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. :)
Having been a wholesaler and a flipper I can see both sides. Most wholesalers just want the fast cash and will take the "fast nickel instead of the slow dime." I think this is why wholesalers do what they do and flippers do it their way. There's other things to consider, but it often comes down to the pay day.
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.
The options are VERY simply, and the have been gone over again and again and again here in the forums. They are:
1)Close on the property and then immediately resell it, or
2)Get your RE license and take the property on as a listing. A RE agent can do anything that a wholesaler can do, and more, only done legally and ethically. It is easy and inexpensive to get licensed. I have no idea why there is so much resistance to this idea as opposed to trying to be a "wholesaler" ... you are doing the same job, except one way is legal and you are not trying to deceive the seller and the other is not (other than 1 above).
So, it is VERY simple.
@David Faulkner I am actually in the process of getting my RE license too. I feel it def has more advantages than disadvantages. May I ask your perspective on any potential negative aspects of having a RE license.
Thought I posted on this thread but was interrupted (twice) - might have got lost.
There are massive advantages of Partnering instead of taking a fee. Which should be done via a Special Entity - I prefer a C Corp to an LLC because of the extra benefits.
First there are the dollars - likely more of them. Then there is the possibility of tax structuring - less tax.
Next is the fact that you will be contracting with sellers in the name of the entity. You and the Buyer can both be directors with powers as defined - which should be to contract under certain provisos. There should be specific clauses that prevent the wholesaler indebting the Corp. etc
A Corp. makes it easy to cash out - with tax at 15% after a year, to bring in new partners or swap places with others. While most small players see an LLC as simpler initially it is more cumbersome adding or changing partners and most profit will flow through to be taxed at marginal income rates. The actual tax management process for a C Corp. is more complex but is much better than even most CPAs appreciate. If yours is in the know they should recommend a C Corp. Otherwise go with a LLC.
I have had agents ask for a percentage of the deal in lieu of a commission (when the deal started getting tight) or in addition to the commission (when they thought they had something really special off market - usually screwing over the buyer). I've always said NFW. I would never partner up with a listing agent or wholesaler under those circumstances. I assume they would be looking for the first opportunity to stick it to me, and I would have to take on a mindset of doing the same to them. Also, partnerships can last a long time, like marriage - heck, at least a marriage ends when you die - your kids might be stuck with this partner for years after your death.
@Account Closed - Tell me more about why a C corporation makes sense. To me it seemed like a lot of hassle - corporate and individual level tax (no capital gains rates on corporate tax either), plus gain on taking any real estate out of the corp if you ever want to distribute to shareholders in kind. LLC is easy to put real estate in and out, plus the advantage of long term capital gains and only a single layer of tax.
What are the CPAs and everyone else missing about the right way to run real estate through a corporation?
@Doug W. I really like the way you just explained that on the first page. Incentivizing your wholesalers to get the best deals and bring them to you! I really like that... I was kind of confused what you were getting at @Ryan Phillips and I know we both saw the whole investing instead of wholesaling clarity but at the same time, what he said is brilliant! I am really interested in trying to find some wholesalers near me that would be interested in this sort of set up....
@David Faulkner I am actually in the process of getting my RE license too. I feel it def has more advantages than disadvantages. May I ask your perspective on any potential negative aspects of having a RE license.
The costs to get and maintain would be the main down side I could see. Some may say that it is also a disadvantage that you have to disclose that you are a RE agent and be aware and abide by stricter guidelines and fiduciary responsibility, but I see this as a benefit actually and not a burden. There is also an ongoing education requirement where you need to invest so many hours a year to RE related training of your choice, but again, I see this as something you should probably be doing anyhow. Finally, in the beginning you will either need to pay a flat fee or per transaction fee or commission split to a broker, but this varies and there is a lot of benefit a good broker can provide ... after 3 years, you can get your broker's license and not need to hang your hat under another broker if you choose to.
@Josh Prince Not all CPAs are in the dark on the advantages of C Corps. Have a look at the videos by them on Youtube to see the reasons the good ones back C Corps.
LLCs can be used to put real estate in as you say - but there are no major tax advantages there, and little in the way of asset protection. LLCs can not issue shares - every time you add a member requires a special meeting and approval of ALL other members. C Corps is simple - just issue additional share.
Transfer of memberships of a C Corp is cumbersome - whereas for a C Corp all that is needed is to transfer the shares.
Control of a C Corp can be altered without any transfer of shares - just dilute the shareholding by issuing additional shares.
Long term capital gain occurs when shares are sold (after 12 months).
Ask the CPAs to find out details of medical deductions, and how to use 401k to a) reduce employee tax, shelter corporate profits, retain earnings and transfer LLC profits to a tax friendly state via management fees to the C Corp.
Banks do not like LLCs as borrowers - Finance is more easily obtained by C Corps. LLCs can not obtain Interest Free money without tax - IRS deems 4% as an interest rate and taxes Interest Free Loans. Whereas IRS does not mind when a Corp receives interest free money.
Tax free capital can be raised by a C Corp by issuing shares - and there is no liability attaching to the funds received. There are a heap of different classes of shares which can come in to play to suit, such as Redeemable Preference shares, Convertible Notes and any other particular type you care to utilize.
The above is not an exhaustive list of why Corps make senses - do your research to discover more about their advantages.
typo - should have said Transfer of memberships of an LLCs is cumbersome (not Corps)
P.S. C Corps are ideal for Estate Planning - when you know how - assets do not need to be sold triggering gains tax - they can remain in tact. That can be a Massive Tax Benefit - but there is specialized know-how needed for this!
The marketing campaign practically writes itself!! Awesome!! haha
I love what @Doug W. said. I love the idea of mutual incentives for both parties to succeed and do their best. It will keep everyone motivated, make them work harder on the deal and in the end everyone profits more from the hard work they did. Symbiotic relationships for the win.
-PIP
@Greg Rollins @Ryan Phillips @Doug W.
My main question is how to get the wholesaler(s) that are used to being paid quickly up-front on board with being paid after the fact??
Also, Doug, do you use some scale of percentages based on that Post-rehab sales price when paying the wholesaler?
@Brian H. I am not sure what the best way to convince existing wholesalers to change their model. To be fair I have also been in deals and negotiations with wholesalers who either state their fee (assignable contract) or do a double close.
The percentage is negotiable. So the balance is between the fact that you are taking all of the risk and the wholesaler can (in theory) go with another rehabber and cut you out completely. In my mind I would prefer to pay a higher percentage to a wholesaler who I believe can consistently bring me good deals. Meaning that if I pay 20-25% of profits instead of 15%-20% I am ok with that if it keeps my pipeline full. There is also consideration given to the total profit. For smaller deals I will likely try for a lower percentage simply so that I don't do a ton or work with all of the risk and have a small payday.
I hope that this helps.
@Shaun Pruett, I never tell the seller I'm buying their property nor even hint at it. As I walk through their house I let them know I represent investors who want to buy their house. In fact on my card that I give them for my business, my title is Aquisition Manager. When I explain the contract, I tell them that I will be assigning the contract to one of my investors, then I explain the process.
I may say something like this "...this clause says that I will be assigning the contract, meaning that on the day of closing my investor will actually be the one buying the property, not me. That doesn't matter to you does it? Just as long as you get your money right?" I emphasize "Just as long as you get your money right?"
I've never had a seller protest, say no, question me further, etc.. but they all universally say "..no it doesn't." The key is that I work with "MOTIVATED" sellers. Motivated sellers want out of their situation, they don't care who is at closing.
When you have a motivated situation you don't have to trick the person into believing that you are going to "buy" their property. They aren't looking for nor are they expecting top dollar, that's why they are not using a Realtor.
@Brian H. how would you set up your partnering deal? I wholesale in the DC Metro area, but I went to school at Duke & my wife is from Durham. I want to expand down into the research triangle area sometime this year though & would be interested in hearing your thoughts on possibly partnering up like this on some deals.
@Ryan Phillips i see nothing wrong with partnering on a deal with a contractor if the deal makes sense and there is no immediate need for the wholesale fee. With that said, I have no interest in staying involved on a project after closing as I'm just moving from one deal to the next, to the next building capital for my REI goals. I do stay in touch with buyers to make sure things are running smoothly but then again we don't sell rehabs either.
If a wholesaler is not running a business and just doing a deal or two per month/quarter then perhaps it would make sense but if your running an operation wherein there are different lines of people that are looking to be compensated at closing for work put into making a deal happen then I don't see how the delayed gratification approach will fly. I have several layers of people to pay on each deal and I don't think any of them will buy into this idea as they are working for my company to meet immediate financial obligations. Lastly, It just seems like there are too many hands in the point and if everyone is not in sync then things can go left quickly.
Great question and perhaps the answer lies in the overhead on a deal for an individual wholesaler opposed to one that is running an operation.
@Brian H. how would you set up your partnering deal? I wholesale in the DC Metro area, but I went to school at Duke & my wife is from Durham. I want to expand down into the research triangle area sometime this year though & would be interested in hearing your thoughts on possibly partnering up like this on some deals.
Wow! A Dukie! Obviously one smart fellow! Shoot me a message on here or email me (email in my profile). Would love to talk!
James Green I like how you word your conversation with the seller, emphasizing "as long as you are getting your money." It is a good negotiating tactic to have them agreeing with you. In fact, as you say it, nod up and down too. It's so important to be honest and spell it out. When people are surprised by a last minute revelation, that's when they lose their mind. They feel mislead, lose trust and feel like they may have been taken for a fool even if they have not.
I agree. It also just feels more honest, which I prefer. Thanks for sharing that method James!
@Ryan Phillips, LOL, that's exactly what I do. They don't care if my dog is going to buy it, just as long as they get their moolah.
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.
I agree. There's a lot of BS, fakers phonies and frauds in this business just wasting everyone's time.
Don't ad to this mix.. it's not profitable and will end up just wasting your time and everyone elses'
I'm tired of getting these wholesale deals that are "Nice build house 70% ARV, but only need $10k rehab" then I spend 20 minutes looking at the deal and it's really 80% ARV, needs $60k rehab and is already on the MLS. There's too many lists bouncing around where I see the same property on these "virtual whole sellers" mailers. just blasting out mailers with trash.
There are deals out there if you work hard enough. Get out there and WORK and find a real deal people. A lot of these are newbie people who think they're gonna get rich quick with some magic bullet. It's not true. Use common sense and GRIND.
People get into 'real estate investing' to dabble. This takes real work to get a real deal.
*look how the original poster is gone. People get into this...think wholeselling will get you somewhere, realize to do it requires real work, then they quit, just quit now if you're not passionate about real estate
So there seems to be this concept that "wholesalers" are out to trick, scam, find a sucker, etc.
I don't even wholesale in the traditional sense, i.e. I'd rather close to give more leverage on the as-is sale, do the deal directly myself OR make sure the seller is fully on board with understanding the process of the showings to other investors and a double close. But honestly, that is pretty rare for me. Bigger profits in waiting out the seller to meet my price and do the deal myself.
The point I want to make, for people just breaking in the industry as they find their niche and reading all this wholesaler hate here, is people have different strategies, beliefs, about the property. The idea people are "tired" of seeing wholesale lists and wholesalers are too blame doesn't really make sense. If you don't like a wholesaler, think they estimate ARV or repairs either intentionally or unintentionally inaccurately, why are you subscribing to their list? That's your option? No one is forcing wholesale deals down anyone's throat. If you feel like that's the case, perhaps its a you problem in that you are trying to work with wholesalers who don't help you. It's literally 1 button to unsubscribe or a 5 second phone call or e-mail your not interested.
Now, the other thing is people seem to think that a wholesaler is out trick/scam some investor about repairs or values. You have the address, you see the property, it's the investor's responsibility to vet this deal. Why would anyone rely on anyone they don't really know to make a deal? Also - it's not realistic for a wholesaler to anticipate some other investors strategy. In fact, sure you get a random home run deal here and there, I get most my deals when I am applying strategies that no one else is (for example, complicated rental situations where I have to keep a tenant for even 7 or 8 months at a loss, additions to boost ARV, adding units). Wholesaler could not possibly understand this and it wouldn't make sense for them to try.
You can get me a formal Broker Opinion and I STILL take it with a grain of salt. It's my money on the line, not some broker, some agent, some wholesaler. None of those people have any "skin the same" so why would anyone possibly defer even 1% to anyone of those people. If you are, well, that's a you problem. If I see the value I do the deal, and my trusted GC gives me the quote, I literally give absolute zero weight to any stranger to my business (I do rely on trusted employees, but always double check the work).
Since my website has pretty good Google rank, often I get contacted by wholesalers. I mostly say "no thank you" since the deals 99.9% don't meet my criteria. No reason to get worked up or angry, people are hustling, trying to break in anyway they can. If they have their a contract, or a license and co-wholesaling, my understanding is that is ethical. I'm not an attorney in every state, but that's my understanding.
My main problem is wholesalers who contact me with deals not under contract or pretend to be the owner or "friend". However, this is the vast minority.
@Ryan Phillips Good to see you're not gone. It's bad for not reading the thread correctly, I replied on the iphone and admit I didn't read the whole thread in full. The format on the phon it looked like orig poster was on page 2/2.
@Lucas Machado and @
I agree not all wholesalers are scammers. Nor are all people in the real estate industry. I don't talk in absolutes.
There are a lot of scammers, phonies etc in Real estate investing, the industry, as any other industry where there's a decent amount of money to be made.
I just see it again and again. Lucas is definitely Legit and runs a stand up biz. (I don't know if you remember me Lucas I actually met you at the Denny's in hollywood FL you def seem to run a tight biz)
Lucas, I agree with 90% of what you're saying. But at least in my experience out here in LA I've wasted a lot of time meeting wholesalers who basically not only had no clue what they were doing and only know how, but wasted my time trying to con me into bs deal that they knowingly try to pawn off as their own. Whether it was due to their ignorance of RE (like they're just guys off the street who read a blog about RE and think they can therefore wholesale to get rich quick ) or they just wanted to throw a crap deal onto someone because they're a straight up con-man. I can see through them. I value my time more than anything.
I'm actually not calling out anyone on the thread Ryan... I admit I haven't even read the whole thing... I'm just speaking in generalities as a warning to anyone who want's to get into wholeselling or REI.
@Will F. I figured you weren't intentionally aiming those comments at me. While I can't speak for your character, my account was still active so it seemed obvious that your comment was in error. However, I did want it to be clear that I operate with a conscious and with integrity. I know that a few bad apples can ruin the bunch. However, I think this only adds to my point about wholesaling when I began the thread. The original post highlighted the idea of doing a partnership vice wholesaling. While the quick return on investment (ie direct mail) might be necessary for the system to keep working, thus not an option for a wholesaler to do anything but walk with the cash. I actually like the idea of partnering in the business. 1. A partner in the deal would be less shady than someone who quick turns the property simply because from an outsiders point of view it looks like a swindle. This doesn't mean it was a shady act, but it is possible to "appear" to be and as they say, "perception is reality." 2. I think you can actually return a better profit if you are willing to stick around to the end and see the fruits of your labor. I don't have anything against a wholesalers, but I just like the idea of partnering when possible.
@Ryan Phillips reading through some of this thread as I'm trying to figure out how to "wholesale" a HUD deal. By any chance, did you ever end up partnering on a deal as you described here inn your original post? Did you end up either seeing a contract or putting one together along these lines?