PROFIT STACKING?

Question

I'm just starting out and recently posted a thread in regards to a licensee investor marketing another investor's (wholesaler) properties to your own buyer's list in attempt to collect an assignment fee/advertising/referral fee (however you see fit) from original wholesaler.

I got mixed responses on if this strategy is legal, ethical, etc...Mostly said that the licensee would just need to disclose his/her license at all times, or yes -- that it was indeed illegal, and one added that I was making this too difficult, and there was nothing wrong here.

I phoned my broker, and he didn't have a clue as to an answer, so I then called the state RE legal hotline, and tried to explain to the attorney this idea of marketing other wholesaler's properties to my own buyer's list to collect a pre-arranged fee from the original wholesaler. I immediately was discouraged by the attorney who was very short with me, probably because I used buzz words like referral "fees", marketing un-owned property...If I had a chance to re-explain the approach, maybe I could have found middle ground with him, where I don't collect a "fee", but instead am paid at closing.

To make a long story short, I took his advice and immediately eliminated that strategy from my business system (before it even took place)...

Oddly enough, I begin reading a book on wholesaling and the author highly recommends this strategy, which the author refers to as "PROFIT STACKING." I did my due diligence to make sure there wasn't a post on this topic in BP, and strangely I found nothing. Maybe some of you refer to this as something different. Do any of you practice this, and is this indeed legal even for a licensee?? It is to my further understanding that legally you can only send someone a gift of no more than $50 as a referral or marketing "fee".  I'm trying to get to the bottom of this. Is this example legal because no fees are actually handed out, but merely disbursed by the title company at closing? And are title companies even willing to do this?

1. Investor #1 puts a home under contract with a seller for $40,000 ====>
2. Investor #1 calls and offers to sell you the contract for $43,000 ====>
3. Since you don't have any direct buyers you call Investor #2 and see if he has any
buyers that would like to buy a $65,000 home for $48,000=====>
4. Investor #2 calls his buyers list and has an interested buyer who is willing to pay
$51,000.=====>
5. After coming to an agreement with investor #1 about him paying you the
difference between the end sales price and his $43,000, you put him in touch with
investor #2 and his buyer.====>
6. Now investor #2 will take over the contract for $51,000 with investor #1====>
7. This leaves investor #1 a gross profit of $3,000, leaves you with a gross profit of
$5,000, and leaves investor #2 a gross profit of $3,000.

Thanks in advance,

JDK

Christopher Davis · Answer

I've heard this referred to as a daisy chain, no personal experience with this myself. What I've been told is that in this type of transaction the chance of someone in the line not being able to perform for various reasons tends to result in someone getting screwed or left with the bag.  
  The advise I was given was to walk away and go find the next deal

Jason K. · Answer

Ahh! Just as soon as I feel like I'm starting to understand the details, the thread dies!

Am I on the right track here? If someone could walk me through once you have located a buyer at a higher price in this scenario, I would appreciate it. Or if you would prefer to send me a PM and chat about it over the phone, that's cool. I know explanations can get a little lengthy on here...

Thanks in advance

JDK

Jason K. · Answer

Nick,

So I would need to sign an option agreement with wholesaler #1 for however long his contract with the seller is for I'm assuming. This gives me an equitable interest, therefore I can legally market the property.

Let's say I do find a buyer. It only works if I'm able to find a buyer at a marked up sales price from the original asking price from Wholesaler #1 to make any coin.

So Wholesaler #1 wants 50K for this property, I need to bring in a buyer for 55K.

On my original purchase option with Wholesaler #1, do I write the contract like he did with the seller (My name and/or assigns ___), or what? Do I become Wholesaler #2 and then assign to my end buyer? He gets the property for 55K, I collect the difference between the end purchase price and 50K at closing. It reflects on the HUD, and everything is ok.

OR...

Double close like you mentioned with original wholesaler using end buyer's 55K, and you pocket the remaining?

Which is easiest? The most important thing is the option agreement with wholesaler #1, or I can't participate.

I get a bit confused after I bring in a buyer for 55K...

Thanks Nick!!

J Scott · Answer

With regards to determining whether the payment you make to the other wholesaler is legal, here's a very easy way to make this determination:

If you can pay this other wholesaler his "fee" right off the HUD, you should be okay.

On the other hand, if you have to pay this fee outside of closing (off the HUD), then what you are doing is almost certainly going to be against the law.

Nick Cifonie · Answer

the seller who brought you the deal can list it with you, as long as he discloses it to the owner of record. (we do this ALL the time... get a contract, then list it ourselves)

The contract we have the seller sign has a clause in it that discloses that we may put it on the MLS, although we used to do it without putting it in writing.  (as long as we have the equitable interest)

So you'd get paid by the person who has the 1st buying contract when it closes. No title company will question a Realtor getting paid, with or without an assignment in the deal... however, you're right, you likely won't make as much $ this way. Maybe take 6%?

Anyway, if you find a deal someone else already has under contract, and you get an option to buy from them, you're within your rights to try and find a buyer.  What you want to attempt to do though, is take control of the transaction, so you don't get lost (or cut out) somehow.

When you sign your option with your seller (not the owner of record) I'd suggest you tell him, as well as have it in writing, that if you find a buyer, you want to be put in contact with the owner of record and facilitate the close. Either that, or have your attorney do it.

You could have your seller assign the deal to you, then do a double closing, you from the owner of record, then you to the end buyer, or you can have your end buyer close directly with the seller, paying YOU the spread, and YOU pay the parties involved.

I find this to work, as long as I am in control.

A disclaimer:  This has been found to work and be legal in the states I do business in. I'm not familiar with "every" states Realtor and listing rules, so in some areas it may be questionable.

Nick

Jason K. · Answer

Nick,

Thanks for the reply.  Who's paying my commission in this transaction? The buyer? Remember, the seller does not own the property in this scenario. Even if the buyer offered to pay 3%, it probably wouldn't be greater or equal to the amount I could collect from the original wholesaler, (or title co.)

But to get away from the realty commission and back to the assignment fee, or whatever you want to call it...

Yes, I am interested in knowing more about what I can/can't do and how to do it. I feel that as long as I disclose my license (since apparently it's become a burden LOL), that I can participate in a deal like this.

Nick -- please add me as a colleague so we can discuss.

Thanks,

JDK

Nick Cifonie · Answer

I could explain how to do it if you have an interest of course... get an option, and do whatever you like with it...

However, as a Realtor, couldn't you just facilitate the deal and charge a commission?

Maybe I missed the point, but that would make sense to me.

Nick

Jason K. · Answer

What if! That's where the advice needs to start pouring in! :) It sounds logical, but what if?

Yes, I am licensed. I did talk to my broker, but he's not knowledgable in  REI, he just takes $99 of everything I make and I keep the rest. So I'm on a 100% - $99 plan. Not that you needed to know, LOL...

But I'm wondering if this Profit Stacking strategy is an issue if there was an actual FEE paid to you (as I described it to my attorney), or  just a simple matter of having the title co. divvy out your portion at closing to stay out of troubled waters.

If this is the case, I wish the attorney would have shown me my options instead of closing the book on me after 2 seconds, haha.

Any takers?

Sometimes the best wisdom comes from the ones who are actually in this business, and no one else...

Thanks,

JDK

Terry Royce · Answer

Might want to check with a lawyer, but what if you marketed it in an LLC, and the referral fee got paid to the LLC, instead of you?

At closing you could just have a funds dispersement

Not sure about legal issues

When you say you phoned your broker, are you licensed? Or you were just calling your agent?

PROFIT STACKING?

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