Newbie Wholesalers - don't be THIS Guy

Newbie Wholesalers - don't be THIS Guy

Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes

During my closing today - I wholesaled a house in Zion, Illinois and made $5,309.84 - my real estate attorney approached me and introduced me to a real estate agent - let's call her Pam.  I can see a sense of skepticism in her eyes...and later, I learned why.

My real estate attorney has just talked with Frank - a newbie wholesaler. Pam was working with Frank for the past couple of months. Pam called my attorney to seek help.

Pam submitted 25 offers for Frank and got 5 offers accepted. She thought she would be cashing in but she got the surprise of her life when she found that Frank has NO EARNEST MONEY to lock up those 5 deals. Frank used a Proof of Funds provided by the "gurus". And get this: Frank does not even have a car (probably sold it so he could pay the guru). Even though Pam has been a real estate agent for a long time, Frank talked a BIG game and she was convinced Frank is the real deal.

So now...Pam had to go back to all the listing agents on all 5 properties and told them that her buyer does not have the money and cannot close. Pam hates wholesalers because of Frank. BUT, my attorney explained the process to her and assured her that wholesaling is completely legal. My attorney told her I've wholesaled enough number of times and I do lock up my deals with earnest money. I offered to help her out by being able to close on the properties that Frank couldn't. So we ended the conversation in a positive way and maybe I will buy 1 of those 5 properties that Frank messed up on.

So...to all the newbie wholesalers out there...do NOT be like Frank:

1. Before you waste the time of real estate agents who will put in all these offers for you, get your act together.  @James Wise and other agents have bad experiences with wholesalers who just graduated from the guru seminars. Realtors are people too and their time is valuable, maybe even more valuable than yours.

2. You need earnest money when tying up a property listed on the MLS. That's just the reality and there's no getting around to it regardless of what the gurus say. If you don't have any earnest money, don't try flipping a house. Find a job flipping burgers and save up $500 or $1,000 instead. 

3. You need the right contract valid in your state and don't use one these "guru contracts". It makes you look like a fool or worse, you'll end up messing a deal up because your guru contract does not work in your state.

4. Don't be "trigger happy" with regard to making offers on properties all over town. I know the gurus say make 100 offers and you buy 1 property. Well, choose a market, a farm area within that market and make intelligent offers for houses in your farm area. By doing so, you don't waste the realtor's time.

5. If you don't have any money...here's an option for you: partner with an experienced wholesaler in your town and work for him or her. Find him a great deal. He puts in the earnest money and coach you as well. You do the work, he takes the risks so he deserves to make more money than you. And last but not the least ....

6. Don't pay any guru thousands of dollars. Listen to the BP Podcast, read the BP blogs, network with BP folks...specially in your market. And keep those few thousand dollars as your earnest money and your marketing budget instead.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y

@Anson Smith   something just does not sound right that you would knowingly tie up property without any intention of putting up EM only EM if you find a buyer.

I guess I just hold Real Estate to a different standard of and code of conduct and ethics. And a basic principal that if one gets into the business at least cobble enough money together to put up EM... and be proud that you can... 

In the timber business we called those that tied up timber stands and had no money and no ability to close  Timber Pimps  they were just pimping contracts. 

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  • Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    E/M, as it relates to the validity of a contract is a non-issue in my state. A contract is a contract is a contract, with or without E/M, as long as all other elements of a contract are also in place. E/M is only ONE form of consideration, not the only form. 

    For the last 15 years, only a small percentage of my contracts ever include E/M...but seldom do I buy listed properties so I don't have to deal with agents on the buy side. 

    As @Jay Hinrichs indicated, it is very difficult in Texas to get E/M returned to the proper party without both the buyer and seller signature(s) affixed, even in the event of a clear default by one party.  

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Guy Gimenez 

      In our state it is impossible to get EM returned without both sig's.. the title company will after time simply interplead the funds to the court.

  • Edgewood, MD · Member since 2014 · 283 posts · 59 votes
    11y

    @Wendell De Guzman Thank you for sharing your story and providing your recommendations on how to properly wholesale a property. 

  • Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    @Jay Hinrichs

    We can get it released without both signatures when the termination of the contract is so clearly within the buyer's contractual rights that the title company feels litigation by the seller would be futile. Our standard real estate commission contracts have about a dozen ways for the a buyer to legally terminate but few agents know the form well enough to recognize this so they often pitch a fit when one of the seldom used termination points is used and will have their seller threaten the title company if the money is released.  

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Guy Gimenez 

    Not the case here I Oregon and WA... SEller and buyer must sign cancellation docs.  Even when its clearly spelled out in the contract.. Like for instance I had a deal last week that called for the realsease of EM to me after a specified date.. and the buyer would have had to cancel in writing prior to that.. the date came and went ( by at least 2 weeks) but title still would not release Em until buyer signed.  Our title companies here just default as stated to interpleaders.

  • Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    @Jay Hinrichs   Ouch! I sure don't like that plan at all. 

  • Peoria, IL · Member since 2013 · 967 posts · 383 votes
    11y
    Originally posted by @Andrew Whicker:

    From what I understand, many wholesalers have verbiage in the contract with the seller that assures the wholesaler can always get out of the contract no matter how far along the process is.  The wholesaler takes a hit on the earnest money, but they still get out of the contract if they don't find a buyer.

    If I understand this properly, I would think arguing about ethics of EM is a bit misleading... A wholesaler can tie up a property with $500 in their pocket with no intention of closing.  That idea doesn't seem too ethical and $500 isn't a lot of skin in the game.

    As far as the person above not paying EM, don't these wholesale contracts have a due diligence period just like other contracts?  If so, you could still get out without paying EM, right?

    I don't know much about wholesaling.. am I wrong?  Just trying to learn.

    I'm with Andrew.  All RE contracts have escape clauses.  Financing is a big one.  Oooops I just opened up 200 credit cards - now I can't get a loan.  Oooops my inspector found a smudge on one of the windows.  & after escaping from my experience the earnest money goes back to the buyer.

    Why would a Realtor ever let a buyer lock up a property with $0 Zero earnest money.  Sounds like a bizarre case.  Can't really think of instance where 5 deals between 6 Realtors and no earnest money?

    Did she write 25 offers in a day and got 5 accepted?  I want to make 25 offers in a day and see if any of them get accepted.  I more wonder about Pam than the wholesaler.

    Here is my proof of funds letter.  It is an email from an African Prince that he will give me $1,000,000 if I help him transfer some money.

    Seriously though I would feel kind of bad if I went to some 80 year old lady and offered her $1 for her house and she took it.  I know I would be offering a great service for getting her out of her house and all.

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Kirk R.:

    All RE contracts have escape clauses.

    Mine don't.  And I know MANY other serious buyers whose contracts don't.  

    That's the essence of a true cash buyer...

  • Dover, DE · Member since 2014 · 15 posts · 1 vote
    11y
    Anson Smith I understand your point and would love to hear more.
  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    BP is just as guilty in many ways of promoting this **** as any guru out there.

    You look at the forums and you'd get the impression that wholesaling is this, that, and some more of the other :)

    I can't be the only writer on the blog who tells the truth...  You ever thought about writing, @Wendell De Guzman .  We could use you!

    Want me to twist Brandon's arm?

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    Guys - this is no different across the board...

    I get a call from an attorney who says - I've got a client in Chapter 11.  Bank is forcing liquidation.  Make your offer for $xyz with no strings attached...

    What escape clauses? REI is full of risk-taking. Freaking deal with it and get some balls - are you a player or not? Do you have the infrastructure of not? Are you real or not?

  • Peoria, IL · Member since 2013 · 967 posts · 383 votes
    11y

    @J Scott  at least where i am in il,  realtors use standard boiler plate contracts. Realtors are not supposed to change them because only lawyers/attorneys arr sposed to change contracts.   Realtors are supposed to only fill in the blank lines. 

    so when you go Realtor to Realtor you have ZERO escape clauses? i will give you $100,000 for 123 Main street in 5 days.   If title is not clear you stiill have to purchase?  or termites? how long is your contract? 

  • Real Estate Investor · Greenville, SC · Member since 2014 · 76 posts · 23 votes
    11y

    @Anson Smith  You said,

    "hood winked or helped? 14 days beats the 6 months an agent ties up a property by putting a sign in the yard and listing in the mls then walk away. These are the sellers that appreciate what I do. I find motivated sellers and match them buyers that are ready and get paid for it. Whats wrong with that?"

    A real estate agent isn't "tying up" a property when listing it on the MLS or putting a for-sale sign in the yard the way you are, as a wholesaler, when you put the house under contract.

  • Fayetteville, NC · Member since 2014 · 17 posts · 4 votes
    11y

    I agree with you Anson smith, If as a wholesaler you are doing your research and due diligence on a specific property, and you close the deal, yet had no Em where does the problem lie. I always telly clients what my job is and that I expect to make money, I started with no capitol, however I closed on my first deal within weeks. Nevertheless, I believe if you are able to provide Em you should just in case things fall through.  Also not all contracts consist of contingencies that say the seller may not market or negotiate their property to other investors or realtors. Correct me if I'm wrong.

  • Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    @Account Closed 

      I am with you in addition I have it released to seller after due diligence. AS you know our West coast deposits are not as easy to get to as in other states..Or maybe you don't know.

    But in other states mainly attorney states.. I can put in EM and get it back without other party acknowledging. I just make a demand for it.  As you know EM given to a west coast title co. cannot be released without both buyer and seller agreeing.

    This I do know. Which is why it's usually a waste of time to try to keep EMD or force performance. The value has to be there ($5K+ minimum). As does an easy to prove (IMO) breach of contract. A $1-2K EMD doesn't cover an attorney letter and filing fee. :)

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Account Closed 

     Agreed from our end.. although you know others that get all worked up over 1 to 2k of EM... I have had 2 go all the way to interpleader.  I did not show up or spend any money. The people that owed me the money though and would not sign they probably spent most of what they would get back on court cost.. Normally I  would just give it back No issue but these were Butt heads...

  • Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    11y
    Originally posted by @Kirk R.:

    @J Scott  at least where i am in il,  realtors use standard boiler plate contracts. Realtors are not supposed to change them because only lawyers/attorneys arr sposed to change contracts.   Realtors are supposed to only fill in the blank lines. 

    so when you go Realtor to Realtor you have ZERO escape clauses? i will give you $100,000 for 123 Main street in 5 days.   If title is not clear you stiill have to purchase?  or termites? how long is your contract? 

    Clear title contingency isn't an "escape" clause. It's a contingency.  A clear cut one at that.  Escape clauses are clauses that are intentionally vague and subjective and in favor of the buyer wanting an easy out.  Such contingencies are a result of consumer protections for retail buyers....paying retail prices. Of which I am in favor of btw.

    Indeed some of us do not use any of those contingencies when we buy.  Why would we?  I've never had a termite inspection or any other kind of inspection contingency on any property I've bought.  No appraisal, no inspection, no tenancy or vacancy contingency.  Try it sometime.  It will really separate you from your competition.  :)

    The reason you won't try it is that you want the same things the retail buyers want. That's not how you get a discount.

  • Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    @Account Closed 

     Agreed from our end.. although you know others that get all worked up over 1 to 2k of EM... I have had 2 go all the way to interpleader.  I did not show up or spend any money. The people that owed me the money though and would not sign they probably spent most of what they would get back on court cost.. Normally I  would just give it back No issue but these were Butt heads...

    The two times I kept EMD were from Butt head buyers. One was trying to wholesale the property. The other was doing the rental cash-out refi musical chair game in 2007. Both said they were cash buyers and made all cash offers. Then their cash buyer and or cash out refi didn't happen. Where was the cash I wondered? They weren't even nice about tying up the properties for 45 days and not performing. Nice would have gone a LONG way towards me refunding that EMD,

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Account Closed 

      well happens to the best of us.. get snookered by no money no means buyers.  And one wonders why this behavior gives the industry a bad name  :)

  • Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    11y
    Originally posted by @Account Closed:

    The reason you won't try it is that you want the same things the retail buyers want. That's not how you get a discount.

    That's good to hear. I went to a few REI meetups when I lived in a different city and found that most of the people that attended went under contract with no intention of closing. They taught us how to put in escape clauses and make the duration until closing as long as possible so that worst comes to worst, they only lose EM.

    As you can imagine, it bummed me out about wholesaling and the people that practiced it once I grasped what was going on.  This thread is changing my opinion for sure!

    Unfortunately, the real estate broker licensing organization decided that instead of competing they would work with our government to make it illegal for anyone to be a broker besides their own certified agent which makes 'bird dogging' illegal.  Of course, the loophole is to put the property under contract and then re-assign contract.  And it seems the ultimate loophole is to require the end buyer to put the EM down.  I think if anything is immoral,  it is restricting the supply of brokers.  (Signing a contract that you have intention of fulfilling is unethical).  Bring on the criticism : )

  • Peoria, IL · Member since 2013 · 967 posts · 383 votes
    11y

    @k. marie poe. 

    contingency escape same same in my mind

    Maybe except for an auction,  there is a period of time for buyer to do title work inspection etc.   what is difference between that and wholesaler has time line to find buyer and do inspection title etc?

    I am working toward being able to make cleaner offers. 

  • Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @David White:

    @Wendell De Guzman Thank you for sharing your story and providing your recommendations on how to properly wholesale a property. 

     You're very welcome. You can follow my real estate wholesaling "journey" here - http://www.biggerpockets.com/forums/223/topics/121...

  • Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @J Scott:
    Originally posted by @Anson Smith:

    My contracts states the earnest money is due in 14 business days or the contract voids. This gives me time to find my end buyer.

    The OP mentioned a wholesaler who was putting offers on MLS listed properties. I can almost guarantee that no half-decent listing agent would recommend their client accept a contract where the EM wasn't delivered until 14 days after binding agreement.

     Precisely!

  • Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
    11y

    @Kirk R.

    I agree.  A clean offer does not mean you need to throw caution to the wind. It your your responsibility to protect yourself and your company...that's what business people do. 

    In our standard Texas promulgated contract forms, a savvy buyer has plenty of ways out. And using any one of the rights afforded me contractually does not make me (as buyer) an unscrupulous  investor...in fact, just the opposite. It indicates I've taken the time to understand my rights and obligations better than the opposing party so I can mitigate my risk.  

    Cash deals in Texas can close in 3 to 10 business days. If a cash buyer needs 30 days or more, that's a red flag and I would seriously question that buyer's abilities and motives. On the other hand, I would never sell one of my properties without a "non-assignment" provision...this keeps me from dealing with the issue to begin with.

  • Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    @Anson Smith   something just does not sound right that you would knowingly tie up property without any intention of putting up EM only EM if you find a buyer.

    I guess I just hold Real Estate to a different standard of and code of conduct and ethics. And a basic principal that if one gets into the business at least cobble enough money together to put up EM... and be proud that you can... 

    In the timber business we called those that tied up timber stands and had no money and no ability to close  Timber Pimps  they were just pimping contracts. 

     As always, Jay you nailed it on the head.

    And to remind everyone - below is what I said:

    2. You need earnest money when tying up a property listed on the MLS. That's just the reality and there's no getting around to it regardless of what the gurus say. If you don't have any earnest money, don't try flipping a house. Find a job flipping burgers and save up $500 or $1,000 instead. 

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