How to Partner on Direct Mail Campaigns
When we first got started fix & flipping, we were scrapping to get by. We’d found a couple deals but knew we needed more access to deal flow. In the meantime, we had a couple of friends who were getting interested in real estate investing as well. While we lacked deal flow, what they lacked was systems and processes to manage a direct mail campaign. They also didn’t have the legal entity, insurance policies, business licenses, and contractor connections to manage projects. So, this created the beginnings of a perfect partnership. We had to come up with a partnership structure that worked for everyone on a deal by deal basis.
Introducing…The Profit Pie partnership structure.
The Profit Pie is a structure that dictates how profit on a flip project will be divided between the established flipping company (we’ll call the primary partner) and the marketing partner according to their individual responsibilities.
This structure allows marketing partners who may be new to real estate investing an opportunity to work with an established company to gain experience and contacts. Unlike wholesaling, by using a Profit Pie structure, marketing partners are able to benefit on the upside potential of a flip without the downside risk. For the primary partner, this structure gives you access to deals you didn’t have to market for.
There are 3 main equal sections: FINDING, MANAGING, and FUNDING. Furthermore, the FINDING section is divided into two sections: MARKETING and LEAD FULFILLMENT. MANAGING is divided into ESCROW MANAGEMENT AND REHAB MANAGEMENT.
This is the doorway to the deal. The marketing partner can only get into the deal through FINDING the deal and more specifically, through the MARKETING scope of responsibility. This is usually done by funding a direct mail marketing campaign. The premise is that for an established flipper, a marketing partner isn’t very valuable unless that partner brings an off-market deal that otherwise would not have been found by the primary partner.
This is half of the FINDING section and refers to the responsibility for the direct mail marketing costs. This section is always the marketing partner’s responsibility and corresponds with 16.67% (or 1/6th) of the profit.
- LEAD FULFILLMENT
This is the other half of the FINDING section and refers to the capture, management, and follow-up of leads as well as ultimately the negotiation with the seller. With some of our partners, we (the primary partner) would have this responsibility if our JV partner is running their marketing through our phone and CRM systems and we are managing the marketing partner’s leads. We’ve also worked with partners who manage their own leads and come to us when they have a deal. In those cases, the marketing partner would get this additional 16.67% (or 1/6th) of the profit.
This section is also broken into two separate sub-sections and refers to the management of the rehab as well as escrow processes (on both the purchase and disposition).
- REHAB MANAGEMENT
Whichever partner is primarily given the responsibility to manage the rehab process has the right to this additional 16.67% (or 1/6th) of the profit.
- ESCROW MANAGEMENT
This section of the profit would go to the partner who takes title in their name or entity and ultimately assumes responsibility for liability and insurance for the project. This partner would also work with the escrow officer or attorney to close on both the purchase and disposition transactions. In every case with our partnerships, we (the primary partner) would have the ESCROW MANAGEMENT responsibility because our lenders would not be comfortable with someone else on title. If both partners buy the property together then this section could be divided in half.
This section goes to the partner who provides the funding for the deal. Funding would need to include both rehab and purchase. If both partners bring half of the funding, this section could be divided in half. The partner providing funding should not charge an interest rate since their compensation comes from the profit. Funding could mean bringing a hard money lender by using experience and credit or it can mean providing the cash needed to complete the deal. If a hard money lender is used, loan fees and interest costs would be considered costs against the project and would not be the sole responsibility of one partner to pay. As with everything else, however, this can all be negotiated depending on each specific situation.
- “Must Add Value” Principal
- Each responsibility/profit share section must be allocated so that each partner brings value to that scope of responsibility. For example, if the primary partner does not have a need for capital, it may not make sense to have the marketing partner be responsible for FUNDING since additional access to capital is not necessary and does not bring value. In situations like this, the partners can split the FUNDING section since both have available capital and neither is bringing value that the other partner doesn’t have.
- “No Monopolies on Relationships” Principal
- Both partners will develop professional relationships that can add value to a deal. The partner bringing a relationship should initially be compensated in the Profit Pie structure. For example, a marketing partner may develop a relationship with a wholesaler who sources great deals. On the first few deals, that marketing partner should get the FINDING section of the Profit Pie. However, keep in mind, no one has a monopoly on relationships and ultimately the primary partner will establish a relationship with that wholesaler and the marketing partner will no longer be bringing value.
- This can cut both ways. For example, if a primary partner uses a great hard money lender, eventually the marketing partner may decide to use that same lender. If the marketing partner can qualify for lending, the primary partner is no longer bringing that value to the deal. In this case, it may make sense to either split the FUNDING section or the marketing partner can do the deal on their own.
- Non-Disclosure Agreements may be warranted, but, unless you are doing something extremely unique, there are no secrets in real estate investing. This principal eliminates awkward expectations by potentially both partners for lifelong “royalties”. This principal is closely related to the “Must Add Value” principal and should be explained upfront to potential partners.
SOME FINAL THINGS TO KEEP IN MIND:
- A marketing partner can market in many ways within the Profit Pie structure but direct mail is probably one of the simplest since it’s very clear cut who sources the deal as long as you use exclusive marketing phone numbers for each partner.
- A primary partner may want to insist on being responsible for rehab management since they are ultimately responsible for the project. This can be negotiated.
- A primary partner may want to set a minimum profit % to be paid to the marketing partner. For example, if the marketing partner only pays the direct mail expenses, and the primary partner does everything else, they’d only get 1/6th of the profit and that may barely cover their marketing costs. A minimum profit % may be necessary to attract deal flow from a marketing partner.
- As a primary partner, do enough marketing on your own so that any potential deal you get through a marketing partner is gravy. This makes negotiating the Profit Pie splits much easier since you aren’t relying on those deals to survive. You don’t want the Profit Pie partnership to psychologically limit your internal marketing goals.
- If you are a marketing partner and your primary partner is managing your leads, make sure you understand and are comfortable with the unique process the primary partner uses to manage and follow up on YOUR leads. For example, if you believe someone should always physically meet every seller at their house but the primary partner only negotiates deals over the phone, that could be a problem.