Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Adam Smith wrote in the wealth of nations - in any competition, “individual ambition serves the common good.”
Or in other words, it's every man for himself.
As real estate investors, we know the concept well. In this market, we need to be gladiators to get deals, because if we don’t kill anything – we don’t eat. So we go out and compete like hell against our colleagues and friends, and beat the crap out of each other to get properties under contract.
And I’ll bet you think that system works, and that it’s the best approach to doing business.
I’m telling you that you’re wrong. Completely wrong. And also that it’s costing you money to work that way.
I ran into an example of this recently on a co-wholesale deal that I was a part of. As a co-wholesaler, I have relationships with several full-time wholesalers in my market. I do the lead gen., take the calls, qualify the prospects, and then pass the leads on to one of my co-wholesale partners, then they do the rest. And we split the fee 50-50.
And it Works Like a Charm, Except When it Doesn’t
You see, none of my co-wholesale partners is exclusive to me. They all work with, in some cases, several other people who do their own lead gen. and feed them leads.
So guess what happens on occasion?
That’s right. Two (or more) co-wholesalers may get a call about the same property, and then pass the same lead to one of the wholesalers.
No problem, you say? It’s first come, first served, right? The first one to pass the lead wins. And that’s indeed what happens.
But what also happens is that if I’m not the first one passing the lead, and Wholesaler A is already working with someone on the lead, then I will pass the lead to Wholesaler B, and so on, until I find a wholesaler to work the lead for me.
That exact scenario happened recently on a huge deal... I worked with Wholesaler B, and I knew Wholesaler A and the guy who fed him the same lead. As it happens, the two wholesalers booked appointments to see the property back-to-back.
Thankfully, the first appointment went long and my guy showed up while the other guy was still there schmoozing the seller. That’s when the fun started.
Wholesaler A is a smart guy, and he’s the guy who I normally work with. And instead of working against each other and bidding the price up, Wholesaler A talked my guy into working together to get the deal. And we got it, and split a very, very nice fee four ways.
The Nash Equilibrium
That got me thinking about a concept called the Nash Equilibrium and how it could be applied to real estate investing.
In a nutshell, Nash stated that instead of using Adam Smith’s “every man for himself” approach, each person in a competition should instead work to optimize the result of himself AND the group. And by doing that, everyone in the group would do better than if they acted in their own best interests.
That played out perfectly (by accident) in the deal I mentioned. Because if the two wholesalers had decided to compete and work against each other, all that would have accomplished was bidding up the price, and one team would have won, but their splits would have been lower than they ultimately got via cooperating.
So I called the other co-wholesaler and walked him through the concept, and suggested that he and I start working together with Wholesaler A each time we sent him the same lead instead of competing against each other.
And by doing that, our 3-way split would of course be higher than if one of us lost, and it would almost certainly be higher than if we happened to do another 4-way split.
I’m disappointed to say that he declined. And I’m sorry to say that I think most real estate investors would say no.
And that’s a shame. Because we’ve run into each other on leads several times since then. He’s won some, and I’ve won some. But the bottom line is that we both would have made more money - probably a lot more - had we worked together instead of competing against each other.
We don’t get brownie points for winning deals. Far from it. The check we get at closing is all that matters. So it’s beyond me why investors would rather win a deal by themselves than partner up and make more money. It just doesn’t make any sense to me.
If you’d like to get a better understanding as to how the concept works, take a look at this video clip from the movie A Beautiful Mind.
Do You Share?
What are your thoughts about doing joint-venture wholesaling like this? I’d love to hear your thoughts in the comments section below.