Many real estate agents, entrepreneurs, and investors choose to work as part of a professional team. A well-crafted group of wholesaling professionals offers support and guidance while creating a platform where each venture member’s skills and talents can be shared to the benefit of the venture and its affiliated members.
In wholesaling, the ideal partner would supplement skills you have yet to acquire or skills you want to sharpen.
Real estate wholesaling, in all its glory as one of the preferred short-term investment strategies, means you must be able to act and close quickly. As a result, in the real estate joint venture (JV) wholesaling sector, the importance of partnering with the right person cannot be overstated.
The acronym “JV” in Wholesaling refers to a Joint Venture, which is essentially a business arrangement in which 2+ wholesalers or real estate investors pool their resources and talents for the purpose of accomplishing a common goal or task.
More specifically, in JV wholesaling, the purpose of the joint real estate investing venture is to close a real estate wholesale deal for a profit.
The participants in a joint venture are responsible for profits, losses, taxes, and expenses. But, in many aspects, the joint venture stands as its own entity – apart from the venture member’s other businesses.
Many people mistakenly believe that a joint venture is a term that can be used interchangeably with the concept of a partnership. While a joint venture can be a partnership, it does not have to be.
Joint ventures, when wholesaling houses, can be formed with other legal business structures. These include, among others –
Combining resources can be an intelligent approach to investing because this type of business relationship has the unique opportunity to pair complementary talents. And, depending on its defined structure – a joint venture offers financial protection and potentially superior tax structures to its members.
As a business strategy, a joint venture that wholesales houses creates a situation where -
The whole is greater than the sum of its parts. - Aristotle
For example, a wholesaling joint venture may include one member with a wholesale background and a knack for finding viable wholesale opportunities joined with another who is either well-connected to other investors or has built a curated buyers list through experience and innovation.
Clearly, pooling these two talents would work best than if each tried to go it alone as a wholesaler!
A JV wholesale deal is a fancy legal/investment term for what is more often known as co-wholesaling. It refers to the combining of efforts and resources to achieve a common purpose.
Regardless of the legal structure used to form the JV, the governing or leading document is typically the Joint Venture agreement. The JV agreement details each of the partners' rights and obligations with respect to the venture.
Each state sets forth specific regulations that define its jurisdiction’s acceptable joint venture agreement protocols. This legal agreement includes many details and relevant factors that include, among others –
It is important to seek legal guidance from a qualified real estate lawyer when drafting or signing a Joint Venture Agreement. The JV agreement should define, in a clear and transparent way, the important aspects of the venture to avoid costly as well as time-consuming potential litigation in the future.
To ensure JV wholesalers operate within the relevant jurisdiction’s laws and regulations, it is important to -
When a joint venture entity in the wholesale real estate market finds a property that meets its preset investment benchmarks, they execute a purchase contract with the seller for a sale at a specified price and within a defined period.
Upon signing, the buyer (i.e., the Joint Venture as an entity) provides a small EMD – Earnest Money Deposit as a show of good faith as a buyer. However, the JV’s goal is to locate another buyer for the same property before the existing real estate contract’s closing deadline arrives.
A JV wholesaler can use the legal instrument - an Assignment of Contract, to assign the JV’s equitable interest (their right to purchase the property) to the property to alternate cash buyers. This legal right to purchase is granted by the legal concept known as the Principle of Equitable Conversion. The difference between the purchase price of each deal would equal the JV’s gross profit.
However, successful JV wholesaling begins with finding the right property. Consider the following tips when searching for wholesale properties with motivated sellers –
The primary objective of Driving for Dollars is to sniff out potential properties by driving through and noting (in an organized way) properties that may meet the JV’s established wholesaling criteria. This property-hunting technique has been used for ages and remains effective despite the fact it fails to fall within the modern digital real estate business model.
But Driving for Dollars works, and is cost-effective.
Driving for Dollars is an effective way to get a JV wholesale deal – probably in a neighborhood that is near your home, which adds convenience. Classic signs to look for when Driving for Dollars include -
If a neighbor happens to be outside, see if you can get their phone number and chat them up a bit. Maybe they can offer some information regarding the property. Remember they have a significant personal interest in the neighborhood’s devaluing eyesore - the potential wholesale deal.
Finding your first and subsequent JV wholesale deals requires good old-fashioned networking. While the digital marketplace has altered the real estate industry, there is still a sizeable social factor associated with a successful career as a real estate professional.
Most communities have local or virtual networking events, real estate meetups, or real estate investment clubs – with knowledgeable and helpful members who share similar interests and real estate goals.
The internet, as one would expect, offers many access points that lead to potential JV wholesale properties.
Wholesaling real estate as an investor is a great way to enter the marketplace without a lot of money, as most wholesale transactions require only a small escrow deposit.
Joint venture wholesaling begins by searching/locating a potential property. After negotiating with the seller, the JV wholesaler executes a purchase contract to buy the property at a specific price within a defined timeframe.
The joint venture’s “right to buy” (a.k.a., its equitable interest) becomes the legally marketable asset upon which the wholesale transaction hinges. The ‘right to buy’ is awarded by the legal Principle of Equitable Conversion.
A JV wholesale real estate deal resembles any other wholesale transaction, except it includes a few extra steps, which are noted below.
Real estate law is strict as it is designed to protect the public. States require real estate professionals to become licensed if they wish to work (sell, list, or market real property) in its jurisdiction, unless the person happens to be the principal owner/seller.
However, a wholesaler, when assigning their “right to buy” to another buyer, is not acting in a way that would rise to a level that would require a state-issued real estate license. This is because when wholesalers market or sell equitable rights, they are not marketing or selling the real property but another asset – their equitable rights.
While the above differential may appear as minor, in real estate law, this distinction should be considered the legal line in the sand.
With its great popularity, wholesaling has caused quite a stir in an evolving real estate landscape. Some states have adopted new laws that impact the ways in which wholesalers may operate.
Read Also: Is Wholesaling Real Estate Legal?
While real estate can be understood in broad statistical strokes covering states or even countries, each real estate market is unique – offering something different and special from surrounding markets. This is the information that may be particularly helpful.
New wholesalers will find a joint venture offers a great platform on which to learn how the real estate wholesaling business operates. It offers this experience while allowing you to participate in a transaction with the potential to earn a profit.
Pro-Tip - Market knowledge is critical to successfully navigating your way around wholesale opportunities that you would be better off avoiding.
A joint venture wholesale transaction’s profit is defined by the difference between the original agreed-upon purchase price and the sales price a subsequent end buyer is willing to pay.
Professional wholesalers typically create an investment model to measure the potential of a wholesale deal. Some analyses are quite complex – using real estate comps and similar properties in valuating; however, there is no need to complicate the process.
In general, real estate investors who specialize in wholesaling and flipping houses tend to follow the 70% Rule. This rule is considered the Rosetta Stone, upon which much of the industry professional opinion rests.
An example that applies to both wholesaling and joint venture wholesaling should help clarify the concept -
A wholesaler finds a motivated seller who is interested in selling their small home in an up-and-coming neighborhood - quickly. The asking is $180,000, which is priced below market value. In your professional view, someone with a knack for fixing and flipping could renovate and resell the property for $400,000 at current market prices.
For the wholesaler, the estimated value of the subject property (of $400,000) - after its updating and renovation, is referred to as its After Repair Value (ARV).
The end buyer of a JV wholesale deal is likely to be a real estate flipping specialist – who also employs the 70% Rule to determine the maximum amount they would be willing to pay. However, a fix and flipper’s analysis would also include another investment metric/concept known as a Maximum Allowable Offer (MAO) in the final analysis.
In the above example, 70% of the ARV would be $280,000 (or $400,000 x 70%). This is the cash buyers’ starting point.
Note, however, that a cash buyer’s Maximum allowable Offer subtracts potential carrying, renovation, and closing costs. Ultimately, a fix and flipper optimize their offer to an amount that subtracts anticipated expenses.
If the cost to carry and renovate the above example is $80,000 – the flipper’s MAO calculation would be as follows –
$280,000 (70% of the ARV) - $80,000 (Expenses) = MAO of $200,000 – this analysis reveals about a $20,000 potential wholesale profit – which is probably less than the deposit required to start the JV wholesale deal.
Each real estate investment starts with a property that has potential – as defined by your wholesale investment model. When looking, consider these resources -
When an investment opportunity presents itself, wholesalers must understand that competition in the marketplace can be strong, especially for a property with real potential. In other words, a wholesaler cannot dawdle and be ready to decide and act quickly.
The first step is to negotiate with the property owner to determine the price, timing, and other transaction specifics.
At this point in the process, if the joint venture is to have the legal capacity to enter a real estate contract as a wholesale buyer, each joint venture partner must have appropriately executed a JV contract or agreement that complies with relevant law.
Wholesaling requires the execution of a legally enforceable contract of sale, so if you are unfamiliar with the contract’s language (or legal consequences), it is prudent to reach out for legal guidance.
There are two primary exit strategies for wholesalers working as a joint venture entity. Each closing strategy requires the JV to find an end buyer.
In the assignment exit strategy, the wholesaler enters into a purchase and sale agreement but never takes title; instead, they assign their Equitable Interest/Title to another buyer at a higher price using an Assignment of Contract. In this exit strategy, there is never a need to find capital from available lenders.
The difference between the original contract’s purchase price and the assignment’s price tag is the wholesaler’s gross profit.
Using the Double Closing exit strategy requires the joint venture to enter a real estate purchase contract, but the difference is that they take title by closing on the first contracted wholesale deal.
Typically, a JV wholesaler’s property ownership is temporary and may only be for a day or an hour. The double close requires additional closing costs, but the extra expense provides extra legal protection. This is because there can be no question as to the fact that the wholesaler is a principal owner/seller and in need of no license.
A joint venture refers to a specific kind of business arrangement in which each member joins to reach for a common objective.
For some, the fact that a joint venture spreads the risk among its members is an important aspect.
A joint venture offers the opportunity to combine complementary resources to accomplish the venture’s objective. Unique backgrounds and skillsets can combine to create specific expertise.
Joint ventures can create cost advantages – known as economies of scale. These cost benefits are reaped when is optimized and efficient.
Forming an alliance within the real estate wholesaling arena is common, but it does require a certain degree of due diligence when searching for someone who will become a trusted member of your wholesaling joint venture.
There are always professionals or mentors, who offer great insight and experience, but their services can be a bit pricey, especially for those new to real estate wholesaling. For a simple start, become a part of the local real estate community, participate in business and community events, and get to know property owners and colleagues.
There are also real estate investment clubs designed for local investors, contractors, agents, and wholesalers to gather and share their experiences with like-minded investors.
Ultimately, the joint venture wholesaling partner you choose must be trustworthy, reliable, and bring something to the venture that helps it to reach its goal.
An attorney can help evaluate potential real estate venture partners through a variety of background checks and investigative techniques. An experienced assessment by a legal professional can offer a well-informed decision that may help avoid future legal conflicts while providing peace of mind.
There is one fundamental difference between a traditional wholesale deal and a JV deal. Each type of wholesale transaction requires the same steps; however, in a JV wholesale deal, the contracted buyer would be the Joint Venture, as an entity.
So, instead of having one buyer, there may be two or more (individuals or companies) that are legal buyers.
A JV wholesale deal includes a minimum of two venture partners. The joint venture is typically managed (and defined) by the rules set forth in a legal contract known as a joint venture agreement (JV Agreement), a legally enforceable document.
While the JV wholesale contract can be oral (like any contract), it is highly recommended an agreement be in writing to ensure it is legally enforceable.
Each state sets the guidelines that a joint venture must follow.
Here’s an example of a joint venture wholesale agreement template to use when co-wholesaling deals with other wholesalers:
When business and money are involved, be cautious and protect your interests with legal guidance and the proper paperwork which may include –
A joint venture resembles a partnership in that it is a collaboration; however, a partnership is a type of structure that has legal dictates determining how it operates and pays taxes, whereas a joint venture does not.
The key to a JV arrangement is that all members contribute and share in the resulting opportunities and risks.
There are many reasons why wholesalers choose to close transactions using the business relationship known as a joint venture. Also known as a co-wholesale deal, JV wholesaling offers investors a way to pool their resources in a cost-effective manner. And with the digital marketplace, the concept of JV virtual wholesaling houses has become another offshoot for those who wish to wholesale beyond their local market.
If you’re looking for a step-by-step process to help you start and grow your wholesaling business without spending a dollar in marketing, check out our brand-new free training and start scaling your real estate business today!
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