As a real estate investor, partnering with wholesalers can be one way to greatly increase the number of opportunities in your investment sourcing funnel. Understanding the role of wholesalers, how their fees work, and some industry standards can be helpful when considering adding wholesalers to your strategy.
In simple terms, the role of a wholesaler is to identify properties that would make ideal investment opportunities, contract them, and subsequently assign the contract (or double-close) to end buyers as potential investments. They make a profit through fees associated with the transaction – sometimes transparently, yet often attempting to stay opaque. Why would wholesalers try to hide their fees? Recognizing why they deserve a fee and what are appropriate fee amounts are important topics to fully understand.
When working with wholesalers, a savvy investor views the wholesale fee as a part of the transaction purchase price. One could consider it as a substitute for other marketing costs. As the end buyer, you are essentially paying a fee to have wholesalers find you deals. The amount of the fee shouldn’t matter to you so long as the investment meets your return expectations, including the wholesale fee as part of the purchase price in your calculations.
Buyer beware, because unfortunately, many wholesalers focus solely on maximizing their fee on every transaction. This is starkly opposed to setting up a deal that is likely to close. At the end of the day, if the investment does not work for the end buyer, then the deal will likely fall apart and nobody is going to be happy.
One lesser-known industry standard that end buyers and wholesalers should be aware of is that over the years many lenders have decided to establish a “maximum wholesale fee” as a blanket rule for risk mitigation. Lenders will not fund a transaction that has a wholesale fee greater than 10% of the purchase price (sometimes 15%). Transactions with wholesale fees exceeding the threshold can still be profitable for an end buyer, but often they are not, so the lenders have established the rule. Understanding that the threshold exists is helpful so you’re not expecting to close, but instead left back at the drawing board with no investment property, and many hours wasted.
If a wholesaler is a smart long-term operator, they will maintain reasonable fees, ensuring that everyone meets their return expectations and increasing the likelihood of closing the deal. Doing so will not only help both parties close deals faster, but will help strengthen a working relationship for future opportunities.