Lessons learned from wholesale deal turned into lawsuit

Lessons learned from wholesale deal turned into lawsuit

Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes

This is a kind embarrassing/bizarre story, but I figured I'd share it since everyone and there brother is getting into wholesaling.  Basically, I was approached about buying a buy-and-hold home from a wholesaler in a decent area.  I wasn't super excited but didn't have anything else going on.  Long story short, we agreed to do a double close instead of an assignment and, despite assurances from the wholesaler that the seller was on board with this, the seller absolutely freaked before closing when he found out the wholesaler was selling the home to me for an instant profit.  He accused the wholesaler of breaching the contract because there was a title insurance premium pass through doc he had to sign that identified me as the end buyer.   Days on the phone trying to save the deal, and it ultimately falls apart and seller refuses to close.  What makes matters worse is that the seller then demands my $5000 earnest money.  (The seller was a complete crook and had pulled this type of scam before, tying up earnest money to extort some sort of settlement.)  

I had enough, had the wholesaler assign me his claim, and sued the seller in state court.  I'm a litigator so I did it myself.  In the end, the seller settled with me and sold me the home, but this was only after I aggressively litigated the case.  (Attorney fees would have easily been $15,000 if I had paid someone else to do it.)

Here's what I took away from the lesson:

  • Wholesaling sure seems like a lot of work to avoid licensing requirements.  All of this likely could have been avoided if I could have simply directly paid the wholesaler a referral fee, but I couldn't do that because he didn't have a license.  
  • Even if a wholesaler fully discloses that he is reselling the home or assigning the contract for a fee, there is going to be a certain percentage of sellers who are going to freak out and be pissed.  This blows up deals and leaves the wholesaler in a bad place.
  • The chances of a wholesale deal blowing up are higher simply by virtue of the fact that there are additional parties involved.
  • Wholesaling should only be done by sophisticated and experienced investors who are selling to other sophisticated and experienced investors.  There's just too much that can go wrong.  Yes, many wholesale deals will go through and maybe my experience was just a "one in a million" type experience, but I suspect a higher percentage of these deals go south than straight buy/sell type transactions. 
  • When it goes bad on a wholesale deal, it can go really, really bad.  If my lawsuit hadn't gone well against the seller, I would have absolutely sued the wholesaler.

I left out a lot of details but I should qualify that I made mistakes as well, the biggest one being that I agreed that my earnest money could be pledged to the underlying contract.  

I should also add that I'm not bashing wholesalers.  There are definitely good ones out there.  Just thought I'd share my experience and observations since I see so many people wanting to get into this field.

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Investor · Tampa, FL · Member since 2016 · 46 posts · 40 votes
9y

I have wholesaled many properties here in my area and never had a problem....

HOWEVER in my area our contract for the state of Florida has an entire clause that is dedicated to assignability. Now I know in this case it wasnt an assignment. Furthermore, My title company does not allow "Flow through" double closes, so we cant use the funds from back end buyer to close on the A-B transaction. We will just use Transactional financing in order to do a true close on the front end, and then sell within hours on the back end. Thats the true way to do it and leaves way less room for error. 

We typically just use assignments, but the KEY to wholesaling in my opinion is managing the sellers expectations and crystal clear communication. Managing the seller is the biggest part of the equation. 

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    Great post and (not so) great experience! Personally, I haven't had any deals that involved wholesalers, but I suspect it's more to do with my market & price point than the lack of wholesalers out there. Whenever I hear of "a deal" it's rarely anything better than a few thousand off the list price of an MLS home.

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  • Investor · Memphis, TN · Member since 2016 · 24 posts · 27 votes
    9y

    @John Chapman thanks for sharing. I'm from Memphis, but I currently live and work in Dubai. As you can imagine, I've been approached by a few wholesalers. In your experience, what are key items to look out for with these types of deals? 

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    @jd 

    @JD Martin Thanks for the compliment.  The irony of the whole experience is that I really didn't even want the home.  I'm kind of burned out on rehabbing at the moment and it just fell into my lap (lucky me).  

  • Rental Property Investor · Memphis, TN · Member since 2015 · 203 posts · 135 votes
    9y

    @John Chapman What sort of experience and/or reputation did the wholesaler have?  What do you think that person could have done differently so prevent this sort of thing?

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    @Fernando Parker I don't really have any pointers for buying from wholesalers other than make sure they are putting up their own earnest money with the seller.  In my case, I think the wholesaler made a few mistakes and did a few things that were not completely above board, but at bottom this was a crazy seller situation.  I think even if the wholesaler had done everything right, he could have still ended up in a world of hurt.  

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    @Ben Roberts, the wholesaler actually had a decent reputation and was pretty experienced.  Here's what he did wrong, in my opinion.

    • His contract with the seller did not mention a simultaneous closing or that he would be immediately reselling the property.  This was not required under Texas law, but it gave the seller grounds (in his view) to claim breach.  I've seen contracts where the wholesaler is very clear about what he intends to do, which I think is advisable.
    • The wholesaler told me in writing that my contract with him (which did reference simultaneous closing) would be identical to his contract with the seller.   This is where I screwed up.  I saw the "final" unsigned version of the contract with the seller, but I did not see the signed contract with the seller until after I had signed.  I was on vacation and the wholesaler had a good reputation.  Totally dumb on my part.
    • When things started going south, it was very apparent the wholesaler was doing everything to cover his own butt.  He didn't step up and basically tried to do everything in his power to avoid taking responsibility (and liability).   Bad customer service on his part made me much more likely to sue him.
    • He used a one-page custom contract.  I've used them before in the past and never had a bad experience, but they leave too much open and unaddressed.  I would probably feel fine using one in a straight buy/sell deal.
  • Rental Property Investor · Memphis, TN · Member since 2015 · 203 posts · 135 votes
    9y

    @John Chapman Thanks for the detailed response.  Trying to up my game and this advice will help.

  • Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y


    No license.
    NO insurance!
    This would not have happened had the original "buyer" closed and then resold. 

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    @John Thedford I completely agree with you.  

  • Las Vegas, NV · Member since 2014 · 732 posts · 137 votes
    9y

    @John Chapman

    Yes the old lets get rich quick buy wholesaling property. To many late night T.V. shows and all the seminars people go to and spend thousands of dollars to learn these tricks. I do flip dirt and have done it for many years without any problems, I make sure I disclose. Different world from land investing to houses.

  • Investor · Marietta, GA · Member since 2014 · 226 posts · 97 votes
    9y
    John Chapman Interesting. I've bought several properties from wholesalers and had always used assignments. However, this past summer, the wholesaler wanted to double close. I should've known something may happen when my attorney refused to close the deal. He does assignments only. I went to the wholesaler's attorney. After we closed, all hell broke loose. I went to evict the tenant and got a writ of possession. Between the time of receiving the writ and the sheriff's arrival, I receive a call from the sheriff indicating that the magistrate vacated the writ because there was an allegation of fraud. Essentially, the argument was that the original seller did not have authorization to sell the property. She apparently had an old POA from a husband who she was divorcing and who is now in prison. The father in law had the valid POA and filed a sheriff complaint. Long story short, I am also an attorney and filed an emergency petition and litigated the matter before the magistrate, specifically on subject matter jurisdiction grounds and in the alternative, the magistrate was using the sheriff as its agent to do what it couldn't do directly (litigate matters of real estate ownership). Further, it was giving the father in law the benefit of court intervention without having filed any court case. Anyway, the magistrate reversed itself and issued the writ. The tenant was evicted and we moved forwarded. I agree that that law degree comes in quite handy in this business.
  • Investor · Marietta, GA · Member since 2014 · 226 posts · 97 votes
    9y
    Fernando Parker I do agree that these may not be the norm but some tips I've learned so far: 1. My attorney requires all parties to attend the closing. 2. The contracts should have assignment and double closing clauses and be clear about reselling. 3. I NEVER EVER pay for the attorney UNLESS he is representing me. Otherwise, I don't agree to pay. 4. Always write the earnest money check to an attorney, not the individuals 5. When the contract says non refundable add things like except if (and I put dates and non performance in there). 6. Always buy owner's title insurance. This is not legal advice just some things I've learned when dealing with wholesalers. Even I, as an attorney, use one.
  • Investor · Tampa, FL · Member since 2016 · 46 posts · 40 votes
    9y

    I have wholesaled many properties here in my area and never had a problem....

    HOWEVER in my area our contract for the state of Florida has an entire clause that is dedicated to assignability. Now I know in this case it wasnt an assignment. Furthermore, My title company does not allow "Flow through" double closes, so we cant use the funds from back end buyer to close on the A-B transaction. We will just use Transactional financing in order to do a true close on the front end, and then sell within hours on the back end. Thats the true way to do it and leaves way less room for error. 

    We typically just use assignments, but the KEY to wholesaling in my opinion is managing the sellers expectations and crystal clear communication. Managing the seller is the biggest part of the equation. 

  • Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    Were the people involved in these deals made whole by the unlicensed broker? 

  • Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    9y

    @John Thedford I think you missed where he said it was a double closing.  That means the first buyer was actually closing and then reselling.  

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    @Logan Hand totally agree with you about the double closing.  You can do "flow through" double closings here in Texas but I agree it leaves a lot of room for error (as my experience shows).   Totally agree that it all comes down to managing the seller.

  • Investor · Austin, TX · Member since 2016 · 16 posts · 4 votes
    9y

    great info. Sounds like a can of worms.

  • Investor · Virginia Beach, VA · Member since 2016 · 90 posts · 49 votes
    9y

    Wow, a one page contract? That's a bit ridiculous to me. The contract I use is six pages long, and they are very detailed. 

    Cases like these are reasons why I try to be as open as humanly possibly as a wholesaler. There are so many people that give us a bad name. 

    Signing a contract without any buyers, or approaching investors with a house you don't have under contract, just so you can see what your gross profit will be. 

    The #1 thing I can't stand is a liar. I've looked at plenty of houses, and the "seller" who was with me, who assured to me numerous times that he/she was the seller, was really a wholesaler when it came down to signing paperwork. Just shameful. 

    Sorry you had to go through what you went through, at least it worked out in your favor. It may take years to build a good reputation, but only seconds to destroy it.

  • Investor · Sachse, TX · Member since 2015 · 223 posts · 66 votes
    9y

    The wholesaler should have used transnational funding like stated above. Would have solved all problems. 

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    Yep, @Chance Housos, I completely agree.

  • Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes
    9y

    Here is an idea, why doesn't the wholesaler buy/close on the property with his/her "cash" like he/she probably presented and then market and sell the property he/she legally owns to whomever he/she chooses :)

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    I think there's a real theme that's important for newer wholesalers who want to do double closings.  You need to (1) put up your own earnest money with the seller; and (2) you need to actually close the first transaction using your own transactional funding.  If you don't do that and play all those "no money down" games and use other people's funds you're just playing Russian Roulette.  Sure you'll get by most of time, but the one time it blows up it is really going to hurt.  

  • Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
    9y

    I forgot to share the punch line of the whole story.  After I was in litigation, I let the wholesaler know that he obviously was not going to receive a fee given how jacked up everything was.  He was actually shocked and asked that I pay him something.  Sigh.  Some people.

  • Los Angeles, CA · Member since 2014 · 113 posts · 17 votes
    9y

    The problem is most wholesalers come to the table with nothing but their crappy contract. They call it driving for dollars. 

    I actually thought about wholesaling but I am a 20 year investor. I have considered buying properties cash then selling them to an investor for 30 - 40% below comps. Why that percentage? Because as a fellow investor I know that if I am not making at least 30% I am not interested. I also know that by dealing with all the crap and buying cash the investors job is easy. All they have to do is sign on the dotted line. 

  • Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
    9y

    Dallas people take not and contact John if u need litigation help. 

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