Rookie Mistake: I Lost Money to a Wholesaler

120 Replies

Originally posted by @J Scott:
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?

Reputation.  We have built a reputation in Houston on delivering on our promises.  We are even BBB rated.   If the wholesaler DOESN'T have a reputation...then its a pretty big ask for the investor.  Something I wouldn't feel comfortable doing without making phone calls to the wholesalers past customers ect.

Originally posted by @Sam Craven :

Reputation.  We have built a reputation in Houston on delivering on our promises.  We are even BBB rated.   If the wholesaler DOESN'T have a reputation...then its a pretty big ask for the investor.  Something I wouldn't feel comfortable doing without making phone calls to the wholesalers past customers ect.

You're assuming that your reputation precedes you...

I think I have a pretty good reputation in this business, but there are tens of thousands of investors out there who have never heard of me (including lots of investors in my area), and I don't expect them to trust me just because I tell them I have a good reputation.  In fact, I think it's pretty presumptuous of me to think that anyone would have any idea of who I am or what my reputation is.  I'd rather treat all my customers, vendors, contractors, etc., as if I assume they have no idea who I am, and if they happen to know, that's just a bonus.

But, that also means that I have to assume that nobody has any idea of my reputation either...

@J Scott more people get into a twist about EM ... I have seen EM handed to sellers direct outside of escrow.. it happens but very infrequently.. As a RE broker I never ever touch EMD they all go to escrow period its the easiest way to lose your license IE commingling .

And this is why there is such a rant these days on all these folks that want to wholesale and a good number of them are very much lacking in most of the things we would describe as a RE professional.. this instance for the OP is he ran into someone who stole his money .. used his EM to spend on something else that's evident as he did it to multiple folks.

I am all for VERY Large EM to week out the wanna be wholesalers and those tying up multi hundred k properties with 100 bucks or 1000 bucks.. and getting back to the days were you really had to have some experience and funding to be in the business. this no money ty up and flip property has never settled well with me personally.. 

coming out of the bay area we were already at 10% of purchase price EMD back in the 80's LOL.

what two folks who know each other well do that's another story.. but if you don't know someone... and or the other party does not know you then of course that's what escrow is for.. I agree that we get a little to big headed when we think our reputation preceeds us we are just small fish here in the grand scheme.. I have not seen many billion dollar RE companies hashing things out on BP  :)

Sorry this happened to you. About a month ago I was involved in a deal with a local wholesaler/agent. The purchase and assignment agreements looked to be in order. He requested for $2000 EMD (on a $50,000 deal) payable directly to him. I declined and offered to give the title company $500 EMD instead or walk away. This was accepted, and the whole deal went through without any issues. Your episode makes me feel like I did the right thing in risking the deal even though I may have had a successful transaction either way. There is no reason to risk it if everyone is working in good faith.

Sorry to hear about what happened.  I'm curious to know, if I might ask, what kind of equity was in the property you were purchasing that you were gaining through a wholesaler in your area?   Here in So Cal no one I know who is wholesaling gets a deposit.   

Dang man!  I didn't even realize people were capable of that and you're a great guy so that makes it worse.  I hope you find him and get your money back and thanks for spreading the word about this crook.

Ehab

Thanks for sharing @Waylon Themer

Being a new wholesaler/investor, I have being to several REI groups and we were told time and time again EM and Deposit always go thought the title company, never give a check in hand. And always, always do ones due diligence One should protect you investment interest and the people you are working with.

People like these does give wholesalers a bad name and make it for new wholesalers/investors not wanting to reach their financial goals.

@Sam Craven , to add to this conversation - I wonder if you can get a wholesaler to pre-sign EMD release form if they choose to deposit to a title company in lieu of a direct deposit. Or maybe add verbiage to your assignment contract that authorizes the release. I'd imagine that would need to be title company specific as some are more investor friendly than others.

Like you mentioned before, getting EMD back from a title company when the other party defaults is not easy. I had money tied up for about 4 months before I finally got it back. Not fun!

Wow, that is a costly mistake and from someone with experience, surprising to say the least. Competitive market or not (I am in one of the most competitive in the nation right now), there is not one person who will be getting my EMD made out to them directly, not going to happen and NOBODY under any circumstances I can possibly think of should either.

I see this in wholesale emails all the time, non refundable EMD of $XXX required. Like I am going to give a wholesaler, let alone a seller, money directly without any third party? Heck no and hell no!

Another back and forth started in this thread about reputation. I am one who shouts this the most on BP about the importance of a good reputation and I have earned mine, but that does not ever mean I need to use that to have someone write me an EMD directly. For what purpose? If you can't have your buyer send an EMD into an escrow account or held in trust with an attorney (some states use attorney's as closing agents), then you likely do not have an up and up deal or are not doing the deal correctly.

PLEASE PLEASE PLEASE people, do NOT give earnest money directly to any seller regardless if it is a competitive market, a wholesaler, an actual seller, current new standard practice in your area, or any other reason.

I fully understand that wholesalers want to tie their buyer in so that they can't back out without risking financial loss and that is valid, but under no circumstances should that money go to them directly at the start. End of story.

@Waylon Themer Regarding Troy,

Send that DB an email from a newly generated email address and from a new IP address (not your computer) stating that you (Trish Miller - you have to use a fake girls name) met him some time ago at a real estate event and that you are looking for a wholesale deal because you have cash and no deals. When he responds with a deal, act upon the due diligence and then let him know you want it, all of course by email and not phone. When he asks for the EMD made out to him, schedule a meeting at a very non public location. Arrive early and when you spot him, corner him and let him know he can either keep your $3k or keep all his teeth, his choice!!! That's what I would do if I had a few hours to kill. . . .

We need those guys with the TV show " to catch a contractor" start a new show called " to catch a wholesaler!" LOL

Now that would be entertaining........ : )

I believe regardless of reputation that business should be conducted in a certain way. It doesn't matter that they trust me I still want it handled X,Y,Z way.

With EM on my deals it can be substantial in the hundreds of thousands for commercial. Usually the title company holds the money. If the seller and buyer both want to hold personally or their attorneys and can't agree on title to hold it then I have seen a neutral third party attorney hold the funds.

I have seen some so called commercial lenders that were scammers take money upfront calling it all kinds of things and the buyer never received the money back.

You have to be really careful whoever you are dealing with. I have seen some professional wholesalers but for every 1 of those is hundreds that are a joke.

Great post and great advice! @Waylon Themer

Sure are a lot of different viewpoints on this one. My personal favorite is the "crooks" comment. Aren't there "crooks" in virtually every business? 

So hey, you didn't do enough homework ahead of time - due diligence as you put it. One great thing about the internet is you can now really check up on someone and often find out about them/their reputation ahead of time. I would also use this as a *reminder* to make sure your own online feedback and contact information is what you want others to find when considering doing business with you.

Right?

To your success,

Jill

This thread would be a lot longer if all of us listed the mistakes that we have made in the past.  If nothing else we have all learned to be more cautious in similar circumstances.  I certainly appreciate the insight as I am considering wholesaling.

Giving a non-refundable amount of money is a big no-no. Even if it was refundable, how would you know it would be refunded? He can take the money and run. Something for something, always. If you can afford to lose it because it's a small gambit, that's fine.

@Waylon Themer

Whether a rookie or seasoned investor, we do all make mistakes at point in time in our real estate investing. Unfortunately there are so many rogue people out there to take advantage on others. We do  fail or make mistake. Sometimes we learn thru failures or make mistakes in order  to succeed. Good luck to your future dealings.

Waylon,

now that you have been through this experience I am interested in knowing how you feel about dealing with wholesalers in the future, also despite the precautions you mentioned in your post what else would you do differently the next time around.  I wish you had a picture of the guy... 

Once again, thank you to everyone for the encouragement, advice, and words of wisdom.  To answer @Andre Key question, I will continue to work with wholesalers.  I don't have a different view of wholesalers, in general, from this experience.  What I will do differently, is slow down, not get married to a deal, and analyze the true transactional risk by looking more closely at the records of the property and who I am dealing with.  If I am dealing with known commodities like @Sam Craven (Senna Homes) or @Lyall Storandt (New Western Acquisitions) or White Picket Realty, Jet Lending, Houston House Buyers, I will push to put money in escrow at a title company but I would still do a deal with them even if they wanted the deposit in their name. (to that point these guys all know me well enough that I think the point would be moot either way.  We have all been to each others offices and know where to find each other to take kneecaps or teeth (@Will Barnard ) in lieu of deposits.)  Lesser known wholesalers or wholesalers with a checkered past, I will only do EM in escrow from this point forward.

Originally posted by @Waylon Themer :

Once again, thank you to everyone for the encouragement, advice, and words of wisdom.  To answer @Andre Key question, I will continue to work with wholesalers.  I don't have a different view of wholesalers, in general, from this experience.  What I will do differently, is slow down, not get married to a deal, and analyze the true transactional risk by looking more closely at the records of the property and who I am dealing with.  If I am dealing with known commodities like @Sam Craven (Senna Homes) or @Lyall Storandt (New Western Acquisitions) or White Picket Realty, Jet Lending, Houston House Buyers, I will push to put money in escrow at a title company but I would still do a deal with them even if they wanted the deposit in their name. (to that point these guys all know me well enough that I think the point would be moot either way.  We have all been to each others offices and know where to find each other to take kneecaps or teeth (@Will Barnard) in lieu of deposits.)  Lesser known wholesalers or wholesalers with a checkered past, I will only do EM in escrow from this point forward.

I was pretty clear in my post in stating that under no circumstances should anyone give EMD deposits direct to any wholesaler. You mention some names and company names above as well and that makes no difference in my mind. To be even more clear and more frank, I have dealt with New Western Acquisitions and they too asked for a deposit in their name. No way was I going to do that and on top of all that, my dealings with them were less than satisfactory to say the least. I was lied to, I was given false information, and the entire process was not above board. Further, they have constant turnover where they hire newbie people with little to no experience to market their properties or wholesale for them. Not a company I would recommend dealing with at all. Regardless, even if they were fantastic to deal with, I still would not ever agree to write them a check directly when I could simply wire funds into a safe and secure escrow account. if they say that is not an option, then your response should be, "then me buying from you is NOT an option". Simple as that.