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Joint Venturing on Wholesale Deals—The Inherent Problems. | By: Multiple Speaker(s)

Joint Venturing on Wholesale Deals—The Inherent Problems.
By Vena Jones-Cox

For whatever reason, I’ve been approached frequently in the past 2 months with questions, concerns, and utter meltdowns in what has come to be called “Wholesale Joint Ventures”, or JVs.

The concept is easy to understand, and seems like a great idea on the face of it. It’s basically this: a wholesaler (we’ll call him wholesaler A), has a contract to purchase a property from a seller. In an effort to sell it faster, or sometimes because wholesaler A has an inadequate buyer’s list, he contacts another wholesaler and lets it be known that he, wholesaler A, will pay wholesaler B some percentage of wholesaler A’s profit if wholesaler B can bring a buyer to the table. In a perfect world, wholesaler B then finds a buyer, wholesaler A assigns his purchase contract with the seller to that buyer, the buyer and seller close on the deal, and wholesaler A and B split up the resulting wholesale fee as per their agreement.

However, these arrangements are fraught with potential ethical, legal, and practical problems. Some of these are due to sloppy paperwork, misunderstandings, and other communications issues; others are a result of bad behavior, whether intentional or accidental, by the parties involved; yet others are due to the fact that most of these arrangements are in, at best, a legal gray area.

Let’s deal with the practical issues first.

Practical Problems
Bottom line is, there are a lot of different ways in which wholesalers do business, and any particular wholesaler has probably trained his buyer’s list that his way is the “right” way. If wholesaler A’s right way is different than wholesaler B’s right way, it causes often-irresolvable conflict and leaves the two wholesalers with wasted time, bad feelings, and no deal.

This happens, for instance, when wholesaler A’s policy is “I get paid when I assign the contract” and wholesaler B’s policy is, “I get paid at closing”. Wholesaler B’s buyers are NOT going to want to meet wholesaler A’s requirements, because it’s never been asked of them before, and wholesaler A isn’t going to want to break his usual “It ain’t sold ‘til you show me the money” policy with a buyer he’s never worked with before and, potentially, never even laid eyes on.

I’ve been wholesaler A in this situation, and it’s nearly impossible to overcome. Not only can the BUYER not understand why I want my money up front—often, wholesaler B can’t understand it, either. Wholesaler B has actually gotten angry at me for “blowing his deal” because I wouldn’t assign my contract and then wait to be paid for that action. I’ve also been informed by wholesaler B that his buyer thought I was “trying to rip him off”. Gee, I wonder if ONLY the buyer said that, or if my buddy B agreed?

Another, similar issue occurs when wholesaler A has specific policies regarding to whom he will sell properties. For instance, I have a policy that I won’t sell buyers their first rehab—primarily because buyers doing their first rehab usually go over budget, do the wrong work, take 5x as long as they should, don’t make money, and then, sometimes, want to blame ME for all of that.

But very few other wholesalers have such a policy, and when I try to enforce MY policy on THEIR buyers (ie, if you’re a newbie, keep moving), wholesaler B gets upset because 1) In his mind, I’m not selling the property, he is, so he doesn’t think I should care what happens to HIS buyer and 2) unfortunately, many wholesalers have a buyer’s list absolutely chock full of inexperienced buyers, so they can’t find someone on their list who’s qualified to buy my properties.

In both of the two cases above, I’ve tried applying creative solutions, including:
Offering to have the buyer escrow his money with HIS attorney, agent, or title company
Telling wholesaler B that he was free to do whatever he wanted with my deal—as long as he paid my fee up front and closed it first
Explaining to wholesaler B, up front and in writing, what my policies are and that I wouldn’t be willing to break them for him or his buyers
This has been moderately effective in some cases.

Ethical Problems—Theirs and Yours
When you give up the control of dealing with buyers yourself, you run the risk that your co-wholesaler will say or do things that run counter to your principles. For instance, he could understate the repair costs or overstate the value of the property in order to make it look like a better deal than it is.

But the most common issue I deal with is when wholesaler B wants to raise the price of my deal to his buyer, usually keeping the difference for himself. I understand that different buyers have different uses for the properties, repair and finance costs, and opinions of value and that a particular property might actually be WORTH more to one buyer than to another, but I take that into account when pricing my properties.

Therefore, if wholesaler B is significantly increasing the price on one of my deals to one of his buyers, I can only believe, based on my extensive experience, that the higher price is NOT a good deal. If it were, I’d be asking the higher price myself.

Again, you may ask, “What do you care if wholesaler B rips off HIS buyer, when you had nothing to do with setting the asking price?” It’s simple: I don’t want to be involved, at all, in a deal where the ultimate buyer won’t make money on the property.

Generally, when this is suggested to me by another wholesaler, I repeat that he can do anything he likes, as long as he closes the deal and sells it to his sucker, I mean buyer. But oddly enough, no one has ever taken me up on that deal.

And then, of course, there’s the whole question of whether you can trust the other wholesaler in the deal, whether you’re A or B. I’ve heard of cases where B, having gotten all the details of the deal, tried to go around A and negotiate directly with the seller; I’ve also heard of cases where A sold to B’s buyer, then didn’t pay B, sometimes just ‘cause he didn’t want to, and sometimes over a technicality like, “yes, you brought this buyer to this deal, but he was already on my buyer’s list, so he’d already gotten an email from me, and even if he ignored it, that means he’s my buyer”.

This is why these agreements, if they’re to be done, should be done in writing, outlining all the “what ifs” you can think of.

Legal Issues.
Agree with it or not, the law says that you are not allowed to procure, sell, or lease real estate for others for a profit unless you have a real estate license with your state (with some exceptions for w-2 employees). This means that you can’t get paid for finding a buyer for someone else’s house, and a buyer can’t pay you for finding a house for him, unless you’re a licensed agent.

The legal argument that’s been made for why you can wholesale without a license is that you’re not doing it “for others”. By contracting to BUY the property, you have, yourself, become a principal (the buyer) in the transaction. What you’re doing is NOT getting paid for selling a property “for other”, but rather selling your rights in the contract on a property FOR YOURSELF, as a principal in the transaction.

But what about wholesaler B? He’s definitely not a principal—he does NOT have a contract to purchase the property, nor is he himself the buyer. He is, in a very real sense, being paid to bring a buyer to a principal, which is illegal.

Yes, this is a stupid law meant to create a monopoly among people who have real estate licenses. Yes, most co-wholesaler wouldn’t care one whit whether taking the money is illegal—they’ll take it anyway, and damn the torpedos. But you know who, as it turns out, DOES care?

Real estate agents.

There’s no question that a co-wholesaling deal, as it’s normally set up, involves wholesaler B getting a fee for something he’s not supposed to get a fee for, and I’ve personally seen real estate agents get upset when people OFFER to be wholesaler B. Why? Because, in the agent’s mind, wholesaler B is doing the same thing the agent spent a bunch of time and money getting legally licensed to do.

So what, you say? Well, the so what is that upset agents call the state division of real estate, which gives you a cease and desist order on your activities, and potentially even fine you, which is expensive and a pain in your butt.

Is there a legal way to do this? Not in the sense that there’s any case law of which I’m aware that outlines such. One way is to do what many other investors have done and just get a real estate license. Another is to have wholesaler A assign the contract to you, wholesaler B, and then assign it to your buyer, thus making you, arguably, a principal in the same sense as wholesaler A.

At the very least, if you’re wholesaler B in this scenario, you should have a written joint venture agreement that states that you are selling a contract, not a property. Will this protect you legally? I’m no attorney, but I’m guessing not. Divisions of Real Estate aren’t too good at seeing the subtleties of such arguments.

So should you do wholesale JVs? Maybe. But do them carefully, and in writing, and with other wholesalers who share your business practices and values.

Reprinted with permission of Vena Jones-Cox. To get more free articles and tips, subscribe at www.TheRealEstateGoddess.com

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