Agent work for % of profit on rehab deals?

Question

I was wondering if anyone has been doing this and if so how has it worked? The plan is to have an agent or multiple agents, who would both handle the purchase (finding the deal, negotiating it, and all standard buyers agent tasks) and selling it.

The purpose is to streamline acquisitions and sales and also I like the idea of having an agent with the same interests in the deal as I do. Also by eliminating the 6% in commission it opens up a few extra properties that may have just been a bit to thin to consider otherwise (the 70% rule would become the 76% rule).

I was thinking 20-25% of net profit to be paid for this, does that seem fair? The better deal they find the more they make. 20k net is the lowest I consider for a flip so at that they would make 5k, which is slightly more than what they would make on just listing a property at about 150k (avg price in area), but there is room for much better returns if they bring in good deals.

Any thoughts or ideas are much appreciated, Thank you and have a great day!

J Scott · Answer

What's to stop the rehabber from having contractors create fake invoices with higher numbers?

What's to stop a rehabber from going to Home Depot, purchasing an extra $3000 in materials and then returning them (but keeping the receipt)?

It very easy for a rehabber to misrepresent the actual net income from a deal if he really wants to...

J Scott · Answer

On #2, either scenario is paid on the back-end.  When you pay a commission on sale, you don't pay it until the sale is closed.  So, you're not keeping the money in your pocket for any extra amount of time.  And the way you propose, you're spending more at the time of the sale.

On #3, everything you list above is what any good agent should be doing for their commission -- bring deals, handle negotiations, etc.  Your job is to look at the property, run the numbers and tell the agent how much you want to offer.  If you're thinking that you wouldn't have to look at the property and you'd just let the agents run the numbers, I'd highly recommend not going that route.  Unless the agent is a successful rehabber herself, I don't imagine she'd be able to accurately estimate rehab costs on your behalf.

Again, it's not clear what you're trying to accomplish here.  It sounds like you want to pay your agent more to have your agent work harder for you.  If you're agent isn't working hard enough for you, find another agent.  If there is something extra you believe your agent will be doing for the extra money, that's fine...I'm just not clear on what that is...

Matthew Paul · Answer

"there would have to be a trusting relationship between all parties involved."

That sounds like a marriage , most marriages end in divorce because of finances .

The gross profit is the hardest to manipulate ,  You buy the house for $ 100 K , you sell for $ 200 K  the gross profit is $ 100 K .........Simple

The net profit is after all expenses , materials , contractors, insurance , I could keep naming expenses that could eat up the net profit with ease .

As Jay Scott mentioned , returning materials would be easy .

Contractor buddys giving 2 bills , Paying the rehabber a salary , and bonus for working , etc , etc .

I see doing a great job on the property , and offering the agents a bonus to get the property sold a better solution , the agents see a real number , not a questionable possibility .

Maverick V. · Answer

and yes there are always ways to do shaddy transactions, there would have to be a trusting relationship between all parties involved.

Maverick V. · Answer

@J  Scott Your right on #1, i wasn't accounting for the seller paying on purchase.

#2 I would now be saving 3% in transnational costs  (listing agent fee) which isn't as much as the 6% i had accounted for and not really significant enough to change the deal. I understand I would still be paying my agent in the back end with the model I described above. I look for a 20k net minimum on the deal it self as a safety net, I don't need 20k in my pocket to do the deal.

#3 Saving money on paying the agent wasn't the goal at all. The goal was to save time, by having the agent bring in the deals, worry about all the negotiations and then just send them to me for final approval. In all honesty I want the agents to make much much more than what they would typically get paid by bringing in the best deals. I feel this structure would give them reason to come to me with their very best deals because they can make much more than they would bringing that deal to anyone else.

This is much more of a JV type structure and I understand that I'm just wondering if it would be attractive from the agents perspective and are there any flaws with a structure like this?

Maverick V. · Answer

gross profit can be easily plaid with, net is an actual amount. It is not as easy easy to predict as sales price but there's no disputing what the net is after the deal is done. as-long as both parties can review the final closing statement, the contractor invoices and the financials there's not much room for argument. This would all be clearly defined before a working agreement was made. If the deal ended up being a net loss it would be on me as I didn't do my due diligence. The agent has no cash in the deal other than whatever they would be paying for marketing so they loose nothing but their time. I would hope they value their time enough that they wouldent be bringing bad deals to the table in the first place. The whole purpose of this idea is to pay on performace.

J Scott · Answer

Your statement above makes no sense and I'm not sure what you're trying to accomplish here...

You seem to be missing a few things:

1.  You only pay your agent 3%, not 6%.  When you purchase, you pay nothing (the seller does) and when you sell, your agent splits the 6% with the selling agent.

2.  The 70% rule only becomes becomes the 76% rule if you end up saving 6% somewhere.  But, you're not saving anything -- you're still paying your agent some amount of money for their services, and that amount of money comes out of the deal.

3.  From your statement above, it sounds like you're trying to save money by paying your agent like this, but it's actually costing you more -- if your agent would typically make 3% of $150K from you ($4500) and they're now making a minimum of $5K (what you said in your original post), this methodology is costing you more money, not less.

If your real estate agent is appropriately motivated by repeatedly making commissions when you buy and sell, then you should find another agent.  If paying your agent a percentage of the profits means they'll find you better deals, you should be asking why your agent isn't already trying to find you the best deals possible.

Matthew Paul · Answer

Net profit ?  That figure can be  too easily played with .  What happens when it becomes a net loss?  i cant see a agent doing this , 6% of the sale price is a real number .

Agent work for % of profit on rehab deals?

Most Popular Reply