First prospective wholesale deal in LA. Would love advice!

19 Replies

Hi,

I have just recently got into real estate, purchasing my first home last month. I still have some cash in the bank and am looking to invest it. I have a friend who has been wholesaling and flipping, and I asked him to let me know if he comes across any deals that we could partner on. He has come across a potential wholesale deal in Los Angeles, but has no cash. He is asking that I put up the earnest money and he will write the contract in my name with a 10 day contingency period. The earnest money would be $60,000. He hasn't gone into all of the details of the deal yet, but basically I would put up the earnest money, the contract would be in my name, he will do all of the work to wholesale it, and I will get 25% of the earnings once he sells the contract (he anticipates selling it for $100-150k). 

It seems to me that I am not really at risk, because the contract will be in my name only and we will have a 10-day contingency period at which point I can back out and get my earnest money back. Does anyone see any risk that I am not seeing? It seems like if it's a bad deal, then all I lose is the ability to use the $60k for 10 days, but if it's a good deal, then I stand to make a lot of money in a short period of time. 

I would appreciate any feedback, as this is my first deal in RE outside of buying my own home and I'm eager to get my feet wet. 

Thanks,

Kaivan 

If it's really a good deal, it may work out well.  If he can't find a buyer, and for some reason, talked you into waiting past the 10-day period. Then you'll end up with a house. You were looking for another property anyways, so I guess it would be okay.

If it's not a good deal... he tells you on Day 9 that there's a buyer for sure but he needs a couple more days. What do you do?

@Fay Chen Thanks for your input. Great questions! If he tells me that there is a buyer on day 9 but the buyer needs a couple more days, then I will ask the seller for an extension of my contingency period. My plan is to not sign off my contingency (no matter what), no one will talk me into that. If we don't get the extension and the buyer cant make the deal by day 10 then I will walk away with my $60,000 (hopefully). 

Since I have only done 1 real estate deal in my life before, I'm not sure how safe my earnest money is if I decide not to close. If I have a 10 day inspection contingency and decide on day 8 that the deal is not going to work, how likely am I to get my EMD back? Could the seller refuse to cancel the contract and tie up my money in escrow or do I have some recourse?

If I don't sign off the inspection contingency and tell the seller that I want to back out (before the contingency period is up) and they don't sign off on the contract, is the seller under obligation to either sign off the contract and return my EMD or sell the house to me? I guess I don't fully understand what leverage I would have in that scenario.

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Kaivan Entezarmahdi,Everything you just wrote about this wholesale deals stinks like dead fish.If your friend was a real wholesaler and flipper he wouldn't need you at all because wholesaling doesn't require earnest money actually being wired into escrow at all.If he actually knew what he was doing,he would have already obtained a long list of confirmed cash buyers who would be seriously interested in the property and contacted them to make sure they have enough cash available to pay him and assign the contract to them before the 72 hour window to fund escrow with earnest money expires in California.He would actually profit around 10k to 20k,not 125k for 3 days work without a dime ever leaving his pocket.I'm sorry but it sounds like he doesn't know the business or is trying to pull off something with your 60k in his pockets.I would seriously question him and his methods and previous successful transactions (if any) before plunking down a penny.Be Careful With Your Cash!!! Believe me,I am already in a trap with another clown who wanted to make me "Rich" and hasn't given me back a dime.

@Andy Cross & @Damien Dear The property is $2,000,000 so the $60k is 3%. It is a lot of money, but I don't think its unreasonable considering the price of the property. 

After reading @Brandon Battle 's comment and reading more about EMD horror stories in BP, I think I may sit this one out and see how it plays out without being involved before doing a deal with this friend. I have known him all of my life and trust him, so I don't think he is intentionally trying to rip me off, but I'm also not sure of his RE track record yet.

I was more wondering how much my risk would be in this scenario in general. Could the seller not sign off on the contract even if I ask to cancel the deal in my contingency period? What recourse would I have? I understand that if I don't sign away the inspection contingency, and if the seller doesn't agree to cancel the contract the money stays in escrow in perpetuity. Does this mean that the seller could not sell the property until the contract is dissolved and my EMD returned to me?

If he writes the contract properly,you will have a ten day inspection period in which to cancel the deal and get the money back.After that you lose it.Some wholesalers do take 10 days to sell but in no way shape or form would I invest 60k unless he already has a list of cash buyers that can actually afford 2 million in cash to pay you and the seller.Again,make him prove he has the knowledge and experience to pull off a deal like this.How could he have no money of his own if he is really good at this business? Ask yourself that question and then ask him about it.He really shouldn't need you if he knows what he is doing is my point.Protect yourself and good luck.

@Andy Cross Yes it does, but it could be a probate (typically ask for 10% of purchase price as EMD, but sometimes negotiable). It also depends on the purchase price though. It doesn't seem like @Kaivan Entezarmahdi is involved in the actual transaction, but if his friend is stating he's going to make 100k on the assignment, this might be a high end purchase.

Also, in general, there are a lot of different ways "to drag it out."  The most important thing, as @Kaivan Entezarmahdi mentioned, is not signing a "contingency removal" (C.A.R. From CR). That form is the "do not sign until you are 100% committed to the deal" form.  Even if you offer with 0 days inspection, you still have to sign the CR to officially go non-refundable, and you can still probably get that back.  Other than that, you are completely protected.  All you need to worry about is the delay it takes for your check to get mailed from the escrow office to your home if the deal cancels.

@Fay Chen on the C.A.R. Extension there is a section for extending your contingency period.  Even if you don't get the extension signed and you run into the end of your contingency period, your money wouldn't be gone until you signed the CR.

@Zachary Myers , so @Kaivan Entezarmahdi can go longer than 10 days without an extension and still get his deposit back, as long as he doesn't sign the CR? That makes the "10-day rule" sound like it doesn't have much legal binding power. Can the seller keep portions of the deposit for going beyond the 10 days? Converting it into something like an options contract? Or argue that the delay caused them financial loss in court to keep part or all of the deposit?

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@Fay Chen it's not the right way to do it but pretty much yes. However, the seller can send you a "notice to perform" (performing meaning to remove contingencies). There is also a "demand to close" that is the same as a notice to perform except specifically aimed at closing escrow.  From the time you receive the notice (or demand), you have 3 days before the seller can take any action. A seller can send the buyer a notice to perform 7 days into your 10 day inspection period (note the 3 day gap) and nip it right away, but very few do. After those 3 days the seller has every right to cancel and go after your money. Keep in mind that going after the buyer's money (even if seller has the right to) and getting it are two completely different things. Main point: receiving a notice to perform is when you start getting into the "at risk" zone, not necessarily the end of your contingency period but they are related. Also, I do not recommend or advise dragging it out as it may become stressful, risky, and it may be viewed as bad business...but knowledge is power and these rules are good for both buyer and sellers to know.

So Ill simply write how I would structure this wholesale deal using an assignment contract and double closing.

Assignment-  You found a good deal in which you believe you will make a big profit. Now on a 2 mil deal I would know for sure if have a buyer lined up. Hell most of the time even before I put it on contract I present it to my best buyer so I know I wouldnt be wasting the sellers time and if he likes it he goes to inspect it and makes me an offer. If it works out for me then I create the contract between the seller and I, then I  have my buyer look it over and immediately assign it over to him once he approves. So it would look something like this,   property is for sell at 100k and I have a buyer that has offered 115k after his inspection,   so I would then assign the contract between the seller and I over (after terms have been negotiated) to the buyer for 15k, he would then be responsible for the emd and closing. Simple. and risk free if done correctly and I get paid after closing 15k

Double close- So again I would still have a buyer lined up because I don't like wasting my sellers time. But with the double close you would be responsible for the EMD and depending on the clauses in the contract if the buyer (you ) defaults on the property you can loose that EMD. So at closing you would then close on the contract between you and the seller then shortly after you would then re sell the property to your end buyer for your profit . So it would look something like this, you find a good deal on a property for 100k your buyer wants it for 130k. You have the first contract signed between you and the seller for 100k and the EMD in escrow with the title agency and another contract between you and the end buyer for 130k. At closing you have to close on the contract between you and the seller fist, paying closing cost and taxes. Now you might say I don't have 100K+ to close, so you would use transactional funding to fund the close for a short period. After you close and own the property you would immediately re-sell to your end buyer for 130K so now you just made 30k minus closing cost and taxes and the fee's for transactional funding. so maybe 25k

If your partner doesn't know these methods DONT do the deal. Let me know if you have any questions.  

This would be a no go for me!  60k is too much for any wholesaler to put down, especially without a long list of certified cash buyer's whose criteria match the property your friends speaks of. If he can't go half on you with the earnest money then he's not ready to deal with a 2 mil home.  I believe we all should stay in our own league and work our way up. Some people try to structure their presentations in a way that might sound pleasing, but it isn't always what it seems. 

I wish you many blessings. 

Originally posted by @Kaivan Entezarmahdi :

@Andy Cross & @Damien Dear The property is $2,000,000 so the $60k is 3%. It is a lot of money, but I don't think its unreasonable considering the price of the property. 

After reading @Brandon Battle 's comment and reading more about EMD horror stories in BP, I think I may sit this one out and see how it plays out without being involved before doing a deal with this friend. I have known him all of my life and trust him, so I don't think he is intentionally trying to rip me off, but I'm also not sure of his RE track record yet.

I was more wondering how much my risk would be in this scenario in general. Could the seller not sign off on the contract even if I ask to cancel the deal in my contingency period? What recourse would I have? I understand that if I don't sign away the inspection contingency, and if the seller doesn't agree to cancel the contract the money stays in escrow in perpetuity. Does this mean that the seller could not sell the property until the contract is dissolved and my EMD returned to me?

 AH...yes...$2,000,000. That's the part I was missing. Totally makes sense. Thank you!

If you cannot close the deal, your $60k is locked in escrow until there is mutual agreement between buyer and seller to cancel and RELEASE IT TO YOU.

Escrow cannot just give you your money back when it cancels, despite contingency periods.

I do not even require an EMD for wholesale/investor deals for this reason, but there is no need to have such a high EMD on a wholesale deal, unless the seller has concerns or there are non-investor savvy agents involved making "traditional" offers.

I have a ton of end buyers in my network, send me the property and lets skip you risking any money at all and close the deal. :)

Hi Kaivan

The majority of EMDs are about 1%. A 3% EMD is often the sign of broker advice to the seller thinking that a higher EMD % will make the sale more secure. However, the important thing to keep in mind is that whether the EMD is 1% or 10%, the seller receives exactly the same amount of money at close of escrow.

Hope this helps.