Wholesaling and the nonrefundable deposits

43 Replies

Concerning wholesaling and the nonrefundable deposit:

1.) Why do wholesalers implement these (especially if the deal is a legitimate deal)?

2.) How can a new real estate investor convince a wholesaler that a nonrefundable deposit is actually bad for business?

My feeling is that if a wholesaler truly has a deal, a nonrefundable deposit is unnecessary and redundant. I see them everywhere here in Dallas and many of the deals are actually not deals (some are even MLS listed). Just wondering how an investor might get around these.

@Albert Yamoah To me, the best thing to do is simply not work with wholesalers that require a deposit. One of two things will happen: the market will dictate that local wholesalers will still contact you and work with you, because they need buyers. Alternatively, no one will work with you without a deposit, because they have enough buyers willing to pay it!

That may sound overly simple, but if everyone in your market is requiring a deposit, that may simply be the reality of the marketplace right now.

Best of luck!

If you are a genuine buyer, why would you not have a deposit? If you don't have the money now, will you have it later?

The general concern is working with "Daisy-Chains". You take on a property with no deposit, and hold it, while trying to sell it. After some time, you cannot sell it, so you just "return it". That kills a wholesaler.

I will never offer a property without a contract and deposit. And I wholesale a lot!

@Joseph Ball  if it's truly a good deal why would you hold it for so long? Why wouldn't an investor buy it? Do you require payment of deposit before or after investor sees property/does due diligence?

I don't hold it. I sell it fast. I don't tie up a property for someone who just wants to sell before he buys.

@Joseph Ball  Do you require payment of deposit before or after investor sees property/does due diligence?

A deposit is due when you sign a contract, which is the point you've "tied up" the property.  Why on earth would a wholesaler let you tie up their property under contract, without a deposit so you can simply walk away?  Your contract time is likely close to their contract time, so of you walk away they won't have time to resell it.  Wholesalers are looking for buyers who can buy, not other wholesalers.

Updated over 3 years ago

To clarify, yes the deposit is refundable if the seller/wholesaler can't deliver clear title/perform as per the contract.

Originally posted by @Joseph Ball :

If you are a genuine buyer, why would you not have a deposit? If you don't have the money now, will you have it later?

The general concern is working with "Daisy-Chains". You take on a property with no deposit, and hold it, while trying to sell it. After some time, you cannot sell it, so you just "return it". That kills a wholesaler.

I will never offer a property without a contract and deposit. And I wholesale a lot!

 You mean, do exactly what the original wholesaler did to the original seller?

I find that hilarious.  Karma, she's a cold, cold bi...

In my world, there are there are kinds of buyers:

"Ozzie and Harriett". Retail buyers, contracts, deposits.

Daisy Chains. No down payment. Try to sell before purchase. Bad for wholesalers.

True investors. Due diligence and buy. Cash. When the investor has done due diligence and is ready to buy, he buys-cash. No deposit. 

The point @Albert Yamoah is trying to make is that due diligence has to be done before a final decision to buy or not to buy a property is made and that decision should not cost the buyer anything except for a small token amount (option fee).

Compare:

Buying from an owner: you have 10 days option period for which you paid $50 or $100. The property is yours to inspect and if you find something that you don't like you walk away or negotiate a better price. The most you can lose is that option fee.

Buying form a wholesaler: a non-refundable deposit (option fee essentially) is now $5000. If the property is no good you either walk away and lose the deposit or may lose on the property later. You're also not in the position to re-negotiate the price.

Nick

Originally posted by @Joseph Ball :

If you are a genuine buyer, why would you not have a deposit? If you don't have the money now, will you have it later?

The general concern is working with "Daisy-Chains". You take on a property with no deposit, and hold it, while trying to sell it. After some time, you cannot sell it, so you just "return it". That kills a wholesaler.

I will never offer a property without a contract and deposit. And I wholesale a lot!

Did you pay the original owner an EMD PLUS a non-refundable "deposit" too? If not, why not if you are a genuine buyer and have the money to close on the deal? I would never do business with a Wholesaler requiring a non-refundable deposit. Why should the Wholesaler get paid when the original buyer backs out because the double-closing wasn't adequately disclosed? Why should the Wholesaler get paid when the end buyer shows up to find out that he is responsible for not only his closing costs, but also the closing costs of the original owner and Wholesaler, and that fact was adequately disclosed and they decide to walk?

If a deal is on the up-and-up, a non-refundable deposit isn't needed.  If the Wholesaler is trying to pull a fast one, or not adequately disclose his role and the risks of the process, he will require a non-refundable deposit.  It would be wise for all, especially newbies that get blindsided, to know the difference.  

David Begley MBA, Begley Capital Investments, LLC | [email protected]

There's a lot of really "mixed up" language here.  Let's try to clarify...

  • Wholesaler "John" finds a property, gets it under contract, generally offering some amount of Earnest Money (EM), and - depending on the situation &/or location - a small, non-refundable option fee for a short due diligence period. 
  • John presents the property to potential Investor Buyer(s).  He includes the property address, Offering Price, high-level estimates and any terms (including deposits).
  • Investor "Bob" is interested in the property, performs the initial financial analysis, and determines this could be a good opportunity for him.
  • Bob notifies John he would like to view the property and sets up a time to do a walk through with his contractor.  (Bob also has the option to have a home inspection done, before committing to the property.)
  • Bob & John walk through the property with the contractor, and Bob performs any other due diligence he feels is required.  The contractor completes an estimate, based on the walk through and notifies Bob, who determines he wants this property.  (If applicable, the inspection report is completed as well.  If the contractor &/or inspector find anything net new, John has the option of going back to seller to either negotiate a lower price or kill the deal, losing only the small option fee.)
  • Bob notifies John he wants the property, signs an Assignment Contract with John and presents John with a cashier's check for the required non-refundable deposit.  That amount is deducted from John's wholesale fee, by the title company, at closing.
  • Bob is now the buyer of record for the property and will work directly with the seller.

Bob doesn't put up the non-refundable deposit UNTIL he has completed his due diligence and has decided to move forward with the purchase.  If Bob is a "real investor", he has this process down and can complete that work in just a couple of days. 

The other option for wholesalers, if a buyer wants the property taken off the market, but still needs the remainder of the Option Period to complete their due diligence is to have the "non-refundable" deposit held in escrow, with the terms clearly spelled out.  This is helpful in cases where there may be something out of the ordinary that needs to be fully inspected, prior to locking up the property.  It basically gives Bob the same ability to kill the deal that the any other buyer would have with the option period.  I would charge Bob exactly what the Option Fee would cost me to get out of the deal.  However, if there is something major - big foundation issues, lead paint, asbestos, sub-foundation leak, etc. - that may take more time to fully inspect, I'm not going to hold my buyer hostage. 

The key point is that the deposit isn't made, until Bob decides to buy.

    @Hattie Dizmond , great write up!

    However, this is not how some of these "non-refundable" wholesalers work. They don't allow 2 days for due diligence, the usual time frame is 2 hours. They also like to say: "Hurry or it will get sold fast! You need to act now!" . They also require a non-refundable deposit up front (after 2 hours inspection period). The only way to get out of their contract and get that deposit back is if the title of the property is not clear.

    Nick

    A deposit validates the offer.

    Let's not get mired in the details here!  The bottom line is why in the world should a Wholesaler be guaranteed a non-refundable deposit/fee if the deal falls through - even when a result of that Wholesalers ineptness?  A Realtor typically puts in many times more expense and time than a typical Wholesaler and they certainly aren't guaranteed a commission if a deal falls through.  Why should unregulated Wholesalers? 

    David Begley MBA, Begley Capital Investments, LLC | [email protected]

    @Nick B.  

    I haven't personally seen anyone requiring a non-refundable deposit prior to giving out the address and allowing the property to be viewed and inspected.  Now...that doesn't mean there aren't people out there doing that. 

    What I would expect is that anyone I offer the property to would want access to the property, prior to making any commitment on it, which is why I include a "Right to Show" clause in my purchase contracts. 

    Any time a wholesaler is requesting a deposit, prior to you seeing & inspecting the property, you should run away!  The order of operation should be as I laid out.  Now, if the deal is good enough, time is of the essence.  However, I realize that sometimes wholesalers "create" more of a sense of urgency than there truly is.  The question you, as the investor buyer, should ask is what is the end date for the Termination Option period (Section 23 of the TREC).  That's when the wholesaler gets locked into the contract and their EM is actually at risk.  Aside from that date, there should be NO urgency for the wholesaler.  If you lose out on the deal to another buyer, then you will move quicker next time.  :)

    The other thing I will say is (and I'm speaking very broadly here, with the understanding that some do), if wholesalers would spend as much time building relationships with a few serious buyers as they do building out their "buyer's lists" AND get serious about learning to analyze deals that are actual deals, this wouldn't even be a topic of discussion, because they would have people they trusted and who trusted them to present solid deals.  Unfortunately, there are a host of wholesalers that run this like an old school used car lot.

    @Albert Yamoah  

    A lot of great points made here.  The sole reason I make my investors put down a deposit, because if for any reason they decided to back out once my option is up or at the last minute (which happens) I am covered on my end and don't end up losing my earnest money.  It's a way for a wholesaler to protect themselves.  We assume if not all, majority of the risk, since we are dealing with the seller.  Now, language can be added in special provisions or a separate addendum out lining why the deposit should be returned to the buyer.  That is something I implement to look out for my investors.  

    @Hattie Dizmond , I probably was not clear enough in my example. They do provide property address and their ARV/repair estimate but the inspection period that they allow is extremely short (hours, not days). Also, the inspection period is not exclusive - other people may still buy it while you're waiting for an inspector and a contractor to show up in the next hour.

    I think the issue is refundable vs. non-refundable. I am NEVER putting up a non-refundable deposit.

    @Ross Schneider

    I'm still not understanding what the wholesaler needs to be covered for if it's truly a deal. 

    I agree with @David Begley . There is no reason that a wholesaler should get a guaranteed deposit, especially if they do not have a deal.

    AY

    Everyone...I'll go back to my previous statement...

    Wholesalers should spend more time building trust relationships with their buyers.

    What a wholesaler is trying to avoid is allowing a buyer to "wrap a property up" and then never close on it.  If the buyer never closes, the wholesaler never gets paid, and it's the wholesaler's EM that is lost.

    There are bad wholesalers.  There are also bad flippers who bit off more than they can chew.  If you're asking me to pull a property off the market, while you do your due diligence...that's not going to happen, unless I know you and trust your ability to consummate the deal.  If I don't know you, then - yes - that property is going to continue to be marketed, until you sign the Assignment Contract and pay the deposit.

    That is no different than what happens with a retail purchase. After I put contract on that house, it stays on the MLS. They can continue to show the house and even accept back-up offers. All I'm doing is saying I will continue to allow other investors to look at and evaluate the property, until you accept the assignment and pay the deposit.

    To all the wholesalers I would say that you should have at least one or 2 buyers you give first and exclusive access to any properties that fit their buying criteria.

    I also don't, under any condition, espouse the idea that a wholesaler should ever expect a buyer to make a final decision in a matter of hours.

    Ross and Hattie both did great jobs of answering the question from the OP.  The Wholesaler is taking all the risk and will not only lose his EM but also stands to damage his/her reputation and also lose out on potential profits.

    Nick is right with regard to big Wholesalers.  The investor space is so crowded that Wholesalers will require a NR $5000 or $7500 deposit.  The amount of due diligence is up to the investor, but it's limited to the first taker.  Because of the competitiveness and because of the aforementioned reasons (reputation with sellers, lost profit, lost EM), the NR deposit is necessary.  When the Wholesaler goes under contract, they cannot afford to have 2-3 end buyers going in and out of a deal.  So your options are to (heaven forbid) find properties on your own, find properties elsewhere or adhere to their guidelines.

    What I tell all of my investors is to make yourself available to as may sources of properties as you can.  Say no as often as you want, but by having options, you can ultimately find good fits.

    Sam

    @Albert Yamoah  

     2 clarifications for a nonrefundable deposit.

    1 Should only be after inspection, and at the signing of a contract, and of course contingent on clear title being delivered.

    2 How good of a deal matters not, in the above instance.  It could be a screaming deal, but that doesn't mean You as the buyer have the ability to close.

    @Hattie Dizmond so essentially in your circumstances the NR deposit is like a second earnest money deposit only given AFTER due diligence by an investor who wants to fund the deal. Is this correct?

    @Albert Yamoah  

    That's correct.  My investor buyers are not asked to post their NR deposit, until they sign the Assignment Contract and assume the role of buyer.  At that point, I step back from an active role in the transaction.

    I would have fully informed my seller upfront that a business partner of mine will be the end buyer.  I would have also provided written notice to the seller &/or their agent that I had assigned the contract and that "Bob" would be moving forward with them to closing.  As part of that notification, I would provide an email introduction to Bob.

    I don't want anyone to feel like they got the "bait & switch" pulled on them.  And, I want to make the path forward as easy for both my buyer & seller as possible.  Much like a reputable breeder remains a resource for a dog they have bred & sold, I will remain a resource for both my buyer & seller, throughout the remainder of the transaction.

    I get the remainder of my wholesale fee through the title company, at final closing.  I know there are wholesalers posting big NR deposits required, which represent the whole of their fees.  I don't think that is the right way to approach the deal.  As such, I don't get my final paycheck, until the deal closes.