Rookie Mistake: I Lost Money to a Wholesaler

120 Replies

I didn't mean to detract from the conversation at hand. My point was only to illustrate a bit of what we do here in Houston. My experience with title companies and EMD's has not always been pleasant but that's just my anecdotal account so take that with a grain of salt.

When a deal has gone south through no fault of the buyer, we have refunded them their deposit without hesitation. On the flip hand, we've had buyers who have made our deals incredibly difficult too. Trust is needed on all sides from buyer, seller, and wholesaler. Everyone needs to walk away from the deal satisfied, and the best deals I've done are not the ones where we made a boat load of money but where everyone walks away smiling (especially the seller).

As @Sam Craven has pointed out, trust and respect play a huge role in these transactions. Without them, we wouldn't be able to do what we do. When I hear about "investors" who are taking advantage of others or being shady, it drives me nuts b/c it hurts not only our profession but also hurts the sellers who really have a problem they need solving.

I will also reiterate from an earlier post that many of my business contacts are reputable wholesalers that take deposits in their names as a business practice.  There are many wholesalers that I would write a deposit check to in a heartbeat, including @Sam Craven .  I just view it as part of the negotiation.  I'm not at all sour on wholesalers.  I just ran into a bad one and it has caused me to adjust my risk-meter when handing over EM checks.

Originally posted by @Sam Craven :
Originally posted by @J Scott:
If you care more about your convenience and risk than your customers, you're going to find that you have fewer customers.

Your assumption of not caring about our customers because we ask for a deposit is an unfair one.

First, I've never questioned your integrity, or anyone else's here in this thread.  We've never worked together, and I have no reason to believe that you aren't 100% ethical in every business transaction you've ever done.  

My comments weren't directed at you, but at the industry as a whole.  I consider it bad business practice for a wholesaler to even request that a customer take that type of risk, and I consider it bad business practice for an investor to do it.  There's a reason that many (most?) regulated industries require escrow for asset transactions -- because it's good business practice.

Remember the old adage:  "Trust but verify."  

You seem to think that it should be changed to just, "Trust."

It shouldn't.

Now, that said, you completely took my comments out of context.  I never said you don't care about your customers.  What I did say (and you can see it at the top of this post) was:

"...you care more about your convenience and risk than your customers..."

You might care very much about your customers.  But, you care MORE about your convenience and risk.  And I stick by that statement.  

In fact, you said it yourself earlier:

"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."

Remember, the EMD will eventually be released. It is not a matter of losing the money; it's a matter of the inconvenience of having to fight for and wait for the money. If you've contractually earned the EMD, you'll eventually get it. There is little risk of anything other than inconvenience on your part.

So, going back to my point -- if you cared more about your customer's risk than your convenience, you'd be willing to deal with the inconvenience of having to fight for the EMD (again, you'll eventually get it if you're entitled to it) versus asking your customer to put himself in a situation where he has no recourse.

Remember, when EMD is in escrow, both parties have equal recourse; when EMD is written to you directly, the recourse is VERY unequal.

Hypothetical question:

What if an investor who you've worked with in the past said to you, "I'm going to write an EMD check, but I'm going to hold onto it until the closing. Don't worry, if I have to back out for any reason, I'll give you the check. I just don't want to give it to you now because it might be tough to get it back if you can't get clear title."

Would you think that was reasonable? Would you let the investor not pay the EMD until closing (or until he backed out)?

My guess is that you'd laugh at him...and then require he pay you the EMD.

So, why is it okay that you require EMD be paid directly to you (because you have a trusting relationship with the buyer) when you wouldn't trust the buyer not to pay any EMD until closing?

Last question:

If you have such a trusting relationship with your buyers, why wouldn't you trust them enough to sign over the EMD if they deserve to lose it?

It sounds to me like you know you're trustworthy, but aren't so sure about others.  Isn't it reasonable that others feel the exact same way?

@James P. Yeah I will be suing him in small claims court.  I expect to get a judgement but I'm not so confident that the judgement will pay off. It's too small to hire a lawyer IMO.  I've succeeded numerous times in getting judgements against borrowers during my time as a loan officer; collection on those judgements is a different story.

Originally posted by @Waylon Themer :

I will also reiterate from an earlier post that many of my business contacts are reputable wholesalers that take deposits in their names as a business practice. 

Like I pointed out to Sam above -- do you think these wholesalers would be willing to allow you to hold the earnest money check until closing?

I'm guessing that 99.9% of them (if not more) would laugh at you for even suggesting it.

If you believe it's reasonable for them not to let you hold the EMD, why is it reasonable to let them hold it? Why should the trust be a one-way street?

That's a serious question, btw?  

@J Scott They would laugh at me and then sell it to the next investor. I agree that it shouldn't be a one way street, but, like many things in the free market, this one way street exists because the market has dictated that it is acceptable. The wholesalers sell to a different investor. I, the buyer, can't simply buy from a different wholesaler when 75% of the wholesale deals in Houston are done this way. Also, I don't feel that the risk is the same on both sides. The wholesaler has an obligation to the homeowner as well as the end buyer. And I feel it is easier for a buyer to do due diligence on a wholesaling company than for a wholesaler on an individual buyer. That said, I still agree with you that the EMD should go to escrow.

Originally posted by @Waylon Themer :

@J Scott They would laugh at me and then sell it to the next investor.  I agree that it shouldn't be a one way street, but, like many things in the free market, this one way street exists because the market has dictated that it is acceptable. 

I purchase from wholesalers in several markets, and I've yet to meet a reputable wholesaler who has even asked me to hand them a check, let along required it.

Not sure why your market is different, but I'm guessing you're more the exception than the rule...

@Waylon Themer

Thats very unfortunate what happened to you. As many have already said on the thread, just take it as a lesson learned and continue operating your business. As you mentioned, you have since bought 2 other properties, so I'd say its the wholesalers loss for burning a relationship with a active cash buyer, and also compromising their integrity and reputation....

@George P. LOL

So... I'm assuming you've filed a police report??  Depending on the jurisdiction , 3k could be grand theft.  If he did it to multiple people, it's not just his reputation he's risking.

Well don't feel too bad about it.  Seems like anyone who is actively involved in investing will eventually lose a little sum of money due to a bad decision.  Sometimes it's just has to be chalked up to a learning experience.  Last year I made a bad decision and it ended up costing me over 7k after attorney's fees were thrown in.  I trusted but didn't verify.

I don't agree with this practice from wholesalers either.  It is 95% of the reason why I quit dealing with wholesalers.  That and because after doing my own due diligence on some properties I quickly figured out the comps given in the wholesalers package were often cherry picked.  Lower comps purposely left out, or comps from the neighborhood across the street that was newer build.  I found it to be disingenuous.

I don't mean to bash wholesalers.  Guess it's like any business, there are good and bad.  Unfortunately the bad tend to stick out in our minds a little more.

Originally posted by @Bil Casimir :

As a local wholesaler in the Houston area, there are a lot of losers in this industry who have no integrity at all. Investors, if you are locking up a deal on a property never write the check directly to the wholesaler or his company name, always to the title company and double check the comps! This protects you as the investor and the wholesaler. Last week I had a woman who is realtor back out of my wholesale deal two days before closing. However, my contracts states I keep the EM if buyer does not close except if we cannot get clear title.

I just mentally scanned my entire 15 year history of buying and selling can't think of one time the EM was given to me directly by the buyer or where I gave it directly to a seller.  All EM money is funds made out a title company (or wired) and goes through escrow as do the purchase agreements and assignments when I've done them.  I'm no stranger to cash deals and deals out of escrow.  But nothing as vague as cash EM to a wholesaler.   I've done deals directly with sellers where I gave them cash and got a signed and notarized deed.  I've bought interests from heirs where my payment gets me a signed and notarized assignment agreement.  

Is the competition so great that buyers give EM money directly to the wholesaler? To be honest I'm having trouble imagining how that works.

Originally posted by @Waylon Themer :

@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.

Thanks for explaining. I was confused how payment of EMD directly to wholesalers could be a regular practice. EMD iout of escrow in a double close or assignment is more than a stretch IMO. The wholesaler shouldn't need it or want it for anything, especially if you're jumping through hoops and doing fast closes. Unless he can't make his car payment and/or he he needs the money for his EMD to the seller. Is this who you all are doing business with?

Originally posted by K. M.:
Unless he can't make his car payment and/or he he needs the money for his EMD to the seller.  Is this who you all are doing business with?  

Exactly... This is what I was trying to say earlier...if the wholesaler needs the EMD for some immediate expenses, it's likely the investor will never get that money back if the property doesn't close. And if the wholesaler doesn't need the money for immediate expenses, why is working through escrow an issue?

That's the problem -- the wholesalers who need the money in their name are the ones I don't trust and the wholesalers who don't need the money in their name generally won't ask for it (in my experience)...

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

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.

Actually EMD into escrow is the perfect compromise. It's old school best practice too. I'm hard core on EMD. Too many rehabbers who think/say they have funding when they don't. Too many wholesalers masquerading as B&H buyers, thinking they can mark it up and double close it. Trust me, at this point if there is an as-is mark-up, I've already done it. The EMD makes all the difference is filtering out real buyers. Forget the non-refundable issue. That's just contract language. I can make it non-refundable but it will sit in escrow unless the buyer backing out signs it over. So the goal isn't to keep EMD. The goal is to find a real buyer. Try asking for $10K deposit on a $50K house. $20K on a $100K house. If it's a 10 day or less close in a hot market, you'll get it. I've had buyers that deposit full purchase price the next day after signing.

There is so much cash in the game these days, no one at your level should have to think  twice about significant EMDs into escrow, on either the buy or sell.

.

WOW, I am so sorry to hear of this. I am glad that you were able to take a lesson from the experience. I hope that you are able to get your funds back. Thank you for sharing your experience.

Originally posted by @J Scott:
Originally posted by @Sam Craven:
Originally posted by @J Scott:
If you care more about your convenience and risk than your customers, you're going to find that you have fewer customers.

Your assumption of not caring about our customers because we ask for a deposit is an unfair one.

First, I've never questioned your integrity, or anyone else's here in this thread.  We've never worked together, and I have no reason to believe that you aren't 100% ethical in every business transaction you've ever done.  

My comments weren't directed at you, but at the industry as a whole.  I consider it bad business practice for a wholesaler to even request that a customer take that type of risk, and I consider it bad business practice for an investor to do it.  There's a reason that many (most?) regulated industries require escrow for asset transactions -- because it's good business practice.

Remember the old adage:  "Trust but verify."  

You seem to think that it should be changed to just, "Trust."

It shouldn't.

My intention was not to make it seem like i was saying dont verify.  ALWAYS verify.  Just like we verify our buyers as i said before, they need to do their homework on us.

Now, that said, you completely took my comments out of context.  I never said you don't care about your customers.  What I did say (and you can see it at the top of this post) was:

"...you care more about your convenience and risk than your customers..."

You might care very much about your customers.  But, you care MORE about your convenience and risk.  And I stick by that statement.  

In fact, you said it yourself earlier:

"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."

Remember, the EMD will eventually be released. It is not a matter of losing the money; it's a matter of the inconvenience of having to fight for and wait for the money. If you've contractually earned the EMD, you'll eventually get it. There is little risk of anything other than inconvenience on your part.

Again, you are making some broad assumptions here.  Its a big jump to go from "we need non refundable deposit" to "we care MORE about convenience".  We are in a market of a lot of wannabe investors.  To equate a single step in many steps to verify our buyer as a "convenience" is a gross over simplification and misleading.  As i stated before, when the money exchanges hands, and someone is certain they want the property so much they are willing to put a deposit down, its one part of many to ensure a smooth transaction for everyone.

So, going back to my point -- if you cared more about your customer's risk than your convenience, you'd be willing to deal with the inconvenience of having to fight for the EMD (again, you'll eventually get it if you're entitled to it) versus asking your customer to put himself in a situation where he has no recourse.

Remember, when EMD is in escrow, both parties have equal recourse; when EMD is written to you directly, the recourse is VERY unequal.

Hypothetical question:

What if an investor who you've worked with in the past said to you, "I'm going to write an EMD check, but I'm going to hold onto it until the closing. Don't worry, if I have to back out for any reason, I'll give you the check. I just don't want to give it to you now because it might be tough to get it back if you can't get clear title."

Would you think that was reasonable? Would you let the investor not pay the EMD until closing (or until he backed out)?

My guess is that you'd laugh at him...and then require he pay you the EMD.

So, why is it okay that you require EMD be paid directly to you (because you have a trusting relationship with the buyer) when you wouldn't trust the buyer not to pay any EMD until closing?

Not only would we "hypothetically" do that, we have done it...many times.  We have MANY investors who we have done a number of deals with that WE DON'T EVEN TAKE a deposit from.  So your assumption about me laughing at them is again wrong.  It's comments like that that only serve to demean and contribute nothing towards the discussion.

Originally posted by @J Scott:

Last question:

If you have such a trusting relationship with your buyers, why wouldn't you trust them enough to sign over the EMD if they deserve to lose it?

It sounds to me like you know you're trustworthy, but aren't so sure about others.  Isn't it reasonable that others feel the exact same way?

We will always require new investors to put a deposit down, and that will not change.  Like I mentioned before, if they are uncomfortable with it going direct to us, we always offer up the title company to hold it in escrow.  Its not an issue to us at all, you are right.  It shouldn't be an issue, and with a reputable company it ISNT.

One distinction I want to make again, is that its not "easy" to get the earnest money back.  Regardless of what the contract says, earnest money is only released when both parties sign.  Title company cannot enforce a contract, they are only a third party.  So if one person gets squirrely the last thing I want to do have to go through the court system or mediation to get $3k.  Its hardly worth it.

Originally posted by @Sam Craven :

Not only would we "hypothetically" do that, we have done it...many times.  We have MANY investors who we have done a number of deals with that WE DON'T EVEN TAKE a deposit from.  So your assumption about me laughing at them is again wrong.  It's comments like that that only serve to demean and contribute nothing towards the discussion.

Great...so if you're willing to forego taking any EMD from some buyers, why do you ask other buyers to pay you an EMD in your name?

How do you make the decision on who doesn't have to pay any EMD and who has to pay it to you in your name?

And again, I'm not arguing for non-refundable (or refundable) deposits.  I'm only pointing out that asking a buyer to write a check to you personally seems like a bad business decision to me (it's not the way that regulated businesses do things and it's presuming/pressuring a level of trust that doesn't necessarily exist).

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

Not only would we "hypothetically" do that, we have done it...many times.  We have MANY investors who we have done a number of deals with that WE DON'T EVEN TAKE a deposit from.  So your assumption about me laughing at them is again wrong.  It's comments like that that only serve to demean and contribute nothing towards the discussion.

Great...so if you're willing to forego taking any EMD from some buyers, why do you ask other buyers to pay you an EMD in your name?

How do you make the decision on who doesn't have to pay any EMD and who has to pay it to you in your name?

Great question.  And it goes back to what i have touched on a number of times.  Relationships, track record, and trust.  The ones that don't pay a deposit have done multiple smooth transactions or we have a great relationship with.

For instance, my company has a Line of Credit with the Bank that Waylon (the OP) works at, and even though we have never sold him a deal, i would have no problem not taking a deposit.  Though I suspect Waylon would not have a problem giving us the deposit either.

Originally posted by @Sam Craven :

Great question.  And it goes back to what i have touched on a number of times.  Relationships, track record, and trust.  The ones that don't pay a deposit have done multiple smooth transactions or we have a great relationship with.

Is it reasonable to say that if you're working with an investor who you don't have enough of a relationship with to trust them not to pay an EMD that the investor doesn't have enough of a relationship with you to trust you to hold the EMD in your name?

In other words, if you don't know them well enough to trust them why do you expect them to trust you?

Word's walk and money talks.

I read some of this thread but it started getting too heavy.

The reality is at the end of the day buyers can choose to accept the terms of the seller or the person offering the deal, reject it outright, or offer an alternative they feel comfortable with.

If a market is super hot and a buyer wants to take a chance it's their call with their cash. Personally I would never do such a thing offering up money to a seller, wholesaler etc. You can see what happens from this thread sometimes when doing that. I have seen cases where when I was assembling commercial land for development  and although per the contract the buyer (developer) was due the money the seller spent it or would not give it back. Instead even though they knew they would lose it in court they tried to hold out for some of the money to cover their attorneys fees up until that point. Basically legalized extortion almost is what it comes down to. They say we know you will win the money in court but if you release 5k to us out of the 30k to cover our costs we will mutually agree to release it now.

If a buyer was going to have 3k non-refundable to a wholesaler then why not just take the 3,000 and put out your own mailers and get way more than one property out of it you might buy? At least that way you get additional benefits.

Sometimes title companies and even attorneys are crooked also. You have to make sure the seller, wholesaler etc. has no beneficial interest or ownership in the entities where the money is being held. A neutral third party to look at the provisions of the contract for EM can be a good thing sometimes.