The Invisible Agent Syndrome in Real Estate Wholesaling
In the realm of wholesaling real estate it is very common for another wholesaler to bring a buyer and be compensated through a Joint Venture Partnership Agreement (JV). This is not a real estate commission in any sense of the word as long as a JV Agreement is in place. What has been changing in the recent past is how many people are in this chain of JV Partners.
Let’s use an example to make it more understandable. Assume an investor gets a contract on a property for $100,000 and advertises it for $120,000. Wholesalers will be calling and asking him how much is in his “profit spread” and how much they can get if they bring a buyer. If the investor is willing to split his profit a typical split would be 50/50 but I have seen them be as much as 20/80 with the original investor getting the 80%.
So let’s say that the investor bringing the buyer asks for a JV Agreement and gets one for a price of $120,000. He now has an Equitable Interest in the property via the original investor’s contract with the seller. However, the quirk in this transaction is that the investor who brought the end-buyer actually brought him through another investor or in many cases a Realtor®.
The Realtor® who brought the actual end-buyer needs to be compensated and if he isn’t part of the original JV agreement he’ll receive a commission which will likely be a “POC” (Paid Outside of Closing) but shown on the HUD as a debit to the seller who is in this case the original investor – not the homeowner. This type of Daisy Chain transaction is very typical of wholesale deals where more than one party brings a buyer for the property.
What is different and worth scrutiny is who gets what monies when the property finally closes. We first know that the original profit was $20,000 split let’s say 50/50 so the investor got $10,000 and the wholesaler who brought the Realtor® with the buyer gets $10,000. But what does the Realtor® get? Let’s assume the Realtor® wanted $10,000 to bring the buyer to the deal – which is likely double his regular 5% commission. At this point the end-buyer is paying $130,000 for the property.
While that’s not an uncommon transaction, this one sticks out because the actual investor who brought the Realtor® had a JV Agreement with the Realtor® to split his $10,000 commission because it was a Partnership Fee under the wholesaler’s JV Agreement with the Realtor®. So the wholesaler actually got $15,000, the original investor got $10,000 and the Realtor® (if he even existed) got $5,000.
Is it fair that the wholesaler got more than anyone else? Had he not found the end-buyer no one would have made any money. Is the transaction even legal? Our State’s Department of Business Regulation investigates these investor transactions on a regular basis based on complaints from Realtors® who protest that commissions are being earned by non-licensed individuals.
If the transactions do not have JV Agreements in place or the original investor doesn’t have a signed contract with the seller, the Realtors® are correct. However, with JV Agreement(s) in place, no action has been taken because the State regulations have not been violated regarding commission income. We have been audited as have many investors and the results have been the same – JV Agreements in place result in “No Action” while no JV Agreements result in action by the State.
In summary, if you are going to sell other investors’ deals, make sure you get a JV Agreement unless you are a licensed real estate agent.
To your limitless success,