Real Estate investors vs Wholesalers

[Mike Rosback]

I have been attending many meetup groups in my area. Several of the meetings are predominately wholesalers. One subject came up that has been troublesome.  The topic is when a wholesaler is unable to convince a seller to discount their property the stance on this by wholesalers is to reach out to their realtor partner and send the seller to them. If the agent sells the home they are expected to pay the wholesaler a commission. Sometimes this is masked as a "marketing" fee or under some other name.  In some cases I hear the wholesaler may be getting a small fee for each referral even without closing on a deal.

Everything I am hearing from long time brokers here including those who teach at the local association is that is a no-no.  Both parties must be licensed agent in order to get a commission and using fees or other descriptions to disguise it is not proper.

Thoughts?

[Russell Holmes]

@Mike Rosback I agree with you that it's definitely not permitted to pay any sort of significant finders fee to an unlicensed wholesaler. I don't understand how some wholesalers can spend thousands on marketing, guru courses, etc. but won't simply get a real estate license. Without joining Realtor associations and the MLS, it's really not that expensive or hard to get a license. Many non-MLS 'referral brokerages' are under $100/yr and still allow off-MLS transactions or referrals from MLS deals. I feel a 'marketing fee' would need to be completely separate from the sale to be considered allowable. If it's based on a closed sale, they need to be licensed to get more than $50-100 depending on state.

I've got a win/win referral agreement with a licensed friend similar to what you mentioned, but it works since we both have licenses. He's a licensed Realtor with a flat fee MLS brokerage. He runs a sizable house flipping company with his own and investor capital and that operation is his primary focus/business model. He lists his finished flips on the MLS, but he doesn't care to list other people's houses. He spends a small fortune on off-market advertising, has an acquisition manager, project managers, designers, etc on staff, so monetizing everything he can is important. He'll wholesale deals here and there when he gets something under contract that isn't in his target area or that doesn't fit the model he has. However, he'll also come across sellers that have distressed houses that are paid off or otherwise not urgent to sell so they don't need to take the discount, they simply don't have the money to fix up the homes to sell retail. He'll talk me up as his 'go to' Realtor and I'll list the properties on the market to sell them for more than he can pay to flip. The buyers I find are often non-investor types that are handy, buying for themselves and they need more house than they can otherwise afford, so they buy and fix it up themselves out of necessity rather than investment focus.

He's a super upstanding and ethical guy (who is also licensed!), often it'll be "look Mr. Seller, I can only pay you $125k for it to work for me, but I really think you could get $160k on the market, net of $145k+ after costs of sale since you really only need a roof and XYZ to be a great home.  Would you like $125k now to be done with it or could you wait a couple months to potentially get $140-145k?".  When he gets them under contract to wholesale, he's also being honest about the process of being licensed, putting his own money down to ensure he'll follow the contract, and he typically finds a buyer or buys it himself.  But he'll recognize the sellers that would likely be better on-market and offer them a solution. I wouldn't call him a 'wholesaler' but he does wholesale.

I pay a healthy referral for these seller leads because he's put so much into getting to that meeting, he's already set a baseline with his aggressive offer and a timeline that it can take a few months to sell a distressed house for top dollar. I'll also pay a smaller referral fee when those sellers need to buy something else. Then when I sell it for a net of anything over his base offer, sellers are thrilled and my friend who found the deal gets some marketing capital back.  He gets to monetize leads that would otherwise be 'dead' and I get a couple leads a year that basically are handed to me ready to go.

I wish more wholesalers would get a license and hang it with a non-MLS referral brokerage so I could work with them and pay referrals. But wholesalers with no license? Sorry, I can't help you there.... I'm not one to worry about reporting unlicensed activity, but I don't get involved in it myself either. Not worth the risk to my license.