Why Buy Into a Franchise for Real Estate Investing?

Foreclosed homes in Newark, NJ

I wish I had known about the option to buy into a quality franchise business when I was getting my real estate investing company off the ground. 

Though I vaguely understood that it was possible for me to team up with a franchise to borrow their business model and get access to some of their resources, I had always assumed that the costs would be too high to be worthwhile. I’d heard a few horror stories about the profits I’d be forced to hand back, and I didn’t have enough confidence in myself as an investor to believe that I’d have no trouble repaying the initial costs. 

As it turns out, my business would have grown much more rapidly with the help of a franchise’s capabilities in my corner of the ring. Given what I know now, it’s safe to say that I’d have avoided some of the expensive mistakes of my early career, too. Nonetheless, it’s totally normal for new real estate investors to have hesitations—and unanswered questions—about the franchising process and whether it’s the right choice for them. 

Have no fear: I’ll be addressing all of your concerns about real estate franchising today. By the time you’re done reading, you’ll even have a good feeling for the next steps to take if you’re interested in buying into a real estate franchise yourself, so follow along as I dive in. 

What Are Real Estate Franchises?

Before you can answer the question of why to buy into a franchise business, you’ll need to know what you’re getting into.

In a nutshell, real estate franchises are independently owned and operated companies that use the business model and have access to some of the resources of a franchisor. The franchisor is a business that’s typically much larger than the average franchisee, and it can offer countless services, training, and branding. But, these perks come at a cost. 

Franchisees are obligated to pay the franchisor a substantial sum up-front for the right to access the franchisor’s resources. And, franchisees are typically obligated to remit a royalty fee of some sort  to the franchisor. Additionally, franchisors maintain a set of standards for franchisees which they have to remain in good standing with or risk revocation of their franchise. 

In the context of real estate investing, franchises are often oriented around house flipping or wholesaling. 

Rather than having the substantial overhead costs associated with a fully in-house workforce of flippers or corporate investors, franchisors team up with independent businesses which operate on their own terms while using some of the franchisor’s resources to make deals. That paves the way for franchisors to profit from a successful business model in areas they couldn’t otherwise reach. It also enables them to benefit from flippers with experience in their local markets, which is very difficult to replicate from afar. 

Franchisees might get to have their cake and eat it too. With the help of the franchisor, franchisees can often find and make more deals than they could alone, not to mention making deals faster and potentially with more profitability. Plus, they don’t have to surrender their freedom to act as an independent investor in many cases. Still, recouping the cost of the initial buy into a franchise business can be challenging for investors who don’t have a talent for the real estate business.  

In sum, when everything is working well, everyone wins. Franchisees make more than they could alone, and the franchisor gets a cut without using too many resources of their own. 

What to Know About Real Estate Investing Franchises

If you’re considering buying into a franchise business for real estate, it’s key to understand where franchising tends to be the most helpful. In that vein, let’s break down the most important parts of the job. 

As a real estate investor, your core business activities are:

  • Finding leads for properties to invest in
  • Filtering leads into prospects that are likely to be profitable via due diligence
  • Deciding on prospects to advance with
  • Budgeting for the purchase and potentially renovation costs necessary to make the prospect profitable
  • Securing financing to cover the expected costs
  • Negotiating with stakeholders to get the best deal possible
  • Closing deals, making updates to properties, and reselling them

Franchises don’t necessarily have an end-to-end solution for every process element. Even if a franchise can provide you with actionable leads, reputable financing options, and help with due diligence, the ball will still be in your court when it comes to doing the highest-impact work. Nobody will negotiate on your behalf, reach out to prospective sellers, hire contractor crews, or define renovation plans. For investors who want to remain the sole operators of their business, all of the above is a blessing, not a curse.

So, it’s essential to recognize that franchising isn’t a way for you to outsource core aspects of real estate investing, nor will it make up for bad judgment. Your money will be on the line, and all of the most critical decisions and actions will be yours to make accordingly. Franchisors don’t bear any responsibility for your profitability, they only provide you with infrastructure that you can use to make financial gain with the strategies you prefer. Freedom has consequences, and skilled investors learn to make the most of it while accepting the responsibility for success and failure. 

On the other hand, the major appeal of franchising is that it can massively increase the efficiency of your time and your money, which can be a huge driver of further success. 

Rather than spending hours sifting through property listings to hunt for leads, franchises can provide you with them right off the bat. Likewise, working as a franchisee often means having access to financing that can move larger sums much faster than if you were entirely independent. And, some franchises offer tools that can cut down the time it takes to perform due diligence. 

Between getting basic tasks done much faster and cheaper than you might otherwise and being able to go big on your deals, you’ll likely be equipped far better than investors who aren’t franchisees. As a result, franchisees tend to effectively compete in the broader selection of regional real estate markets and range of market conditions, both of which will help make for a sustainable career. 

Quality Investing Tools Can Be Decisive

It helps to have an external standard that you can look to when it comes to due diligence. There’s no single package that can address all of your due diligence needs, but certain software packages can bring order to the home valuation process.

Franchisors provide these packages to their franchisees with the hope that they’ll use them to get a better sense of the true value of a property, both before and after performing renovations. In this sense, the valuation tools can be considered part of the budgeting process, as they can give investors dollar-value estimates to guide their dealmaking and repairs.

Not all valuation tools are created equal, however. The most sophisticated property valuation software provides investors with

  • Context about the market
  • Information about sellers or prior owners
  • Information about disclosures and tax issues
  • Dollar-value estimates of the home’s current value compared to its asking price
  • Dollar-value estimates of the home’s future value after renovations of varying comprehensiveness
  • Cost estimates for renovations

These elements can be useful during bidding for the home during foreclosure or negotiating with the seller. And while it might be possible for investors to purchase a subscription to certain valuation software packages, they probably can’t get access to the exact package with the most successful franchisors to offer to their franchisees. 

Furthermore, the software can be costly for non-franchisees, which will cut into profit margins. Therefore, many independent investors opt to go at it alone when performing valuations, resulting in severely off-the-mark calculations. 

Finally, the more data the software uses to build its valuation model, the better the results will be. Therefore, valuation software that benefits from years of active use and refining via real-world results will have a massive edge over those that don’t. For those who are keeping track, that’s another point in favor of the franchise-issued programs. The weight of accumulated valuation experience will only grow over time, increasing the accuracy for franchisees in the process.

Franchisees Get More Resources to Grow

It’s entirely possible to be successful on your own, but many investors find that their business expands faster when they have help. That help can come in the form of investing partners, or by teaming up with a national franchise.

Consider the chart below:

 

Modality Deal Throughput Financing Considerations Other Considerations
Independent investor Low; limited to the leads you can personally gather and perform due diligence for May require extensive utilization of personal capital to close deals

Need to personally vet lenders

May be hard to find co-investors if needed

Nobody to get mentorship from or bounce ideas off of

Financing obstacles don’t necessarily get easier over time

Minimal paperwork and cash required to start

Partnership Medium; limited to the leads the partners can personally gather and perform due diligence for May require extensive utilization of joint capital to close deals

Need to vet lenders

Need to account for risk and profit sharing

Finding additional co-investors may reduce individual profit share dramatically

Increased networking potential via other partners

Having unequal partners may introduce the risk of conflicting incentives or social strife

Requires some legal paperwork to set up

Local franchise Medium; limited to the leads generated within the franchise’s coverage area as well as what the investor has the capacity to perform due diligence for May or may not include direct access to pre-vetted hard money financing and co-investment opportunities

Local lenders working with the franchisor may or may not offer better terms than national lenders

Need to account for risk and profit sharing with the franchisor

Limited opportunity for networking outside of the franchise’s coverage area

Franchisor resources may be limited or expensive for franchisees to fully access

Startup costs may be prohibitively high given the properties of the local market

National franchise High; quality  leads are readily available and franchisees often have specialized valuation tools which help to streamline the due diligence process May include direct access to capital for certain deals

May include tools to help budget for and reduce financing costs

Enables easy access to pre-vetted and reputable lenders

Massively increased networking potential and ample access to mentors

May include training materials 

Typically requires paying an up-front fee and potentially a share of profits

Working fully independently or in a partnership are both valid options, but it’s no surprise why franchisees have more growth opportunities. Between increasing the efficiency of their core business activities with the help of the franchisor and getting access to their financing resources, franchisees can scope out, purchase, fix, and flip homes at a much larger scale

Similarly, franchisees can sometimes lean on pre-vetted contracting workforces, which reduces the risk of cost overruns. But, the chances of having access to high-quality contractors are probably higher with local franchises than with national franchises, as interfacing with local crews is easier for businesses based in a given market. The flip side of this issue is that the better the training regimen that a franchise offers to its investors, the better they’ll be able to vet contractors and other staff on their own—and few regional franchises offer much training at all. 

Investors shouldn’t underestimate the value of the training provided by certain franchises, as it’s a large part of the value you get in exchange for the initial franchising fees. The opportunity for mentorship from a senior real estate investor is also a major reason to buy into a franchise business. Effective teachers are few and far between, and many of the real estate industry’s training programs targeted at new house flippers are prohibitively expensive, not to mention variable quality. 

With the help of strong training and trustworthy mentorship, franchisees can also hit their stride sooner while building a highly valuable investor network. 

And, with the opportunity to connect with other investors in the franchise, there’s no reason why franchisees need to feel isolated while working. Other franchisees are convenient partners for the largest of deals, and the shared framework of the franchise means that everyone will be speaking the same business language from the get-go. 

Franchisors With National Reach Are Best

Now that you know the benefits and potential pitfalls of buying into a franchise business, the next step is to find a franchisor that will help you to grow your business the fastest. If you already know what market you’re planning to compete in, you’ll probably have a limited selection of franchisors to choose from. 

So, it can pay to franchise with a company that has a countrywide reach and an established history of operation.

HomeVestors® is one of the nation’s leading franchisors for real estate investing, and they offer extensive support to franchisees. Between its We Buy Ugly Houses® national marketing campaign and lead generation platform, its ValueCheck® property valuation software, its direct hard money financing portal, an excellent training curriculum, a mentor seasoned in the real estate investing business and a plethora of other experienced franchisees, HomeVestors is hard to beat. 

Whether you’re a seasoned home flipper or just getting started with your real estate investing by buying into a franchise business, HomeVestors® is a great option. By becoming an independently owned and operated HomeVestors® franchisee, you’ll be able to connect with other investors, get mentorship, and  advertise for high-quality leads to pursue. When it comes to becoming established in your market, having a powerful ally like HomeVestors® can make all the difference.

If you’re considering starting a real estate investing business and want to buy into a franchise business, request information about becoming a franchisee today

Each franchise office is independently owned and operated.

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