Referral fees for passing on deals?

by Readers Question

14:48 PM, 20th February 2017
About 2 years ago

Referral fees for passing on deals?

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Referral fees for passing on deals?

I keep spotting potential deals that I don’t want to take on myself (various reasons such as out-of-patch, already committed, slowing down etc), and would love to package them up and pass them on to investors, for a referral fee each time. This would build my own cash pot for deals that do tick all my boxes. horse trading

Two main questions:

1. How would we set fees, basically for finding the deal, researching it and doing some basic numbers for due diligence. Should the fee be a percentage of the PP, or GDV, or the uplift, or some combination?

2. It’s all a bit of horse-trading, but what percentages are common these days (Home Counties)? 2%? 3%? 5%? ??

Many thanks

Richard



Comments

Mark Alexander

18:51 PM, 20th February 2017
About 2 years ago

Hi Richard

What you have described above is a regulated activity.

Before embarking on this I strongly recommend you read at least the first page of The Estate Agency Act 1979 http://www.legislation.gov.uk/ukpga/1979/38

The bottom line is that you would be breaking the law unless you are a member of a redress scheme and subscribe to its rules including maintaining adequate professional indemnity insurance.
.

Richard Peeters

9:37 AM, 21st February 2017
About 2 years ago

Thanks Mark, I see your point, but that raises a couple of questions too.

There are a few big players out there running lead-sourcing groups and training course on how to find and pass on property leads for profit. A couple of years back (long after the 1979 Act), I took such a course, but I don't recall it ever being mentioned that I would need to be a "proper" estate agent.

1. How do those groups avoid having all their finders needing to become "proper" estate agents? Or do they simply not tell them that they (the finders) should do this?

2. Would it make a difference if I first tied up the deal e.g. with an option agreement or actually exchange on an assignable contract, before passing it on? That puts me as an active player in the deal, rather than "just" a finder/agent.

Gary Dully

10:15 AM, 21st February 2017
About 2 years ago

If I was buying one of your deals, what I would pay would reflect the amount of work you had already carried out and risk.

More importantly what happens if the deal falls through?

But my son wouldn't touch it unless you did all the work, but one of my colleagues would pay 2%.

I say this because you may be setting yourself up for failure by being inconsistent with your clients.

I think you may need to change your approach of setting out your stall and focus on building relationships.

It will take a bit more effort, but may pay big dividends over time.

You are going to need a Rolodex of potential buyers or your business may run out of steam, when you eventually do.

If you want to have a prescribed, inflexible fee rate, why not jv with a local competitor doing the same and learn from them?

Ask them what they charge for a deal in your area.

A full package deal of say all work including legals would be a gold bar price.

If you just gave me someone's number and had done nothing I wouldn't pay you more than a box of tea bags for it.

An easier way in the long term is to consider the longevity of your business.

So be different!

You need to discuss what your buyers are prepared to pay, what for and how often.

I will pay about £6000 inc vat for a 30% Bmv deal with no renovation required, in my area. (Cheshire) on 4 beds that I can HMO into 6 or 7, where no planning is required and there is no basement or converted attic.

If I bought one every 6 weeks, I would expect a discount.

In Liverpool, I wouldn't pay more than £4000 for a 12 year lease option on a 15% BMV.
If the property is a wreck I wouldn't pay more than £1000 for the same, so I may not be considered after you become established.

I'm back in the market in June, but another buyer is looking now.

Am I on your Rolodex now?, if not why not? - it wasn't difficult was it?

Mark Armstrong will have a different criteria, have you spoken with him, what will Mark pay and for what?

He may insist that you have a redress scheme, others may not view that as being more important than the deal, who knows?

Other landlords would, its down to the list of your buyers and knowing what they will or won't pay for.

Join a Facebook group of places offering deals and look at the structure of the deals.

My rate varies from a minimum of £1000 + vat for say a wreck that needs a full refurbishment to a minimum of say £1500 + vat or 3% + vat, whichever is the higher for a 30% BMV deal, before repair costs.

The harder to shift deal will cost less.

Your main mantra would be that "your network = your net worth", you should focus on that and provide a good service, by finding out what they want, what they will pay and can they move quickly.

Your investors will watch you like a hawk and whatever you set usually sets a precedent, so don't make yourself to cheap.

So for example:
You should have a list of investors looking for 30% Bmv deals only
You should have a list of investors, who are looking 10% Bmv deals and better.
You should have a list of 1st time buyers, who are looking for a anything that reduces their deposit required, but will only buy once in a decade.
You should have a list of renovators that pay for auction failures and amateur renovators that pay over the odds at auctions.

To find out what to charge is a matter of history, so why not check land registry for auction lots carried out 6-9 months ago and see what an equivalent in the same street is worth today?

Approach those property owners to see if they are repeat buyers and if you can provide a better service than an auction, which shouldn't be too difficult, see if you can offer a better service.

What do your customers want?

Find out what they are prepared to pay and tell them what you are prepared to offer if the deal fails at say the survey stage.

Or do you verify what you offer by paying for a survey?

Make your business attractive in what it offers and ask your clients what they will pay for it.

When a deal comes up, that's 20% Bmv, no Refurb req'd and is on a timeframe of 24 hrs, who on your Rolodex has the funds and what did they say they would pay for it?

When a deal comes up that's 10% Bmv, Refurb required and is on a timeframe of 4 months, who is on your Rolodex and what did they say they would pay for it?

It's a lot easier knowing your customers first, then you can go shopping for them knowing what they will pay for, how reliable they are and what category of deal they will pay for.

Or do you want a business that is full of doubt, worry and stress every time a deal shows up or would you rather have a list of 10 buyers with funds ready by 5th March, that will pay £5000 on a 15% BMV, with a light redecoration in the kitchen, where you offer a refund or replacement deal if the survey fails or the owner pulls out?

Make life easier for your clients and they will tell you what they will pay, if you meet someone who won't tell you, walk away, you don't need the hassle.

Get networking!

Heather G.

11:01 AM, 21st February 2017
About 2 years ago

Gary Dully - that's an amazing repsonse! I can't think of a single thing to add.

Mark Alexander

12:55 PM, 21st February 2017
About 2 years ago

Reply to the comment left by "Richard Peeters" at "21/02/2017 - 09:37":

Hi Richard

The "guru's" who teach this stuff are negligent of omission in my opinion and open up their paying clients to all sorts of potential legal problems. However, it doesn't suit their "easy-money, get rich quick" agenda to point out the legal obstacles.

Ignorance is no defense in law. The analogy I often use is that just because you might know somebody who drinks and drives every night and has never been caught doesn't make it legal.
.

Richard Peeters

14:07 PM, 21st February 2017
About 2 years ago

Wow Gary! That's almost a business plan created! You should be a trainer!

I'm not sure if my initial post, or my follow-up, was misunderstood, or if I didn't give enough info, but I am *not* aiming to start a sourcing business at all, certainly not a pipeline of lots of small deals per year.

When I am looking for my own deals, and find an odd deal that doesn't fit or for which I don't have resources/capacity, then I'd like to pass them on, rather than lose sight of them altogether.

For example, one recent one was a mixed commercial/residential project which should have GDV £3-3.5m. Another was to totally refurb a run-down block of ex-LHA flats (again, roughly £3-4m depending on finish etc, and possibly adding an extra storey). I don't think it's same thing as passing on off-market leads for houses needing a refurb.

If a wealthy investor stood to make £0.5-1.0m from one deal that I have discovered, what sort of fee would be "reasonable"? Any how I would avoid having to be become a "proper EA"?

Richard Peeters

14:53 PM, 21st February 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "20/02/2017 - 18:51":

Mark:- having looked again at the detail of the Act (your link above), I think the very first paragraph lets me off from the "proper EA" path:

The Act applies to "things done by any person in the course of a business (including a business in which he is employed) pursuant to instructions received from another person (in this section referred to as “the client”) who wishes to dispose of or acquire an interest in land ..."

In my case, I am *not* acting under instructions from any buyer or seller, and am not trying to represent them (as an estate agent might), nor would I be paid to represent them.

I think the situation is quite different for those people sourcing leads according to a well-defined process (i.e. those gurus, or like Gary's plan), who might well be considered to be under the instruction of the sourcing system or the eventual buyers.

Do you agree?

Gary Dully

15:13 PM, 21st February 2017
About 2 years ago

Now that's a bit clearer, Richard,

But it's a similar situation, but with the decimal point further to the right.

Contact a commercial agent and see what they would charge.
Eg. Chartered accountants etc, may be a good source.

Read YPN magazine, there are good examples in there.

Who has bought such deals in the past?

Or as before, networking with similar people who have done what you are doing, who wouldn't do what most landlords do.

I soon fell out with single occupancy, after seeing the yields on HMO.

Now everybody's doing them, the latest is Serviced Accomodation and commercial to residential, but that isn't my field.

But the principle is the same.

Relationships first, especially in millions instead of hundreds of thousands.

As for being an AE, higher net worth individuals,, I believe, can be certified for sidestepping certain regulations, so you might want to enquire down that route, with a chartered accountant.

Mark Alexander

15:55 PM, 21st February 2017
About 2 years ago

Reply to the comment left by "Richard Peeters" at "21/02/2017 - 14:53":

Hi Richard

Sorry but I disagree, and so would the regulators. In your own words, you would be "packaging deals". You would also be charging fees, presumably to either the buyer or the seller?
.

Richard Peeters

8:24 AM, 22nd February 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "21/02/2017 - 15:55":

Thanks for the ideas and feedback so far.

At the risk of sounding like I am now trying to weasel out of something, I am thinking I have used a poor choice of words in my original question. "Packaging" might be too strong and that word might have a specific legal meaning that was unintended. Mea culpa.

Let's just say I am out looking for my own property opportunities and find one that, after some due diligence for my own needs, I decide not to pursue. Nevertheless I can see a profit in there, for someone else to make, and so I want to be able to simply pass on contact details and some basic data to that investor and be rewarded. I am approaching them; they are not instructing me, nor is the seller.

As an alternative, in order to lock in the opportunity (with the seller), I might have to enter into an assignable contract with them, and pay some deposit/ downpayment/ holding fee, and then still find an investor (again, this is not under instruction from the seller or any potential buyer). Worst case is that I have to continue the project so as not to lose that downpayment.

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