Using Wholesalers title company

16 Replies

Good morning BP,

I'm looking to acquire good cash flowing rental property in the DMV area and have a few leads from wholesalers. A common theme i'm noticing is that they are requiring that i use their title company. Is there a reason for this, is there a downside in using their title company. I did some research and the only thing i found was some barging basement title companies may not do a great job on assuring i have a clean title. Is it possible to push back on that requirement and shop around for my own?

I would love your feedback.

Kwame



"they are requiring that i use their title company. Is there a reason for this,"

Since wholesalers are smarmy, they usually need dual escrows to hide the price you're paying from the owner and make it look like the wholesaler's taking title.

Disclosure of what is actually happening to the seller, might upset the seller since being vulnerable, he thought his wholesaler buddy was actually taking title instead of just skimming and then vanishing after close.

Some title companies have ethical issues with this sort of subterfuge.

Kwame

That is an excellent question.  I recently walked away from what appeared to be a great deal in Parma Ohio.  There were several red flags.  First, I had to use their title company.  After some research, I found the title company to be reputable.  They probably have extensive experience with these types of deals.  

However, the wholesaler was a middle man and did not have a direct relationship with the seller.  This, I don't really like.  But the deal breaker for me, was that the wholesaler who was assigning a contract, was not willing to show me the actual contract the he was assigning, and also would not provide a Residential Property Disclosure Form which is required here in Ohio.  He said "we just don't do business that way".  Since I am big on "full disclosure", I decided to walk away.  Glad I did.  Sometimes the best deal is the one you walk away from.

"also would not provide a Residential Property Disclosure Form"

Y'know I never thought about that.  Thank you.

I'm sure the wholesaler's defense is that he never owned the property outside of the brief instant when he got enough control to assign his contract.

@Steve Morris The residential property disclosure form (in Ohio) must be filled out and signed by the seller.   It has nothing to do with the wholesaler, because he is never actually taking title (ownership).  The disclosure is usually not a big deal for an investor, but it could be a very big deal if there is a hidden defect, like lead, or sewer system failure, etc. 

The only exception is for banks (well known for putting lipstick on a pig), and for attorneys (only when offering a property for sale as part of an estate).  

Robert Collett
Residential Property Manager, Remax Trinity

Instead of complaining, try collaborating instead.

In OR, licensed agents wholesaling is not allowed and will get you ratted out.

I have no problem with wholesalers IF THEY WOULD DISCLOSE TO ALL PARTIES.

A lot of these guys look for some old guy to find properties 20% below market, then put 0% into the deal looking for a buyer that the old guy will never meet.  Deal goes sideways, wholesaler is gone.

If you don't want to complain about exploitative behavior then I guess we disagree.

@Kwame Knights , what I have seen from the couple of properties I have purchased from wholesalers is that the wholesales attorney (Illinois is an attorney state) has a huge kickback in line items to both sides of the deal, and since you the buyer are paying them, no one else cares. I also suspect, but have no proof, that the wholesaler is then getting a kickback or "referral fee" from the attorney after closing to help line their pockets even more. I've had closing where the closing costs were $5000-6000 because of these added fees onto the title policy.

One one deal I had a prior existing relationship with the title company and the seller/wholesalers attorney agreed to honor the line item pricing they give me and on the other deal since I was paying both sides, by law, I get to choose the title company and threatened to pull the deal if they didn't match the fees I was given/quoted at other title companies. On that one the attorney reluctantly agreed and turned out in addition to his "seller attorney fee" on the Master Statement he had over $2500 that was going back to him for pulling title that was hidden in the title policy cost. 

Perhaps others, like those who wholesale, could provide a better reasoning. Excluding situations as described above it could just be they want a clean transaction that they make $XXX and don't have to worry about anything else. 

The title company identified in the original (assigned) contract has already conducted the title search and obtained the lien cert and is likely ready to close ASAP. Changing title companies for no good reason will likely push settlement back 2-3 weeks.

@Kwame Knights one reason may be that other title companies are not willing to do the transaction over legality concerns. In my city there are several major title companies. Only one will do wholesale deals. I have talked to some of the others and they essentially say that selling real estate without a license is not legal and they don't believe assignment of contract is a way around it legally. They don't want to be in the middle of the transaction for that reason. So my guess is your wholesaler has to use that company. In a normal real estate transaction, it really doesn't matter what company you use. As far as property disclosure, that is required in some states whenever you sell real estate. It is usually not required for owner to owner transactions, but if the wholesaler never takes ownership, it is not owner to owner. Just another grey area that wholesaler guru will have a good story as to why they don't need to comply. 

One of our local title companies will not do an assignment at a different price that the original seller is getting.  For that reason we don't use them.  We use a nationally known title company that has worked with us on several wholesale and subject to deals.  Don't let people convince you that they are doing anything illegal.  That's just not true, at least it is not true in Indiana.

Man, BP you make it so complicated, the title company is in business for a reason. This post sounds like “watch yourself the wholesaler is after you”. Again if your at a title company that’s in business offering title search and insurance your good to go. If you signing deeds and transfer affidavits at a Walmart parking lot, and believe or not I did that once then you can be a little scared. But if your all set up with a reputable title company again no need to worry. Btw the Walmart signing was with a longtime friend/wholesaler that I still do business with here and there. But do not recommend doing the “Walmart parking signing” with strangers.

There are a lot of things to be concerned about when dealing with wholesalers, but using "their" title company is not one of them, as long as you get title insurance it doesn't matter who performs the closing. Title companies just follow the underwriters instructions and record the docs. It's more important that you get a title policy from a reputable company, if anything comes up later on that's who you will be dealing with, not the title company.

In my experience, being required to use a particular title agent may be an indication the party requiring the use, may have an interest in the agent or vice versa, which gives the agent an interest in the transaction and therefore is not really a disinterested third party. While that may not seem to be a problem, again in my experience, when the agent is not disinterested, there may be an incentive for the agent to ignore or overlook a problem with the title.

While the title policy may be issued without exception for the defect and there may be coverage, a title policy is not a panacea.  Its a contract of indemnification against actual loss suffered by the insured and frequently the insured doesn't understand the policy definition of actual loss under the policy and is surprised, and not in a good way, by what they are entitled to recover.

In addition, the insurer has the right to cure the defect in a reasonable period of time and again, the insured may have a different opinion about how much time is reasonable than the insurer. In the title claims I've handled, and admittedly they were complex, several years to resolve the issue were not uncommon. During this time, the insured may or may not have possession of the property and if in possession, any additional money put into the property would not be covered by the policy unless done with the written agreement of the insurer. So for example, you buy a vacant house under a contract assigned to you by a wholesaler for $100k borrowing $60k at 10% thinking the ARV is $220k after putting in $10k of repairs. Great deal right. Unfortunately, right after you drill out the locks to get in the daughter of the Grantor comes in and asks what your doing in her mother's house who she tells you, is in a nursing home and has been for several months. You file a claim with the title insurer who starts an investigation. The investigation finds the agent allowed the wholesaler to take the deed to have it executed and notarized and no one at the agency ever met mom. Had they met mom, it would have been fairly clear mom appeared to be incompetent and no one should have accepted a deed from her without an affidavit from a doctor that she was competent to sign.

Such a situation would probably result in litigation to determine if mom was legally incompetent at the time she signed the deed and would involve lots of discovery including depositions of the daughter, mom, mom's doctors, the wholesaler, the notary, the opinions of experts and it will all come down to what the judge thinks.  Of course either party would be able to appeal the judges decision if they don't agree with it.  Depending on the amount of money involved, an appeal may be all but guaranteed.  All told you may be waiting several years for a decision during which you'll be making payments on the $60k, probably paying for insurance on a house you may or may not own and unable to even enter it and possibly paying the property taxes if mom's estate doesn't pay them to keep it from going to tax sale.

Then to add insult to injury, if you lose and mom and her estate get to keep the house free of your deed and your mortgage, you then get to argue about the value of the house when you bought it, because that's your loss under the policy. The insurer will probably get an appraisal of the value of the property when you bought it. Let's say it comes in at $80k since the other $20k you paid went to the wholesaler for the assignment, that is what you're entitled to recover from the insurer. The rest, that's yours. You can get your own appraisal and argue with the insurer and the may negotiate with you, but if they don't, it's back to court you go.

The point I'm trying to make is that many people think that getting a title policy is a cure all.  As long as you get one you don't have to think about anything involving the purchase, the title company will have to take care of any problem and it will never cost you anything.  Nothing could be further from the truth.