Rookie Mistake: I Lost Money to a Wholesaler

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Originally posted by @Waylon Themer :

First of all, I'm not a rookie, but I behaved like one, and I write this post as more of a cautionary tale rather than an attempt to seek advice.  I know I should have done more due diligence, and I know what my options are to attempt to remedy the issue.  Giving non-refundable deposits to wholesalers to "lock up a deal" whereby the check is written to the wholesaler has become customary in the wholesaling world of real estate in the Houston, TX market (I can't speak for other markets).  In May of 2015, I gave Troy Joyner or FPM Houston Homes and FPM Development a $3,000 check to lock up a $85,000 house located at 2710 Wheeler Street Houston, TX.  As the closing date approached, Troy had excuse after excuse as to why the closing was being delayed.  Then he went silent.  I later learned that he entered into multiple contracts on the same property, and he did this with other properties at the same time. Multiple investors are now attempting to locate him in an attempt to retrieve their money.   Though I had met Troy in person on a couple of occasions at networking events, I did not know him that well.  At the end of the day, giving a wholesaler a deposit is the same as giving him or her a short term unsecured loan only you have a contract instead of a promissory note.  I learned that I need to a) do more due diligence on the title of the property and b) do more due diligence on the wholesaler prior to writing a check to the wholesaler for any kind of deposit.   I am embarrassed that I let this happen to me, but, even more so, I don't want it to continue to happen to others. Be careful out there; don't let my $3k mistake be your own. 

Wow, how disgusting of a person he is! As a wholesaler I'm embarrassed, apologetic and irritated by reading this thread. I've seen these type of offers from other wholesalers and not that its bad practice to ask for EMD from the end buyer but it warrants a title company, lawyer or agent(one that you trust/know) to handle the funds to avoid this - for those actual rookies reading this thread. As you stated even though you're not a rookie, mistakes happen. You figure you want to move on it fast and get it under contract then close a.s.a.p. I know I've made haste moves even after writing a plan. Human error - this particular time a costly one. Since this vile individual decided to rip-off probably the only buyers he ever will have, I hope it was worth it to him. Karma is a mother.....

Kudos,

Mary

Glanced at the first page.

Pay attention wholesalers!

You have a good chance of getting your money back or at least a judgment. This was fraudulent dealing having multiple contracts on the same property. 

Here's the thing about wholesaling, if they show up in court, they will strike out, they can't hit a home run acting as a strawman without a license.

If they aren't breaking the law, they are skirting it and the more deals they have done, the closer they get as being seen as a dealer in real estate, being in the business has a much different flavor than a one time assignment that can be perfectly legal. 

Wholesalers can get into a very weak position to enforce their contracts or what they are doing, it's not like they can call up TREC and report some buyer or seller who stiffed them. 

Covert operators don't want to be discovered! 

Keeping a low profile is usually prudent as a wholesaler. They just aren't in a good position to cast stones at a glass house!

So, if a wholesaler takes you, makes a mistake you relied upon, gives false information, you have recourse, even if the deal closed a month ago or 6 months ago. 

I'm not starting the argument of wholesaling being legal or not, I'm saying that in real estate a middleman is never seen in the best light jacking up a sale price while standing in front of a judge.   It's Perception! 

When the intent of the law is not followed, the letter of the law may be less important, the judge looks to justice and how to apply the law to get there. 

There are no "iron clad" wholesaling contracts and non-refundable is eye wash, not reality. Destroy the acts, show the conduct and the contract falls as well as agreements to keep any money.  

And, in this case, you might look to the Attorney General, they can find the guy!

Too bad too, a guy has to skip town or go hide out for 3K! I'd say he's out of business. 

Caution too! Paying amounts outside of settlement of a real estate closing without disclosure of who got paid and what was paid is a violation of law and tax codes. If RESPA doesn't apply, tax laws do in all RE transactions. :)

Thank you @Waylon Themer for posting this. This sort of thing is why the BP forums provides such an education. It is great to hear the good but it is also very, very, very helpful to hear the bad so we can know what to watch out for and what not to do.

Once again thank you for sharing your story. I hope you will get your money back, some of it at least, and the bad wholesaler will get what he deserves (jail time and fines).

Following what others have posted, @Waylon Themer , thank you for sharing this experience.  I am sorry that it happened to you but I do appreciate the warning and reminder that there are always people out there who would use others for their own selfish gains.  In my opinion, this will further stress the importance of due diligence for newer investors.  Thanks so much!

@Waylon Themer $3,000 is less than $85,000.

Hopefully, you will gain valuable lessons from the experience. Here are a few ensure you maximize the value and get your money's worth:

You will occasionally meet theives. That's unavoidable. Your job is to ferret out those who may be tempted to take your money.

As my accounting professor (and original RE advisor) told me, accounting is to keep the honest people honest. Your job is to employ systems to separate you from those who are tempted. Escrows can be used to hold wholesale money, too.

Cons are the easiest to con, despite what you'd think.

No one treats your money as carefully as you will. But a thief's motive is not rooted in a mismanagement. They find a way to justify their actions and rationalize their need to be greater than yours. Your guy may have a substance abusers or gambling problem.

Everyone has a part in this. Your "1%" is that you trusted someone who had not earned your trust yet. 

Be careful with blame. If you blame yourself too hard, it could turn into self loathing and that may prevent you from being willing to take risk in your next opportunity.

Your tolerance for risk ought to be enhanced, not reduced.

Any kind of a problem that can be fixed with a check is not really a problem.

In every problem lies the seed for an equal or greater opportunity.

I work for an investment firm that sometimes works with wholesalers and the first question I will ask is "are you a licensed agent".  If your going to negotiate deals then spend the time to go to school. I won't do any deals with anyone not caring a real estate license.  Wholesaling isn't as bad as most people think but go to their office to meet.  I'm sorry that you had a bad deal given to you.

As far as the money lost.  Follow the check.  Find out where it was cashed and get the video footage from the bank.  Best of luck to you.

I really appreciate the outpouring of support from the BP Family.  There are many wise and encouraging words on this thread from rookies and veterans alike.  There is a mentor in Houston that says "People are hard; real estate is easy."  This is a perfect case.  @Rick H. I very much appreciate the perspective. Perspective is the very thing that I always try to have in these situations.  You hit the nail on the head, and I will likely print out and frame your response.  The best thing I can do is learn from the experience.  $3k can be viewed as a relatively cheap education--all things considered.  I purchased two more houses after this occurrence, and I am very happy with the trajectory of both my investing and professional lives.   

A side note, and to Rick Harmon's point, this post is not about avoiding wholesalers or never writing a check to someone that isn't a title company.  Many of my business connections are very reputable wholesalers, and many of them take deposits in their name.  It is about properly assessing risk and reward.  (I also wanted to call out this crook in Houston so fewer people will be burned by him).

Thanks @Waylon Themer for sharing. 

I usually avoid wholesalers while networking as wholesaling is an easier path for crooks to slip-in with little to no skin in RE transactions. Not saying all wholesalers behave the same but this story sure set the bar higher for me. 

It seems many of the post and threads I see on BP these days are "Newbies" introducing themselves. I really hope they take note and read all the comments on this post.

Waylon is a great friend, a seasoned investor, and one of the smartest fellas I know. To see how easy it was for him to lose $3,000 from a crooked Wholesaler, should serve notice that we all need to be conducting due diligence when investing.

Thanks for sharing your experience, @WaylonThemer.

Originally posted by @Waylon Themer :
A side note, and to @Rick H. 's point, this post is not about avoiding wholesalers or never writing a check to someone that isn't a title company.  Many of my business connections are very reputable wholesalers, and many of them take deposits in their name.

What is the advantage (for either party) to writing a check to the wholesaler directly versus writing a check to the title company?

For you, there is absolutely no protection whatsoever.  And for the wholesaler, why would he want to be responsible for that money in the case where the deal doesn't close and he has to give it back to you?

The only benefit would be to a wholesaler who needs the money prior to closing...and do you really want to give money to someone who is going to spend it before you know for certain that you'll get your property?

I just don't see the benefit of not using escrow...

@J Scott  That is a great question!  In my opinion, there is no benefit to the purchaser for this arrangement.  I would not agree to it as a purchaser if all of the buyers would band together and refuse to do it.  But, the competition factor in Houston makes us buyers agree to things that we prefer to not do i.e. non-refundable deposits, 5 day closes, waiving inspections, depositing money directly to the wholesaler.  It's been a (whole)sellers' market in Houston for over 2 years, so buyers tend to stretch in order to make deals happen.  When the pendulum swings back the other way, buyers will likely be able to control the transaction a little better.

Now, as to the benefits to the wholesaler, I will let the wholesalers speak for themselves, but I would imagine that the reason is something along the lines of "possession is nine-tenths of the law." 

In conclusion, I wholeheartedly agree with your stance.

Originally posted by @J Scott:

What is the advantage (for either party) to writing a check to the wholesaler directly versus writing a check to the title company?

For you, there is absolutely no protection whatsoever.  And for the wholesaler, why would he want to be responsible for that money in the case where the deal doesn't close and he has to give it back to you?

The only benefit would be to a wholesaler who needs the money prior to closing...and do you really want to give money to someone who is going to spend it before you know for certain that you'll get your property?

I just don't see the benefit of not using escrow...

There is a lot of good information in this thread, and @Waylon Themer thank you for sharing.  I know you have been fighting Troy for too long.  I wish more people would put  the crooks on blast.

Mr. Scott, i would like to respectfully offer up the other side of the argument regarding the deposit.  I don't know where you stand on the "wholesalers are evil" argument but just consider for a moment a reputable, well funded wholesaler is requesting the deposit.

The deposit is used to protect the wholesaler and the SELLER of the property.  If we did not collect a "non refundable deposit except when we cannot deliver clear title" the barrier to entry to lock up that property and waste everyone's time is too low.  Taking the deposit HELPS to ensure (but is not a sure thing) that the buyer is serious.  

Something that we have done if the buyer seems legitimate but is new to us and not comfortable handing over a deposit is to allow them to deposit it in escrow.  This isn't a perfect compromise though, as it takes 2 signatures to release the deposit.  If the buyer backs out and refuses to sign the emd release then the seller and wholesaler are the ones that suffer, and technically the property is tied up without the emd released.

Also, when we have a buyer back out and keep the deposit (which rarely happens) we offer half the funds to the seller in exchange for more time to find a buyer.

Unfortunately the barrier to entry to being a "wholesaler" is very low, this brings in the riff raff and its very annoying.  The flip side is, the true professionals really get a chance to shine and the little guys no longer matter.  There is a lot of trust that goes on in any transaction.  The good ones take that trust seriously and work hard to protect it.

Originally posted by @Sam Craven :
Originally posted by @J Scott:

What is the advantage (for either party) to writing a check to the wholesaler directly versus writing a check to the title company?

Mr. Scott, i would like to respectfully offer up the other side of the argument regarding the deposit.  I don't know where you stand on the "wholesalers are evil" argument but just consider for a moment a reputable, well funded wholesaler is requesting the deposit.

The deposit is used to protect the wholesaler and the SELLER of the property.  If we did not collect a "non refundable deposit except when we cannot deliver clear title" the barrier to entry to lock up that property and waste everyone's time is too low.  Taking the deposit HELPS to ensure (but is not a sure thing) that the buyer is serious.  

I never suggested not taking a deposit.  I merely suggested ONLY taking the deposit through a third-party escrow (see my quote at the top of this post)...

The taking of a deposit isn't the issue...the issue is the wholesaler taking the deposit in his personal name as opposed to through escrow.  Your point about needing two signatures to release the escrow is true, but I'm not sure why that's a bad thing -- that just means that both parties have to agree where the escrow money goes and if they don't agree, a mediator will be required to intervene.

If a wholesaler isn't willing to let a mediator intervene in the case of disputed deposit, that tells me that the wholesaler is afraid that he isn't entitled to the deposit, in which case, I think we can all agree that we wouldn't have wanted that wholesaler to take the deposit in his name the first place.

In summary, the ONLY reason I can see a wholesaler requiring a deposit in his own name is when the wholesaler is concerned about not getting to keep the deposit in situations when he's not entitled to it.  And that's not an ethical wholesaler, in my opinion.

If there's a good reason to require a deposit in the wholesaler's personal name, I'd still like to hear it...

I agree with @Sam Craven on everything he said.

Sam's already said it perfectly so I will just add that it is a pain in the butt to get money back out of the title company when you need both signatures to release the funds for an EMD. Even when the buyer has promised you the money but the deal has gone sour, there's no incentive for them to just sign off their money to you even after your agreement. We've had money sit in an escrow account for months and it went nowhere when the buyer decided to back out on us.

It's unfortunate that, like many things in life, the few bad apples ruin it for the rest of us. I'm glad we have a forum for sharing this information about bad wholesalers, buyers, investors, etc. and get it out there that people don't tolerate this type of behavior. These type of people usually go from city to city looking for new blood. Let's make sure we spread the word about these type of "investors".

Originally posted by @Kenneth Sok :
Sam's already said it perfectly so I will just add that it is a pain in the butt to get money back out of the title company when you need both signatures to release the funds for an EMD. 

It's easier for a wholesaler to get their money out of a title company than it is for an investor to get their money back from a wholesaler (as evidenced by this thread).  If you care more about your convenience and risk than your customers, you're going to find that you have fewer customers.

If you want to require investors to write earnest money checks directly to you, that's your choice.  But, I can promise you that there are a lot of big investors who will never do business with you if that's your policy.

Take a poll here on BP...I bet you find that fewer than 10% of the serious investors here would ever write you a check for earnest money.  And if that's true, that says that you're excluding 90% of your buyer pool by requiring it.  

Like I said, that's your choice...but seems like a bad business decision...

Originally posted by @J Scott:
Originally posted by @Kenneth Sok:
Sam's already said it perfectly so I will just add that it is a pain in the butt to get money back out of the title company when you need both signatures to release the funds for an EMD. 

It's easier for a wholesaler to get their money out of a title company than it is for an investor to get their money back from a wholesaler (as evidenced by this thread).  If you care more about your convenience and risk than your customers, you're going to find that you have fewer customers.

If you want to require investors to write earnest money checks directly to you, that's your choice.  But, I can promise you that there are a lot of big investors who will never do business with you if that's your policy.

Take a poll here on BP...I bet you find that fewer than 10% of the serious investors here would ever write you a check for earnest money.  And if that's true, that says that you're excluding 90% of your buyer pool by requiring it.  

Like I said, that's your choice...but seems like a bad business decision...

 I want to make sure we keep this discussion from being personal as I bellieve it is a very important one.  When I made my comment I pointed out the difference between working with a reputable company vs the useless newbie.

Your assumption of not caring about our customers because we ask for a deposit is an unfair one.  I told you in my previous post we do it BECAUSE we care about our sellers deeply.  We cat do anything we do without being able to help them.  The other customer is the end buyer.  I mentioned that if the buyer is uneasy about he deposit we work with them.  Again, reputable company assumption.

Not only are we one of the largest home buyers in houston we work harder than anyone to build relationships with buyers and deliver on all promises.  So let's flip the comment about no reputable buyer will be willing to pay the deposit.  We only wholesale half of our inventory, we close on and flip the rest, we will easily hit our goal of 90 homes for the year.  We will happily pay other wholesalers deposits (and have) as long as they are someone we trust.  That last line is the important one: trust.

Hopefully we can continue this discussion, I don't think you are wrong mr scott, and if you only deal with unprofessional people I can definitely understand your stance.  My only hope is that maybe you can understand the other side of the story from a trusted wholesaler and rehabber, and understand we aren't all like "them".

Hi Waylon. Thank you for sharing your story. I'm sorry for the bad experience you had with this guy. I hope this doesn't spoil your view of Wholesalers. We need good reputable investors like you and others.