Wholesaling and the nonrefundable deposits
Rental Property Investor · Denton, TX · Member since 2014 · 63 posts · 21 votes
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.
There's a lot of really "mixed up" language here. Let's try to clarify...
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. Thank you for that great step by step. Wondering if you can answer some further questions:
1. Typically, how much is offered as EMD and the option fee? Range? I know it probably depends on area.
2. How long should I make my due diligence period be for?, i.e., the time before I'm locked in?
3. As one is ramping up, she will have more limited buyers, may have paid too much, or has made some mistakes due to learning curve, what are some strategies if getting close to the end of the option period, but the wholesaler hasn't found an investor buyer yet?
4. You may have said this, but just to be clear: Once I find an investor and he does his due diligence, his deposit becomes non refundable AND I should make sure that it's enough to absorb what I would have on the line if the deal doesn't close due to the investor?
Thanks so much.
@Hattie Dizmond. Thank you for that great step by step. Wondering if you can answer some further questions:
1. Typically, how much is offered as EMD and the option fee? Range? I know it probably depends on area.
2. How long should I make my due diligence period be for?, i.e., the time before I'm locked in?
3. As one is ramping up, she will have more limited buyers, may have paid too much, or has made some mistakes due to learning curve, what are some strategies if getting close to the end of the option period, but the wholesaler hasn't found an investor buyer yet?
4. You may have said this, but just to be clear: Once I find an investor and he does his due diligence, his deposit becomes non refundable AND I should make sure that it's enough to absorb what I would have on the line if the deal doesn't close due to the investor?
Thanks so much.
1. Typical EMD is generally $500+, depending on the purchase price of the property. In North Texas, median price is probably around $200k, so $500 - $1000 would be typical. More savvy sellers, who truly understand that you are selling the property to someone else, may ask for more. Some REO properties, high-end properties, etc. may expect more. Also, my understanding is that there is a standard option period in the purchase contracts in some states. I can only speak for Texas. In Texas, we don't have a "standard option" period. You have 2 choices...include an inspection period as a contingency or use Section 23 of the TREC contract. Using the language already in the TREC contract typically gives they seller less angst than including a contingency, even though the net result is the same.
2. I try to allow myself 7 days, and I usually right that as Business Days, so it gives me a weekend in the there.
3. You can always ask for an extension of the option period, just make sure you execute an addendum so you have that in writing, if you do. Also, the option period in Section 23 of the standard Texas contract is a "any reason or no reason" clause. Meaning, I can cancel the contract, during that period of time, for any reason or no reason, and I only lose the option fee, which is generally $100 or less. With that said, if you have a good deal, you will have no trouble finding a buyer.
4. Actually, I don't get a deposit from an investor, UNTIL he/she has completed their due diligence. Just like you don't hand over an EMD check, until you have a signed & countersigned purchase agreement, I don't get a deposit from my investor buyer, until we have agreed on the offer price and both signed the Assignment Contract.
@Hattie Dizmond Thank you so much. There is a wealth of knowledge here and it's nice to see that people are willing to share.
NEVER EVER work with a wholesaler asking for a non refundable deposit. It's just dumb. I have never heard of one asking for it ever in Memphis.
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.
I love everything you posted here. very good business practices, in my opinion. I don't like someone feeling like they were part of the ole bait and switch. wholesaling can easily become that.
Never sign a non refundable contract with a wholesaler and always give your refundable EMD to the title co!
I was funding a deal for an investor that was brought to us by a wholesaler. I explained to the wholesaler that the deal needs to be delivered by a warranty deed and I'll fund the deal. Unfortunately the investor gave a $500.00 deposit to the wholesaler and he was unable to deliver with a clear title. He then tried to get us to fund the deal that he would transfer by a quit claim deed. After I explained to him we needed a clear title to fund this deal he disappeared and kept the investors deposit!
This "wholesaler" burned a bridge over $500.00!
I have no problem with professional wholesalers but unfortunately there are very few of them!
As a professional Wholeseller, I take a deposit that is only contingent upon me providing clear and marketable title. The corner stone to any deal is title. If the title is dirty then you don't have a deal and I will return the deposit. In two Just one reason why I double close deals.
But if that buyer wants to back out for what ever reason after they have committed to do it then I am probably going to lose my EM and that deposit covers that cost. I am not unreasonable but you signed a legally binding contract.
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.
IMO, those are the offers you steer clear of, point blank. I see them now and again myself in the Phila as well as other housing markets on both residential and commercial pitches. People are going to do what they feel like. I don't get hung up on it. If you want to give them a chance then meet in person or have a phone conversation about it. Explain that you would like to do business with them but WILL NOT give them $2500 or $5000 EMD within 48hrs... If they have a negative reaction towards you then there's your answer, cut ties and keep it moving. If they come to their senses then you go forward with them. I wouldn't spend too much time on it though. There are plenty of deals out there being offered by reasonable wholesalers in your market and if that doesn't cut it then you will find your own. Where there's a will there's a way. Make it happen! That's my Lincoln on it.
Kudos,
Mary
@albert
1) to filter out the real buyers from the tire kickers
2) if I were a wholesaler I would have non-refundable deposit too especially in this climate where cash is available and deals are at a premium. I'd only want to work with people who are ready to close on the property and not just tying it up to take off the market and then finding a solution. Otherwise there's no recourse for the wholesaler to get the time back that they lost.
The irony of this absolutely murders me...
@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
I don't need a deposit from the people that I know, if I know that they would close.
I would take a deposit from a buyer that I have not worked with before. And I would not even look at a buyer that wanted to put my deal under contract without EM that equals at least 5% of the deal's value.
If you are a serious buyer and I'm a wholesaler, you would not ask me to sign the PA with you and give you 5 days inspection period. Serious buyers do not do that, they understand that you, as a wholesaler, do not want to have them control the property for 5-7 days before they do an inspection. When the deal is good and has a good margin, I go and look at the property myself or my workers do and we put it under contract without contingencies. What could possibly be bad with the property that you can't see? Nothing.
Maybe cracked foundation that is covered with drywall or bad wiring/plumbing, which is all fixable. Just spend a little bit more time than 5 min and inspect the property well. You do not need to be an expert builder or inspector to do that. BTW to become a ''certified inspector'', at least in MN, you need to complete 3 days course and you will get an inspector's certificate :-)
I would not execute a contract with an investor-buyers if they had an inspection contingency in the PA. I would tell them, ''If you like the property, go inspect it and then we will execute the PA without contingencies with none refundable EM, assuming there are no issues with the title'' . EM will be delivered to the title Co or given to me as a cashiers check at the execution of the PA.
If investor does not give you EM, that means that they have nothing to loose except their reputation if they don't close. They understand, that you would not sue them for ''specific performance'' and if you do, it will take 3-4 years, plus attorneys' feed, etc; even if you win the case 3-4 years later, it's not worth the time and effort, lick your wounds, and don't step on the same rake any more :-)
The wholesaler asking for a non refundable deposit has nothing to do with whether or not they have a good deal. It most of the time will be a fantastic deal (saying most of the time as I can't speak for all wholesalers). It is to do with the buyers.
If a buyer has agreed to purchase a property, but know they have a refundable deposit, it is very easy for them to pull out with no losses except maybe a relationship with a good wholesaler. They won't pull out because the deal is bad, they will pull out for their own reasons. Perhaps they couldn't get their finances sorted, perhaps they just changed their mind.
If they pull out at the last minute, the wholesaler won't always have time to suddenly find a new buyer and may have to end the contract if they cannot afford to hold onto the property for a while. Not only do they then lose their own deposit, but they also lose a tone of credibility for doing so with sellers and agents alike. That is why they need enough to cover their monetary losses, and also some compensation for their losses to do with relationships/reputation and/or other costs. Sometimes that compensation may allow them to hold the property for a small amount of time after the settlement to allow them enough time to find a new buyer, if they choose to do so.
So that is why the wholesaler not only asks for a non refundable deposit, but also asks for a higher amount. Besides, no buyer should ever agree to purchase a property and pay a deposit without having done their due diligence beforehand, and if they change their minds afterwards, why should the wholesaler be the one to lose?
Albert as newbie my self that makes sense now if I was the wholeseller and you were interested in the deal why not negotiate on a non refundable fee after you preform your own due diligence but as the wholeseler I feel like if you are going to have other investors looking into the deal then I should give u a time frame to due your due diligence so im not wasting time on your yea/nae am I right
@Hattie Dizmond perfectly said and outlined.
@Tavonte Battles that would be dealing with another wholesaler. As an investor I would perform due diligence and give wholesaler yea/nea.
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.
1. In hot market's deposits are more common.
The reasons for deposit are:
2. In my experience, serious investors pay the deposit. Our top buyers have no problem paying the deposit. These always end up being smooth transactions. The only time we have had issues with buyer is when buyer renegotiates deposit or we allowed them to contract the property with no deposit.
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.
I agree with you but your not in a position of strength. At least not as a new investor. Convincing someone the contrary is a uphill battle. Without deposits we couldn't contract deals but that doesn't account for the deposit going hard (non refundable) without allowances for due diligence.
It can't be about the option. Those costs are much lower. Some are even 0 out of pocket.
It's not because the market is hot. If that was the case for every buyer that passes there be 10 right behind them. Have you been to a wholesale showing? In DFW their like REIA meetings.
I hate to say it but it doesn't show a buyer is serious either. A serious buyer comes with more than just the deposit.
So what's left? Lots of things and none are in your favor. Not exactly unicorns and rainbows right.
Instead of trying to sway a wholesaler continue your education, work on your self marketing and look for ways to create your own leads. Invest in yourself and you will succeed.
Thanks @Lamar Cannon and @Alberto Camacho
Much has changed since this post. Most newbies are wholesalers (not to say that most wholesalers are newbies). The numbers I was given were usually far from actuality. That being said I use the MLS and Investway to find and analyze deals. Thanks for your guidance. I appreciate this.
fyi I lost my deposit to Net Worth Realty. They asked for the non refundable deposit right after my first visit to the houae and wanted a cashiers check. Drove me to the bank literally. Ive been asking for a W9 since they want to keep the money but no W9 and no check they said they would refund. They strung me along for a few weeks saying they would give back my deposit.
@Carolyn W. "...wanted a cashiers check. Drove me to the bank literally. " That should have a tip right there! That sort of thing is just never done in a legitimate real estate transaction.
Wholesalers don't adhere to laws and norms because they're unlicensed and for the most part, are operating illegally.
Had you done that deal with a Realtor, your deposit would have been in escrow with an attorney or title company and those funds would not be released without an agreement signed by you and all parties. For this reason, even in cases of egregious violations of contract terms, deposits are split between the parties.
Had you been represented by a competent agent, he would have pushed back against the demand for the non-refundable deposit.
Finally, just because someone asks for a non-refundable deposit doesn't mean you have to agree to it. In any negotiation, sometimes you should just say no.
@Hattie Dizmond @Lamar Cannon Looking for advice with regard to a non-refundable deposit with a reputable wholesaler in my region.
This is my first deal with this wholesaler and I've been wanting to do a deal with them for the past 2 years. We agreed to a non-refundable deposit of 5k after we did our due diligence, initiated the AOS and knew we wanted the property. Side note - if you are a cash buyer and working with a legitimate wholesaler, non-refundable deposits are perfectly fair and should be expected if you want to lock up an offmkt deal for weeks.
Our 5k deposit is now held in escrow at a local title company. The issue is the closing date on the AOS is on or before today, the 25th. We've been trying to close for weeks, have the cash on hand and are eager to close but the seller is having trouble vacating an existing tenant. From the wholesaler side of things, would you consider this to be a reasonable breach of contract since they are unable to get the seller to close by the agreed upon date? We still want the deal, we just want the property delivered vacant as it was agreed upon before initiating the AOS. If this continues and they are unable to hold up their end of the bargain, can we receive our deposit back?