Buying from a wholesaler - First Time

21 Replies

Yesterday, a wholesaler and I verbally agreed for me to buy a property from him.  I understand that since it's verbal, anything can happen until we sign a contract, which is supposed to happen this evening.  I understand the concepts and procedures of wholesaling on a higher level pretty well (assignment, double close, etc), but I'm not sure of the EXACT steps to take in the process.  I don't want to get this process wrong, be scammed, or lose out because I did something wrong.

After we talked, he texted me and said we can meet tomorrow (today) and get the contract signed and he needs $1500 earnest money deposit (EMD).  Although he didn't say it directly,  it seemed as if he was asking me to give HIM $1500 EMD.  I may have misinterpreted it, but I know buyers are not supposed to give earnest money deposit directly to a seller, so I asked what title company does he like to use so that I know where to drop the EMD off at (I have no preference, and he has more experience).  We then decided on a title company with no problem.   Am I being paranoid for no reason?

While talking to him, I asked what method of closing he wants to use (assignment, double close...) and he was unsure.  He definitely understands more than I do and knows the pros and cons of the methods, but just says he hadn't decided yet.  So I want to be prepared for either.

He said that he'd meet me with a contract so that we can sign it.  But normally when I buy a house, I make verbal offer, make a contract that reflects the offer, the seller and I sign it, I take it to a title company and deposit EMD and go from there.  I've never had a seller make a contract for me.  Is this normal or does it not matter?

I've also read that wholesalers should take a nonrefundable deposit to mitigate against end-buyers backing out. If he asks for this, how and when do I give it to him? Directly after signing the contract? After depositing EMD with Title Company? Is it not needed if I deposit EMD with Title Company? Do these serve the same purpose or two different unrelated things (EMD vs Nonrefundable deposit)?

Any help or explanation of how you personally do this would be appreciated. Thanks!

@Ray J. Often, legitimate wholesalers and buyers build a trusting relationship because they work together again and again.  Hopefully, you'll get to this point with this guy.  But in the meantime, and especially if they do not come recommended by investors you trust, you are wise to be a little cautious.   Even with a signed contract things sometimes fall apart, so maybe you could put the assignment fee in escrow with the title company to be paid to them once the deal closes or if you bail on it.

@Larry T. Thanks for that explanation!  I think I will do exactly that, put everything in escrow myself.  If he disagrees, I'll take that as an invitation to find a different deal with someone who can accommodate this.  I don't have a large reserve of cash yet.  I have operating cash reserves for managing my rentals, but this deal will be almost all of my "shopping" cash, so I need to be very cautious.  I'll do it this way until I can get more comfortable navigating this procedure or until I can build a trusting rapport with him or some other wholesaler.  

@Daniel Jahn No problem! I'll update once I've done (or not done) the deal, or if I have any more questions during the process.

@John Thedford That's exactly what I've always thought.  However, while searching for an answer for my questions, I came across lots of threads geared toward wholesalers saying to collect a non-refundable portion of their fee to help guard against people just bailing. Sounds fishy to me, but according to the threads, a lot of wholesalers do it.

Originally posted by @John Thedford :

Non-refundable EMD are not the norm for the RE industry.

That is incomplete information.  EMDs are not willy-nilly refundable.  An assignment contract can have the same stipulations as any purchase and sale contract for refunding EMDs.

Originally posted by @Ray J. :

@Larry T. Yes I understand how EMDs work, but I was specifically referring to "non-refundable deposits" required by some wholesalers, according to what I've been reading here on BP.  They seem to be a different thing than EMDs, and there seems to be debate about them.

one example:

https://www.biggerpockets.com/forums/93/topics/154...

A wholesaler wants to make sure that you can and will perform. But the "non-refundable deposit" is the same thing as EMD and it can have the same stipulations. For instance, there might be an inspection period.

But that said, when it comes to D class neighborhoods and houses, a wholesaler doesn't want to deal with tire kickers. There are plenty of cash investors who can make a spot decision and would be fund the the non-refundable EMD because they've done this before, they know the risks, and they are serious.

@Ray J. the wholesaler writes their own contract, so you are agreeing to their terms which will be very biased to them. This is different than a broker to broker transaction, where you are often using a standardized type contract that has protections for both parties. 

I would avoid giving the money directly to the wholesaler. They could literally take your money and walk off. You would be left trying to locate them and take them to court. Their contract wording may even call it a fee rather than deposit, which means no recourse if they fail to perform.

If they insist on getting the money directly, then write a check so at least you can reverse payment if something goes wrong.

If you are working with a wholesaler for the first time I would have your attorney review the contract. The closing company may even have an attorney that will look it over for you. 

It is strange he doesn't know whether it is an assignment or double close. I would assume that changes the contract. 

If the unlicensed broker demands a non-refundable deposit ask to see his contract. Is he giving the seller a non-refundable deposit? Strange how these guys want to write their own rules while skirting licensing laws. 

@Ray J. @Joe Splitrock Is correct. If he's assigning the deal to you then the only contract you sign is the assignment contract. If he wants you to sign a different purchase contract then he needs to be double-closing. It is very odd that he says he doesn't know which he wants to do. To me that screams either someone who doesn't know what he's doing, or he's trying to pull something.

I don't think you should sign that contract without having your lawyer review it, or at the very least, reading it very carefully yourself.

As for the deposit. Here in Canada we just have "deposits", we don't use the term "earnest money". They are normally refundable until all conditions have been waived and then they are non-refundable unless title can't be conveyed. If they were fully refundable it would completely defeat the purpose of a deposit.

Considering this is your first time dealing with this guy and you have some legitimate concerns, he should have no issue at all with you placing the deposit with the title company.

@John Thedford Ahh! Comrade John! How are things in the Soviet Republic of Florida? LOL! I can't believe a state that is supposed to in the "Land of the Free" won't allow people to sell things they own.

Thanks @Joe Splitrock , @Doug Pretorius , @John Thedford

It's going to be a double close, and he has no issue with me depositing everything into escrow.  And he offered to pay half the closing costs of our transaction, in his words "because we're going to be doing more business together."

A little background, if interested. If not, skip this paragraph. I met him at my local REIA meeting Thursday.  We talked a while and even talked a lot more afterwards (a large portion of meeting attendees met at a restaurant after the meeting).  He is very knowledgeable and I can tell he has experience, but he admits being a little "rusty" because he's been out of investing for the last 10-15 years due to finding a good job and becoming complacent/lazy.  Now, he decided he wants to get back into it (a few months ago) and he knows and works the same areas that I do.  At the meeting, he had a deal to push, and he was asking questions about the fact that it has a boiler and what people's opinions were about that.  Friday, he told me about the deal in question literally an hour after he got it under contract via email with pics, but no price.  I believe that to be true because it's a MUCH better deal than the one he was pushing at the meeting and would have been snatched up right away.  I didn't respond to the email, but he called me Saturday morning to tell me I HAD to see this place and that he wanted to give me first dibs before he marketed it to his buyers list, based on the fact that we hit it off pretty good the night of the meeting.  Met at the property Sunday afternoon, and I said "I wan't it".  We shook hands and he agreed he would cancel his later showings and I would get the deal (but no contract).  Maybe the facts that he's "rusty", it was a brand new deal, and he hadn't even put his marketing together yet could be why he wasn't sure how he wanted to close yet?  I don't know.  I'm a pretty good judge of character and he seems like a straight up guy, but I'm of course trying to be as cautious as I can because I don't know him. (Although, during my amature P.I. work, I found that my cousin knows his wife, but I didn't tell him that, just in case...!)

So, instead of us signing an agreement yesterday, he says his transaction with the buyer is going through title search now at the title company.  This brings me to a different question.

I met him yesterday to verify the electricity was working (there was an area outage the first time I went by) and I was also ready to sign a contract because I want to tie the property up.  But, as I said, his deal is supposedly with the title company now.  He said he has a Purchase Contract for our deal, but he doesn't want himself or me to sign it yet, because he needs to make sure his first deal clears title and everything just to be cautious.  

My question(s) : for a double closing, is it possible/legal to have a signed Purchase Agreement between the wholesaler and me BEFORE he even owns the property? Or must he wait until he owns it or, like he said, at least knows the first transaction will have a high probability to close?  Could it be him also just trying to be cautions, like he told me?  How is this usually done?

@Ray J. sure his contract with you is just subject to the deal with the seller closing. In other words if his deal falls through, it voids your contract. 

As far as you being a good judge of character, everyone ever scammed insisted they were a good judge of character. The point is if you are being scammed, you wouldn't know it, no matter how good you are. That is why it is best to verify everything and hold money in escrow to protect yourself. Sounds like you are doing everything right. Good luck.

Originally posted by @Joe Splitrock :

@Ray J. ........ everyone ever scammed insisted they were a good judge of character. The point is if you are being scammed, you wouldn't know it, no matter how good you are....... 

My point EXACTLY! Those are almost the exact words I use to explain this to other people that I know! I say I'm pretty good because I haven't been wrong (with a meaningful impact) yet, BUT I don't take that fact for granted because it only takes being wrong once...

Thanks for your response and encouragement.

@Daniel Jahn To follow up, I completed this deal a couple of weeks ago and it went smoothly.  As suggested, I was able to deposit all money into escrow to be held until after closing and everything was finalized.  

As a side note, the owner/resident of the building was one of the two guys who co-wrote the song "When a Man Loves a Woman".  He said he's been living mainly off of the royalties from that one song for the last few decades.  That's the ultimate passive income IMO!

Hey @Ray J. I came across your post. I'm wondering how does buyer usually fund the deal to buy from wholesaler? I guess how easy it is to obtain a loan from the lender or it has to be cash or hardmoney? Thanks 

Originally posted by @Jack Yen :

Hey @Ray J. I came across your post. I'm wondering how does buyer usually fund the deal to buy from wholesaler? I guess how easy it is to obtain a loan from the lender or it has to be cash or hardmoney? Thanks 

Short answer: I say cash, but I think it probably depends on the market you're working in. 

Long answer: From my experience and in my market, we usually do cash. Sometimes, we can pull off a contract or other type of owner assistance. Almost never a bank. I'm not sure, but my guess is that it's this way because properties in my market have very low prices. Some people probably use hard money or private lenders to get started, but our prices are too low for that to be the norm here. I just bought a house today for $8.5k, for example... 8 POINT 5, not 85. And the wholesaler made $2k of that! It needs about 20k of work, ARV about $45k. (Will rent for $675 tp $750. A bank wouldn't have sneezed at this deal. HML could have probably worked, be we just happened to have the cash.

Nowadays, we just use the money from our refis #BRRRR

@Ray J. Thank you for your response. It makes sense. Our market is probably somewhere in the middle in terms of the price. I feel the BRRRR will be perfect in this situation and I just have to be creative to make it work :) Thanks for sharing your experience and it's very helpful.

Originally posted by @Ahmad D. :

@Ray J. when the wholesaler makes a profit, is it mainly through the assignment (price difference) or is it a  separate commission ?

Just curious how that works out contract wise

It's normally just through the price difference, minus whatever their expenses were. 

To make extra money, some wholesalers offer other services that an end buyer or seller might use, but the contract assignment fee or double close price difference is the "wholesaling" part of their earnings.