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.