Buying a real estate investing franchise is a bad idea for most people who have real estate experience. Here’s why:
Most investing franchises offer no market exclusivity. That means you share a territory with lots of other investors, and your advertising is generating leads for other people. The franchisor wants to pack as many people into the market as possible (more money for them) but that means you might be competing with dozens of other people using the same brand you are.
Penalized for Success
The more successful you are, the more it costs you. Franchising is based on taking a piece of all your profits (and then some). If you close a huge deal – the corporate office is taking their piece. This can add up to hundreds of thousands of dollars a year in extra fees.
Profiting on your Advertising
In theory, a franchisor should make their income from a franchise fee and by taking a portion of your profits (success fee). In addition, some franchisors have setup ad agencies to take a percentage of whatever you spend in advertising. Want to do a $10,000 direct mail campaign? $1,000 (or $2k or $3k) might be disappearing to “manage the campaign” for you.
Taking over ALL your Business
Read the UFOC/FDD carefully! Sometimes franchisors will have clauses that say they deserve a cut of any real estate transaction you do. Does your brother want to sell his house to you? They get a cut! That’s like having a successful burger restaurant and then opening a Subway franchise – imagine if Subway wanted a cut of all your burger restaurant sales?
Preventing You From Moving On
Sometimes, buying a franchise just doesn’t work out and it’s time to part ways. Unbelievably, there are a few franchisors who have clauses that may prevent you from ever investing in real estate again! Even if you aren’t using the logo, brand, name, or other assets of the franchisor, some agreements state you can’t buy houses for investment purchases if you you ever leave the franchise.
When there are dozens of other people using the same brand in the same area, any of them can do something unethical and create bad PR for you – even if you’ve done nothing wrong. This is especially a problem if you don’t have exclusivity to operate your market.
Without exclusivity, you can’t build equity in your business. Why would any prospective buyer of your real estate investing business every buy your company, when they can just buy a new franchise for less? Without exclusivity, you are just building a brand that you don’t own.
All Up In Your Business
Because franchisors charge you for your success, they are regularly going to check your finances, audit your sales, and generally be very involved in what’s happening with your business.
What do you think? Franchising isn’t all bad – it’s a great option if you have no real estate investing experience and need someone to teach you how to buy and sell houses – but for the experienced investor, there are options that provide a powerful national brand, turnkey advertising (without markup), technology, and systems without the restrictions, cost, and overbearing nature of many franchise systems.