Wholesale JV -- Investor Fronts Marketing Costs

[Matt Schelberg]

I recently met with a wholesaler over coffee to discuss the types of properties I am looking to purchase for my rental business. I was expecting a straightforward wholesale arrangement, but the wholesaler proposed an interesting JV agreement that I'd appreciate feedback on. The wholesaler is not currently marketing in my farm area, so he proposed that I front 75% of the direct mail marketing costs in exchange for first right of refusal on deals. Summary of the agreement:

• Wholesaler would obtain the marketing list and prep the handwritten direct mail pieces.
• Wholesaler would handle all of the calls, negotiating, and getting the property under contract.
• Wholesale fee would be determined by a formula based on the cap rate. The higher the cap rate, the higher the wholesale fee.
• If I decline a deal, I get a percentage of the wholesaler's fee if he sells to somebody else (probably 25-30%).

What I like about this:

• I have a full-time job and don't have time to set up my own marketing and acquisitions team. This effectively subs out my acquisitions.
• The wholesaler's incentives are in line with mine and with the 25% share of marketing costs, he has significant "skin in the game."

What I don't like about it:

• I am spending money on marketing but not building up my own brand. Worse, I am building a competitor's brand in my own farm area -- all the mail pieces will have his brand and contact info.
• The wholesaler would be to take any referral business or referral leads generated from the mail campaign. (Having no experience with direct mail I do not know how many deals can be expected through referrals. Perhaps the number is so small it is insignificant and I'm not losing much.)
• Trust issue. This wholesaler has two years of RE experience (including flips, which is a positive -- he knows how to estimate rehab costs) but only a few months of wholesaling experience. He is established at the local REIA, but I've never worked with him before. There is a chance he could bungle leads or get busy and ignore them.

What other negatives am I missing? Any feedback would be greatly appreciated! Thanks.

[Brian Burke]

I suppose that if the arrangement works for you and accomplishes your objectives, there's nothing wrong with it. The biggest drawback might be that a lead comes in that he doesn't tell you about and keeps it for himself or flips it to someone else without giving you your first right.

To mitigate a couple of your "don't likes", perhaps you should have the marketing go out under your own brand with a phone number that you control. You then have calls to that number forward to the wholesaler. If the arrangement no longer works for you, you turn off the call forwarding and sever the relationship without losing momentum (your agreement should spell out the conditions under which you can do this).