Wholesalers, why take a finders fee and not partner?
Investor · San Diego, CA · Member since 2017 · 54 posts · 30 votes
I often hear wholesalers discuss the legality and ethics of whether or not you are brokering a deal. So then wouldn't it make better sense to partner with your buyer/flipper. I see one negative in that you don't get immediate gratification of the deal, but if you are in it to win it this seems like a good strategy to partner. For example, I find a lead and get into the contract subj to partners concurrence. Then I find a buyer who wants the deal. We agree for me to receive a percentage (say 10%) of his final sale price-purchase price. This is good for the flipper because it reduces risk because if the flipper makes less then the predicted ARV then less is owed to the wholesaler/partner. If the flipper makes equal to or more than ARV then everyone is happy. The legal issues are avoided and the risk is reduced. Anyone doing this?
Hey @Ryan Phillips
Partnering with a Cash Buyer/Flipper is essentially the idea behind Wholesaling. You build a business relationship with multiple Cash Buyers/Flippers. Cash Buyers don't care how much you are making as long as they're getting a good deal out of it as well.
If I am misunderstanding what you're saying, feel free to elaborate a little bit. :)
Hey @Ryan Phillips
Partnering with a Cash Buyer/Flipper is essentially the idea behind Wholesaling. You build a business relationship with multiple Cash Buyers/Flippers. Cash Buyers don't care how much you are making as long as they're getting a good deal out of it as well.
If I am misunderstanding what you're saying, feel free to elaborate a little bit. :)
@ryanphillips
I've thought about doing this. In fact, I am developing relationships with both cash buyer investors/flippers AND real estate agents who represent investors who are not cash buyers. I've added these agents to my "buyer's list" so that when I find a property that is turn-key and cannot be purchased at a discount I still have an opportunity to make money through a referral fee. As the "finder" in the scenario, I want to be careful who I deal with so that the end buyer/flipper doesn't cut me out of the deal when it's time to pay the finder's fee. I'm sure there's a contract out there for that, or one could be created.
10% seems like too high a finder's fee for the types of deals I'm trying to do with 2-4 units multifamily properties, especially if a flippers sells a rehabbed property for $1,000,000.
A concern I have with this model is with how to communicate with the seller. It seems like it could be confusing and cumbersome explaining that I am not going to buy their property, but am going to refer it out to someone else who will buy it.
I guess that's why most wholesalers keep it simple by pretending they are going to buy a property even though that is never their intention at all. (Wink, wink)
@Aaron Phillips It is my belief that most wholesalers present the contract (property) to a buyer and the buyer look at the deal and if is in fact a deal they buy the contract from the wholesaler for a certain amount of cash, say $5,000. I'm trying to wrap my head around the idea that the wholesaler would present the deal to a buyer, and they would sign a partnership contract to go in together. Essentially, the buyer/flipper is not buying you out of the contract but rather you are both going in together. In the end, you would get 7% of the sale price, or maybe 10% of the sale price minus purchase price. The numbers are just examples but when I put them to paper were somewhat in the ball park. While a little on the higher end, you are giving the flipper less risk which might be worth it to them... the whole 90% of a deal is better than 100% of no deal. As for the contract and payback, I would love to see if anyone has made this contract. But as long as the details are presented well, should work. Now the only thing is the contract should have a clause so if the flipper has to execute an exit strategy and keep the property and rent. Then maybe at that time he would buy you out for a specific amount.
@Shaun Pruett I agree you have to have a contract that explains every possible outcome, but hopefully a flipper that does business with you honors the contract so you can do more business. Wouldn't be prudent to burn a wholesaler that got you a house.
I also think it's an easier sell to the original seller, now you really are buying the house as opposed to the usual conversation of I may buy the house or sell the contract. You are buying in a partnership so the explanation is easier imho.
Not only would I like to know if wholesalers are using this method, but what did their contract look like with the buyer/flipper.
Great point! I've always been curious about this myself as to why wholesalers don't just partner with an investor rather than collect a "wholesale fee." The only thing I see to be a challenge, as Shaun eluded to, is finding the right investor to partner with and to ensure you don't get cut out of the deal.
Realistically, partnering just makes more sense if it is legitimately feasible to do so.
Do you (a) Find a property for, let's say, $50k with an ARV of $150k and flip to an investor for a $5k fee, OR, (b) Find a property for $50k, flip with a partnership agreement to a rehabber with the intention of being able to sell at $150k, and making a 10% fee after rehab costs, holding costs, closing costs, etc. For example purposes, let's say all of that comes out to $25k, that nets the investor $75k... paying you 10% would net you $7.5k.
Obviously, there are more intricacies to the two methods above than what I've given as an example, and I'm sure it isn't as cut-and-dry, but the point is what you've mentioned, and that is why not do a wholesale partnership?
I'm kind of confuse by your question @Ryan Phillips I wholesale and I have relationships with all my buyers. That's my objective and to ensure they get the best possible deal. There actually have been cases where I took less in order to make them happy. Wholesaling when done right is a business....also what I do is tell investors that are out of town such as California or New York or whatever if they want to invest in Illinois or Indiana we can rehab the property for them! We also manage the process to ensure everything goes smoothly and we have property managers to manage the buy and holds for investors who want rentals. I have some international investors who buy from me and just like anyone else the goal is to make sure they aren't happy with their ROI or cash on cash return. Real estate just like any other business is all about relationships and sales IMO
I am very new to wholesaling, so correct me if I'm wrong, but from what I am learning thus far it seems like part of the idea of wholesaling is quick money. I wanted to say quick and easy money, and maybe you could say it is easy relative to going through an entire flip process... but it seems like the process is set up to net the wholesaler a quick sum of money per property with minimal hassle. Yes you have all the due diligence but after that and getting the contract assigned to someone else, that is it. Right? I feel like teaming up with people is just investing and not wholesaling, and that would be the difference. Plenty of investors go out and do direct mailing campaigns and what not and find those deals themselves, but then they have the WHOLE rest of the process to see through, hence the larger returns.
Ryan and Shaun,
It seems like this is getting a little twisted. I wholesale to my buyers all the time. This is how it works most of the time: I put a contract on a property for lets say $50k. I put down my name then, "and or assigns" on the contract. I find a buyer at whatever price, let's say $55k. I draw up an assignment contract. So I'm assigning the original contract to my end buyer. I also draw up a contract to get paid my "fee". The buyer signs it and I send it to the title company. This guarantees that I'll be paid at closing. It's fairly simple. if I can't assign the contract (HUD deals), then I have a fee agreement drawn up, send it to the buyer for his signature and then I send it to the title company. That's it.
@Dustin Verley You see what I am getting at here. The numbers work the same, but there is less risk for the investor. If you look at what Scott said, he highlights the process of him going in, then coming out with $5k. That's great, but if his buyer partners with him on the deal, it's less risk for the buyer because he starts $5k down from the initial contract. @Brian H. I'm not trying to make quick money, I'm trying to make a sweeter deal for the buyer. Furthermore, San Diego is slim on good deals, and when you have one, they can make a lot of money. So, I feel this presents a possible win/win.
So, let me back up. Let's say I am virtually wholesaling from a beach in the Maldives. I listsource and direct mail, and I get a call to google voice with a nice deal in San Diego in a A class neighborhood. Now with that information, where would I go without a partner. Now if I partner with a buyer before he sees the property and we sign an agreement, and he then goes to the address and agrees, we have a diamond in the rough. Then this would be a classic example of "50% of a good deal, is better than 100% of no deal." Don't get hung up on those percentages, just a point.
@Elbert D. My investor would be in my home town, but I'm the one who is not in town. So this is why I'm working the partnership angle. I want to build and encourage the deal making no matter where I am. Time is of the essence in a hot market like San Diego.
Now, I'm just asking if anyone has done this method, because I can see how it would work. You would need to have an exit clause if the house becomes a buy and hold, and probably other stipulations but I'm trying to think of the box.
Damn that sounds nice. Lol. But the point I was making is what you are discussing is simply investing with a partner with each of you doing different pieces to make it happen. So it isn't wholesaling. Just investing with a partner or partners.
Gotta ask... is investing from a beach in the Maldives your permanent gig?!
@Brian H. Investing from the beach in the Maldives is not my permanent gig, but I'm working on a system that would allow for that... I'm not far from the Maldives right now though, so I may take a trip in the fall for research purposes. You are right though, it's not wholesaling anymore and now I just had a paradigm shift because here I am trying to figure out a way to find deals virtually for flippers in San Diego (which is the market I understand best) and the term wholesaler was what my mind reverted to when describing what I was doing. However, you are right that I'm just investing with partners if I go that route. Mind blown... BOOM!
I missed how you worded that. "Let's say I'm investing from a beach in the Maldives". I'm missed the "Let's say" piece. Thought that was what you were actually doing at this moment and was quite jealous... but yes, I would love to get to that point eventually as well! I'm still just trying to get off the ground, which has proven difficult working 70+ hours a week running a kitchen. I will get there though, eventually. I would look in some of the other forums on here and post some questions since you have shifted from the wholesaling mentality now! Good luck man!
Yeah this would be great in theory for the flipper. But a solid amount of wholesalers run a hand to mouth operation. Where they can't AFFORD to delay gratification. Not only that... Them waiting on a check for 3+ months ties up funds they can use for marketing. So you would have to offer a fee considerably higher than what they can get in 30 minutes.
At the end of the day if you're a flipper who's confident in your #'s and the deal works for you... Just close on it and move on. Trust me... You don't want to be nagged about a deal by ANOTHER party.
I think you're idea is more likely to work in a competitive market like San Diego, than the boonies but really it depends on what the bottleneck is for a given area. If you attend a local REIA meeting and talk with the flippers there, you can easily see the bottleneck for them, whether it's not having enough deals versus not having enough crews to do the deals they find. I looked at the flipping numbers in San Diego and it's super lucrative what the flippers are doing. They are buying around Encanto for ~$330k and flipping properties in 2-3 months for $500k.
What it really comes down to is profit. If the flippers have a steady deal flow and not enough crews, they would rather pay a lower assignment fee. Giving a % is actually giving away more profits when the profits are so big for a deal, unless you are willing to take a smaller % of the deal's profits. The converse is true, if someone has crews idle and unable to come up with deals they are much more likely to want to partner up for a % of profits.
Coming up with a fair amount that both parties are satisfied with is the tricky part. The idea is solid.
Hello @Ryan Phillips
I am a wholesaler and to me that doesn't sound good at all.
First, I started without any money. So I have to wait for months with my my money tied up and I can't use it to market for more houses. Delaying the growing of my business.
Second, Rehab is a BIG variable. It depends on the view of the cash buyer. We may not agree on how the rehab should work and how much time it will take and how much money. If the cash buyer coated the house with gold then it take years to sale or even a loss. Where will my money then?
Third, I don't know if it just me but I have met so many cash buyer that all they care is their profit. I remembered when I started I got one cash buyer that refused to pay me 6K after I have spent 4K in marketing to look for a property. I gave him over 20K profit because I subtract it from the arv before I minus the rehab and my fee on that property and he still want more. He want to assign for 3K which give me a loss of 1k. So I did what I need to, cross his name out of my buyer list and sell it to a different buyer.
Fourth, the idea is reduce the risk for the cash buyer. However, it reduces the growth of the wholesaler, create a risk of wholesaler not getting any money back, and it will ruin the relationship of cash buyer and wholesaler since everyone want more money for themselves.
The idea will work great on theory or between wholesaler and cash buyers who really care more for a relationship than their profit.
Because in order for that business model to work, the deal would actually have to be an honest to goodness deal even after using realistic rehab costs and exit ARVs. Those are really hard to find ... much easier to try to "fake it till you make it" to see if you can find a sucker to buy your "deal" with deflated rehab costs and pumped up ARV. This seems to be how most wholesalers I come across seem to try to operate, either out of ignorance or by design.
This does nothing to remove legal or moral concerns either, BTW. Putting together a contract subject to partner's concurrence when you don't have a partner already identified and don't have the means or intent to close without said partner that does not yet exist is still just as shady. You are still willfully deceiving the seller.
@David Faulkner I agree with your point about it coming across shady to the seller. Maybe I would have to know the buyer is ready to receive and the partnership is there before the deals come in. I have no desire to mislead or be shady, I want to help the seller and go in on a partnership with the guy who maintains the funding.
@Erick Tran Your points are solid. I think as I processed this post, I began to realize I shouldn't have used wholesaler. I am have money, but I want to build experience building leads from a distance. I know cash buyers, but I think David made a good point, I should have the specific buyer ready. It seems like the percentage concept is not a great deal for wholesalers because many want the cash up front to feed the lead machine. I do think it can be an option for the cash buyer that could be negotiated if the numbers game isn't working. So maybe a negotiation tactic that is in your arsenal if situations like your point three occur.
Thanks for the inputs...
@Brian H. I wish you the best working on this while working 70+ hours in a kitchen. That must be extremely challenging and wholesaling would def be the best start for you. See you in the Maldives in 5 years, lol.
It is an interesting play, one I have thought about in the past. I don't think every deal would warrant the "partner up and take the fee on the backend" scenario, but it is something I would do on a few deals a month. Like anything, it would take a while to build your pipeline, but once it was built and the fees started coming in regularly, life would be good. I think you could easily set this up with single use LLC's and an operating agreement that would outline all of the details. Once you have created this once, the cost would drop, and of course, the cost of everything would come right out of the deal.
Hi @Ryan Phillips. Your idea works. I do it as a rehabber. I love it. Why? For one reason, it means no money up front from me to pay the wholesaler. My contract with the wholesaler (more on that below) states that I will pay him within 10 business days after settlement on the post-rehab sale. The second reason is that it incentivizes the wholesaler to lock down a smoking deal on the purchase price. The more money I make means the more money he makes.
The wholesalers I have done this with say to the seller, in essence, that they and his/her partners are buying the houses. He/she works on marketing and acquisition while the partners focus on construction and selling the houses.
Once the wholesaler gets a verbal commitment from the seller my attorney will draft the purchase contract. At this point I take the point as I am going to be the one on the hook if something goes wrong with the contract portion.
I sign a separate agreement with the wholesaler: an independent contractor agreement. Ask your attorney to draft one for you. I use the same ICA, with different language about payment, for sub contractors who don't have their own agreements for us to sign. I also get a W9 from the wholesalers and I 1099 them at the end of the year.
I hope that this helps.
@Rick Allen and @Doug W. Thank you both for jumping on this post. The idea of doing this came to me for a specific scenario I am in, but the first several responses to my post were leaning hard opposing my view point. I thought I was losing my grip on reality until you guys righted the ship for me, and agreed there are times this works well. Doug, you are the guy I need to talk to because you executed this method, and you point out things I understood would be true but you worded it perfectly. For example, you pointed out how the wholesaler will not only want to find a really smoking hot deal (because they earn more from it) but they will also want to take that deal to YOU because the others don't play your game. LOVE IT. Your post just validated my strategy on this. @Greg Rollins read what both Rick and Doug said, I see the single use LLC name already, the Pip'n'Flip. I think that will also have to be the strategy name from here on out. Just so you guys aren't left out, Greg and I are both military pilots and those are our callsigns, and we are considering this strategy. But maybe it needs to be the Flip'n'Pip since the funnel goes from left to right, haha.
Thanks all,
Flip
I'm looking for ways to wholesale WITHOUT the shady aspects. I prefer to avoid telling owners that I am going to buy their property and putting them under contract when in reality I have no plans to actually buy the property. The property might sell to my end buyer, but under false pretenses. I understand that this is more/less standard practice in wholesaling. But I don't want to lead sellers to believe I can/will do something I cannot. So, unless I have a way to close on a property if I cannot assign the contract, I would rather not enter into the contract in the first place. With the method of partnering and collecting a "finders fee", can we avoid this? Can we be up front with sellers from the beginning and not lead them to believe things that are not true?
I'm currently talking with hard money and private money lenders about obtaining short term financing that would allow me to buy the property and re-sell it to an end buyer. I like this method because I can be up front with the sellers from the beginning. In a way, I feel like it gives the wholesaler more control of the deal. If the property is truly a good deal and the wholesaler has a good buyers list, they wouldn't need to worry too much about their exit strategy - or about weaseling their way out of a contract to the seller. I've heard @Brett Snodgrass talk about this, and it makes sense to me.
The challenge of short-term financing might be the high cost of interest and fees relative to the high cost of properties in the Los Angeles market where I currently live and farm for deals. The spread on a wholesale deal would need to be pretty big to cover the interest rate, points and fees on a $500,000 to $1,000,000 property.
There are MASSIVE Advantages of Partnering over taking a Fee. Most of them are DOLLAR$$$.
The contract between the Wholesaler and End Buyer can be real simple. An entity should be formed - LLC or C Corp. in which each has equity - the Operating agreement establishes who gets what, how and when.
I prefer a C Corp. as that makes it easy to take profits as Capital Gains instead of Income, and you position can be sold by exchange of share.