt Schelberg
    OP
    Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
    12y
    Originally posted by @Carolina E.:
    How would you know if he not selling deals that he got with your marketing budget.
    Also, if you do buy a deal from him, how much would you pay him? I would think you'd get a discount for paying for some costs.

    I would require the mailing list in advance. I would use it to check the tax records for suspicious sales over the next 6 months. The wholsesaler could break the contract, but only at the cost of his reputation. Knowing this person's goals, I don't think it's a tradeoff he's willing to make. But, yes, it could happen.

    I agree that a discount is fair since I am paying the marketing costs. How much? Still in negotiations. The wholesale fee would be determined on a sliding scale based on cap rate. The better the deal, the more he makes.

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  • Matt Schelberg
    OP
    Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
    12y
    Originally posted by @Brian Burke:

    To mitigate a couple of your "don't likes", perhaps you should have the marketing go out under your own brand with a phone number that you control. You then have calls to that number forward to the wholesaler. If the arrangement no longer works for you, you turn off the call forwarding and sever the relationship without losing momentum (your agreement should spell out the conditions under which you can do this).

    This is a great idea! And it provides the wholesaler with a strong incentive to perform. My first thought is to use a GoogleVoice number -- are there any better alternatives out there?

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  • Michael Quarles
    Flipper/Rehabber · Bakersfield, CA · Member since 2008 · 3k+ posts · 3k+ votes
    12y

    The lead capture system should be set to notify both of you of calls.

    If you use a company like RingCentral or even PatLive both can notify multiple downlines. This would be paramount.

    And a good real estate attorney could draw something up that binds them, making them play fair.

    What I don't like is the possibility of accepting a commission without a Brokers license. That may lead you into trouble if one of the deals goes sideways. It certainly would be a question of my real estate attorney. On their answer make certain they memorialize it for you.

    As for you paying 75% of the costs. Confirm their costs. I know a guy who has a print company and he knows that the big players get reduced costs and your 75% may be their 100%. If they dont live by full disclosure dont do business.

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  • Matt Schelberg
    OP
    Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
    12y

    Awesome feedback. Thanks, @Michael Quarles

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  • Christina R.
    Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    12y

    Matthew -

    The overriding issue I see here is trust. There is still a huge trust component here and you must decide if investing your money with the 75/25 arrangement works for you (and, of course, putting systems in place like @Michael Quarles suggested . . . and using an RE attorney). For me, that is not enough skin in the game on their part. I would take a % off the cap rate-based wholesale fee as mentioned because you are paying for the marketing up front. Maybe there is where you can get more skin in the game - 25% discount off that cap percentage formula for the wholesale fee .. effectively they have 50% skin in between their % going to marketing up front and you get the other (variable) 25% on the backend. I also think your branding should be on it unless they are fronting 50% up front.

    1Reply
  • Matt Schelberg
    OP
    Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
    12y

    @Christina R.

    I agree with you 100% on the trust issue, and you bring up a great point about whether 25% is truly enough to keep the wholesaler active and interested. In my mind there are two components of the trust issue:

    1) Will the wholesaler dedicate his full attention and efforts to leads?

    2) Will the wholesaler abide by the agreement and give me the first look at all deals produced by the marketing?

    I think I can control #2 with screening, judgment, and considering the wholesaler's cost/benefit calculation. But #1 is a wild card and harder to control. We all know the feeling of what it is like to get busy, and even someone with the best of intentions might put my leads lower on the priority list than they should be.

    I want to clarify that the wholesale fee will definitely be discounted given that I am providing the marketing costs. I should have made that more clear in my initial post.

    But considering the investment, the time requirements for oversight, and the need to use lead tracking software, I am almost at the point where I could take this in-house without too much additional effort. All those who have commented have made great points, and it has made me realize that outsourcing my marketing and acquisitions would still require significant time and resources.

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