Rookie Mistake: I Lost Money to a Wholesaler

120 Replies

I understand your position @Will Barnard .  You are definitely employing best practices and I applaud you for that.  Your experience dwarfs mine in comparison, so please understand that I am not saying you or anyone else on here is giving wrong advice to put money with a title company.  I am saying that you are doing it the best way.  I understand it is a risk.  It is a risk that you may not be willing to take, but I may be willing to.  Every investor has his or her own risk tolerance.  Look at how differently every real estate buyer does inspections, environmental due diligence, title due diligence etc.  There is a best way to do things but that isn't always the way to achieve your goal. I live out this decision everyday at the bank as a loan officer.  Other bank's make loans that I think are crazy.  I make loans that other bank's think are crazy.  It is just different assessments and tolerances of risk.

I am not a professional home buyer; I don't source my own deals. I invest on the side so I either buy off of MLS or from wholesalers. 75% of the big name wholesalers in Houston take deposits into their name. Sometimes accepting this risk to get a 75% to 80% of ARV deal from a wholesaler as opposed to a 90% to 95% of ARV deal on MLS is worth it in my opinion. I contracted 5 houses this year. I closed on 4 and lost $3k on the other. Had I only done deals where earnest money was deposited the correct way, I would have closed on only 2 houses this year. I feel that losing the $3k and getting 2 extra houses by doing it the riskier way was worth it. Those 2 extra houses are 15% better deals than the two that I did the correct way. Granted, I don't have an adequate sample size, but the data tells me that I need to be willing to take the risk with the right wholesalers.

@Waylon Themer  Thank you for the kind words, Waylon. Hate that this happened to you. I'm sure you're aware that we were briefly entangled with that same property as well; however, I'm not sure if it was ultimately through Troy or another source. I'll give you the lengthy backstory next time I see you.

@Will Barnard Sorry to hear you had a negative experience with our company; let me know if there's anything I / we can do to make things right going forward.

@Sam Craven @J Scott I think you guys both make valid points regarding the earnest money debate. We're in the camp of having down payments (technically not earnest money) paid directly to one of our holding companies on our transactions. I've gone into detail on why we do that in previous threads. The only thing I'll add here is that we're all licensed real estate agents / brokers and have fiduciary duties related to our clients and their funds. We're not in business to keep down payments nor are we interested in losing our license(s) over down payment disputes. We operate the way we do because it works for all parties involved. If it didn't, we wouldn't exist.

Originally posted by@Sam Craven
@J Scott I think you guys both make valid points regarding the earnest money debate. We're in the camp of having down payments (technically not earnest money) paid directly to one of our holding companies on our transactions. I've gone into detail on why we do that in previous threads. The only thing I'll add here is that we're all licensed real estate agents / brokers and have fiduciary duties related to our clients and their funds. We're not in business to keep down payments nor are we interested in losing our license(s) over down payment disputes. We operate the way we do because it works for all parties involved. If it didn't, we wouldn't exist.

If you're a licensed broker, then by definition any earnest money you're holding on behalf of a client/customer is being escrowed.  As a broker, I assume you're legally required to escrow the funds. 

And I see nothing wrong with that, BTW... 

@Waylon Themer

That's a bummer.

Maybe next time when a wholesaler sends you something you like just lookup the owner and push the wholesaler out of the way.

I have never actually had any "wholesaler" or as I consider them "unlicensed brokers" approach me with anything worth looking into. In the event they did I would just go directly to the owner.

........................Oh no, maybe I should not have posted this. Now all the real estate investors in Australia and New Zealand won't send me any more hot Cleveland Ohio properties. My previous words may have just lost me my inside track on all the good deals.

: )

Originally posted by @James Wise:

@Waylon Themer

".....Oh no, maybe I should not have posted this. Now all the real estate investors in Australia and New Zealand won't send me any more hot Cleveland Ohio properties. My previous words may have just lost me my inside track on all the good deals."

 Haha excellent - as a New Zealander I struggle to understand how anyone living here can really understand a property market on the other side of the world. Maybe you can look for deals in Auckland for me, and I'll look for deals in Cleveland fryou! :p

@J Scott  as usual there is misinformation running here.. its very common I have found in my dealings in other states for the brokerages to have CLIENT Trust accounts.. and handle the EM... and then what they do is keep it and off set that with their commissions..

Its also easier to get your EMD back from a broker MOSt of the time.. than a title co. which usually requires two signatures.

So when the OP is stating that he is giving EM to the seller maybe he really meant to the Sellers ( who is a RE broker) Trust Account and in that case that is fine... Although commingling of trust account money is the NUMBER 1 infraction in the industry.. you see it when we get our RE bulletins and they list those that got suspended or revoked or what have you commingling is always number one.   Its the same account licensed PM's use

Originally posted by @Waylon Themer :

I understand your position @Will Barnard.  You are definitely employing best practices and I applaud you for that.  Your experience dwarfs mine in comparison, so please understand that I am not saying you or anyone else on here is giving wrong advice to put money with a title company.  I am saying that you are doing it the best way.  I understand it is a risk.  It is a risk that you may not be willing to take, but I may be willing to.  Every investor has his or her own risk tolerance.  Look at how differently every real estate buyer does inspections, environmental due diligence, title due diligence etc.  There is a best way to do things but that isn't always the way to achieve your goal. I live out this decision everyday at the bank as a loan officer.  Other bank's make loans that I think are crazy.  I make loans that other bank's think are crazy.  It is just different assessments and tolerances of risk.

 I understand your point and agree with all your analogies with the exception of the topic at hand. My counter analogy to you is this: Two people with different risk tolerances and goals, but both have the same goal to get to the other side of the freeway. One walks over the overpass while the other one plays Frogger (OK, I am dating myself with the old 1980's Atari video game) across the speeding cars. I ask you, why take that risk when there exists a bridge to the other side?

Originally posted by @Lyall Storandt :

@Waylon Themer  Thank you for the kind words, Waylon. Hate that this happened to you. I'm sure you're aware that we were briefly entangled with that same property as well; however, I'm not sure if it was ultimately through Troy or another source.

@Will Barnard Sorry to hear you had a negative experience with our company; let me know if there's anything I / we can do to make things right going forward. 

In this case, the damage is done and my personal and company policy is not to ever do business with anyone who ruins it just once. It is my opinion that your company and others like it (along with all the individuals like it) do a disservice to the marketplace and to most investors. If I had my wish, New Western would not have come into CA. The fact that your company was briefly "entangled" in this sad deal of this thread also speaks volumes 

Because the overpass is 5 miles up the road and would take much more time and effort, all the while not providing the adrenaline rush that I need to get out of my system.  I want to take a shortcut at the risk of getting burned.   Much more exciting that way.

Seriously though, point taken.  Thanks for the input @Will Barnard !

Originally posted by @Waylon Themer :

Because the overpass is 5 miles up the road and would take much more time and effort, all the while not providing the adrenaline rush that I need to get out of my system.  I want to take a shortcut at the risk of getting burned.   Much more exciting that way.

Seriously though, point taken.  Thanks for the input @Will Barnard!

 LOL, I figured I would hear a comeback like "5 miles up the road". Glad you get the point. I like adrenaline too, but when it comes to investing thousands of dollars, I invest it, not roll the dice. I would rather do that in Vegas while downing free beer and admiring the eye candy.

IMO this isn't a wholesaling issue. It's not even a "due diligence" issue. It's a bad business practice coming out of at least one Texas market. :) The OP would have the same problem if he was buying directly from the seller and gave the seller the EMD money and then the seller disappeared. Escrow is for funds and contracts. That's what professionals do. Even the ones who trust their buyers and sellers. The exchange between @J Scott and @Sam Craven really muddied the waters.  Sam had all kinds of justifications for not using escrow because EMD isn't easy to get refunded or because it's the way it's done there.  So what?  It's a bad practice, wholesaler involved or no.  

Originally posted by K. marie P. really muddied the waters.  Sam had all kinds of justifications for not using escrow because EMD isn't easy to get refunded or because it's the way it's done there.  So what?  It's a bad practice, wholesaler involved or no.  

My point exactly K Marie. Regardless if a wholesaler is involved, regardless of the reputation of the seller or the buyer, it is bad business practice to give money directly to any seller under any circumstance. I certainly hope that resonates with everyone reading this thread.

As an investor and realtor, one thing I will never do is write a deposit check to a wholesaler.  If they want to do business with us the check is written to the title company.  I get a lot of push back about this, but if they are reputable they really shouldn't have a problem with it.

@Will Barnard   the reality is this is just nothing money the dollars are so small.

I have never kept an EM deposit even though sometimes I wanted to just creates too much bad blood... heck a few grand to me is not going ot change my life style and if I beat it out of some shmuck .. like its apparent these Texas wholesalers do well just shame on them.

Now if we were talking about a major project or bigger money with bigger players then that may be something different. .

However like when I have flipped plats to DR Horton and other builders.. I will get a decent EM deposit and on a certain milestone they go hard and release.. but initial EM goes to title company.   At that point they have gotten a pre lim to understand that we own it.. etc etc.

its all this wholesaling stuff and never acutely owning the asset that creates all this BS.

Not sure what happened with you and the Texas wholesaler that's mentioned sounds like it was not good.

Thanks for sharing and it must be frustrating. 

But I don't think this relates to wholesalers at all. Anytime it seems we get the short of the stick, you always learn a valuable lesson as to what YOU did wrong. I am not sure how it works in your state but giving a deposit to a wholesaler sounds like a crazy crazy thing to do. Always deposit earnest money and deposits into a reliable third party like an escrow or lawyer if they are handling the closing.

I really appreciate you sharing this lesson learned. As a newbie my concern is making a mistake. Is there any recourse through the local authorities? You mentioned other buyers were also taken in this deal. Are you working with them in recovery? Have you added them to your network of buyers? I may have missed it but how did you learn of the lead on the property?

I hope you don't mind the additional questions...my goal is to learn and apply. I know mistakes are part of the process...."failing forward".

thanks again.

Its tough to be open about the losses taken in business but my worst mistakes have birthed some great wisdom to say the least... 

And if anyone is in this business saying they've never lost or made a mistake that's when I'm running lol... Thanks for sharing! 

Originally posted by @Jay Hinrichs :

@Will Barnard  the reality is this is just nothing money the dollars are so small.

I have never kept an EM deposit even though sometimes I wanted to just creates too much bad blood... heck a few grand to me is not going ot change my life style and if I beat it out of some shmuck .. like its apparent these Texas wholesalers do well just shame on them.

Now if we were talking about a major project or bigger money with bigger players then that may be something different. .

However like when I have flipped plats to DR Horton and other builders.. I will get a decent EM deposit and on a certain milestone they go hard and release.. but initial EM goes to title company.   At that point they have gotten a pre lim to understand that we own it.. etc etc.

its all this wholesaling stuff and never acutely owning the asset that creates all this BS.

Not sure what happened with you and the Texas wholesaler that's mentioned sounds like it was not good.

 True and I agree, it is a small amount in this case but small is a relative term and what is small to us could be large to another. Point being, the example is to show that no matter the amount, it should not be done that way.

Regarding milestone releases you mentioned, that is a whole different ball game. Initial EMD's should go to title, releases based on milestones or releases of contingencies are fine in my book, in fact, I have done those many times over. Completely different story.

That does suck and thank for sharing it and like another reader said "Paying it forward" . I've been looking at e mails from a wholesaler called Home Vestors Western Properties, LLC and in the notes it says "non refundable $3,000 earnest money deposit". I'm like "WTF!?"

Would like to notify you guys that this Troy Joyner has raised his ugly head in South Africa. He is attempting to get letters of intent from sellers so that he can defraud investors. I would watch very closely.