In the property sourcing industry, a debate that continually arises is how to apply the right sourcing fee in different situations. It doesn’t help that there are sourcers out there that will apply a fixed rate fee, regardless of the level of work involved or the type of deal. You wouldn’t see this approach in many other lines of business, so why in property sourcing? Imagine going to a restaurant and being expected to pay the same price for a bowl of chips as you would pay for a quality steak? It just wouldn’t happen, would it? So this is a really strange way to apply sourcing fees. On this post, we reveal how we compute reasonable property deal sourcing fees.
At Goliath Property Solutions, our numbers are based on the actual deal itself. There is no ‘one price fits all’ approach, no expectation for people to pay top whack when the deal doesn’t reflect the fee. So investors need to be wary of this and ensure that they work with ethical property sourcers that wouldn’t do such a thing.
So going back to how we apply our sourcing fees at Goliath Property Solutions, to give you an example if we sourced a rent to rent deal that was returning £1,000 per month cash flow and the house doesn’t need any work. All we are doing is adding a few cosmetic touches like feature walls, cushions etc. to the sum of £2,000, meaning it would take two months’ rent to recoup those costs. Now we want the investor to recover the sourcing fee within the rest of the year, so for this type of deal we would charge the maximum on our fee scale, which is £5,000.
Let’s look at a slightly different deal, so say the property needed a fair bit of work doing, costing £7,000 in refurb costs. Then we also had to pay £1,000 up front, so in total £8,000. So once you take that amount out of the first 12 months where the property cash flow is again £1,000 per month, there’s only 4 months left to cover the sourcing fee. So we would look at £3,500 to allow for a bit of give.
Lease option deals are different again, if you negotiate a good purchase price the investor will get their money back at the end of the lease term. You also however, need to make sure you are getting them good monthly cash flow to justify higher fees.
Different deals involve different strategies – if we’re doing a BMV deal then we see how much we can negotiate below the percentage BMV. And that negotiation is where we incorporate our fees. Say we have a property where the actual value (no refurbs or other costs) is £100,000. We will then take 20% off to bring it down to £80,000. Then we also take off the stamp duty and the conveyancing fees, survey fees etc. After that our sourcing fee will come off so to be able to get that 20% BMV deal for the investor, we need to be getting it around 23% below market value.
So for that deal we would be charging a sourcing fee of £2,000-£4,000, dictated by how well the negotiations go. At Goliath Property Solutions, if we advertise a 20% BMV, that is exactly what it means to the investor after our fees. You may find other property sourcers won’t follow the same approach, so you need to check the figures in terms of the current market value, always do your own due diligence rather than taking all sourcers at face value.
If your 15% suddenly looks more like 10%, you probably could have got that direct with the estate agent without paying sourcing fees. So just be wary of that. A fee scale is the best way to ensure the fees applied are fair. If you’re getting quoted a £5,000 sourcing fee on a cash flow of £50 pcm and the same for £1,000 pcm then you know they don’t have a fee scale in place. So always do your due diligence on any deal and make sure you are getting your money back in the first year, or through capital appreciation.
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