How to deal with wholesalers
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
How to deal with wholesalers
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If I am understanding this correctly there is a 2nd wholesaler trying to make money off of a property that another wholesaler has tied up???
If this is the case you need to be working directly with the guy who has the property under contract.
This is why I never let other wholesalers shop my deals. They can bring me a buyer only "if we prearrange a fee" for them.
I understand what this guy is trying to do.....it is not uncommon for newbie wholesalers to get into real estate and start trying to shop other peoples deals even if they don't have permission.
Bottom line, get in touch with the first wholesaler. The second guy should have an arrangement with him and be getting paid through him, not by you.
Oh, and don't give him any earnest money. I'm sure you know this, but only give your escrow money to the title company, not some guy trying to shop another wholesalers deal.
44 Replies
Originally posted by Michael Lauther:
[b]I have made an offer on a property through a wholesaler.Nomenclature is important here. If you made an offer *through* a wholesaler, that "wholesaler" looks like a broker real fast.
You don't have proof of equitable title? Is there not a contract to be assigned? If not, how exactly is this wholesaling?
- 14yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
The wholesaler is in charge of this transaction as should be. You need to follow their requests. Sign his assignment contract. You can negotiate the EM if they are flexible. I would put down no more then $2k but as a wholesaler I always like to get as much as possible, it helps keep you in the deal.
Curt Davis - KAIZEN Realty538 Reviews - Wholesaler · Washington, D.C · Member since 2011 · 449 posts · 94 votes14y
Mike - if you believe that the property is worth what your paying for it, then why are you worried about how much the wholesaler is selling it for? He should have advertised it to you X amount of dollars and that included his assignment fee. If that was the case then you knew what you was paying for the property and it shouldn't matter what he paid for it. The wholesaler is getting paid for putting the deal together, as he should.
Sounds to me like your upset that he's going to make 10k (5k assignment + EMD) for this deal.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Originally posted by Mike Nelson:
Mike - if you believe that the property is worth what your paying for it, then why are you worried about how much the wholesaler is selling it for? He should have advertised it to you X amount of dollars and that included his assignment fee. If that was the case then you knew what you was paying for the property and it shouldn't matter what he paid for it. The wholesaler is getting paid for putting the deal together, as he should.Sounds to me like your upset that he's going to make 10k (5k assignment + EMD) for this deal.
I'm with Mike, why do you care? If you buy a TV for $500 do you care if it's marked up 500% if you thought it was worth $500? You shouldn't... you paid what you felt it was worth... welcome to capitalism.
He did the leg work to find the deal, he put together a deal, he deserves whatever profit he can convince someone to pay him for the work he has done.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Thank you all for your thoughts:
Jeff, I responded to an add on zillow and I was not privy to any contract other than the word of the wholesaler that he had equitable title.When I inquired he sent an agreement stipulating that I was obligated I pay a fee on any property bought from a particular party.(this party turned out not to be the owner of record of the property I wanted)Since I buy and have offers on several properties in this area I refused to sign such a limiting agreement. It turns out the party who was billed as the owner was in fact another wholesaler who had a contract to purchase or in some way control the property in question. This sent up red flags for me so I located the owner through a property search and found he in fact is in some arrangement with the 2nd wholesaler.
I will now attempt to deal directly with the owner of record and negotiate a deal that would allow me to pay directly to him and he could compensate the Wholesaler as his agreement with them.
My primary concern is since the second wholesaler wanted to do a double close after receiving a $5,000 earnest money deposit in his name, there was no simple way to make sure I would get the property other than to put that money in escrow with my title company, otherwise if the recorded owner reneged It could be hard to recoup my deposit.
I would agree to take an assignment of the contract but no contract was offered.what is the normal arrangement when dealing with a wholesaler?
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Kurt : thank you for your practical suggestion on EM.
Mike and Nathan: I understand that wholesalers are entitled to earn any profit they can and it is not necessary that I like it. but when multiple parties are claiming to represent the owner one of which was totally unknown to the owner, and advertised the property on zillow as if he represented the owner I become concerned.I will admit that the confusion surrounding this opportunity has caused me to rethink my evaluation of this property.
And Curt, you are correct in that the wholesaler is in charge of the transaction, but when trust issues arise it may be better to walk away and go on to the next deal.
If I am understanding this correctly there is a 2nd wholesaler trying to make money off of a property that another wholesaler has tied up???
If this is the case you need to be working directly with the guy who has the property under contract.
This is why I never let other wholesalers shop my deals. They can bring me a buyer only "if we prearrange a fee" for them.
I understand what this guy is trying to do.....it is not uncommon for newbie wholesalers to get into real estate and start trying to shop other peoples deals even if they don't have permission.
Bottom line, get in touch with the first wholesaler. The second guy should have an arrangement with him and be getting paid through him, not by you.
Oh, and don't give him any earnest money. I'm sure you know this, but only give your escrow money to the title company, not some guy trying to shop another wholesalers deal.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Dan: thanks for the advice.
I have no problem taking the place of the wholesaler who has negotiated a contract. should't a copy of the contract that I am assuming be disclosed to me. Sure, I would then know that the wholesaler is making a profit and exactly how much, but that would not by itself keep me from following through.I have never done business this way but I am willing to learn.
Michael,
There are several ways a wholesale deal can be closed.
On an assignment of contract you would see the original contract between the wholesaler and seller. You and the wholesaler would agree to the assignment fee and at close title will cut the wholesaler a check for the fee.
Another route that the wholesaler could take is to double close the deal. This is where there are two separate contracts involved. There is a contract between the seller and wholesaler then a separate contract between the wholesaler and buyer (You).
With the double close you would have no knowledge of the previous contract. In this case, the wholealer pays closing costs between the a-b and b-c transaction, but it protects or hides the spread. Typically I use this approach if I'm working with a buyer I don't know well or if I am making more than 10k on the deal.
- Flipper/Rehabber · Mobile, AL · Member since 2010 · 138 posts · 55 votes14y
Dan, good explanation for Michael.
Michael, I'm not sure whey they lashed on you up there. In your very first post, you never made any mention of having a problem with someone making money - they had their defensive guns drawn it seems.
It's cool that you've never done a deal in this fashion but are open to the concept -- you're the kind of investor that will be good to deal with and can do continuous business with a wholesaler and will understand their value in the marketplace.
Best of luck!
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
There IS alot of confusion out there. I've been mainly buying REO, SS, and bankruptcy court properties.
I did my first deal with a wholesaler recently. She assigned me the contract for a reasonable fee, a standard practice especially for wholesalers who don't have the cash to double-close. She wanted to be paid her fee prior to closing, when we executed the assignment document. I said absolutely not, what if the seller flakes out and refuses to close. She said she would then return my fee (I didn't know her from Adam at that point), and that she was taught to do it this way by her mentor, a major wholesaler in the area, and that if she didn't collect the fee I could cut her out of the deal. (I can't even think in such devious tems, but I guess it happens.)
I suggested putting her fee on the HUD, but she didn't want her seller to know what was going on, thought he might get upset and abort the whole deal. I was to be introduced to her seller at the closing as her "money partner".
I suggested that the title company could hold the money and disburse it to her after closing. The title company couldn't do this, they told us, but only after I'd cut a cashiers check to the title company. So it was pretty frustrating. Our "workaround" was for me to let her hold the cashiers check until after closing, at which time I exchanged that check for another made out to her.
You wholesalers, what went wrong in this scenario? How should it have flowed?
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Thanks for the encouragement Brooks, Lashing out is never a problem for me I'm used to it, after all I am a Married guy.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Good Morning David, your experience tells me that I am not over reacting. If I continue on with this I will only work with the owner of record. I will post the outcome.
- 14yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Michael -
David's recent story and your account on this property are great illustrations of what is happening across the entire spectrum of real estate investing right now. There are more people getting involved which is not a bad thing, but so many have very little experience in business and relationship building. Too many people are bringing a 'scarcity' mindset and worried that the current deal they have is going to be the last deal they have.
My point is that the art of building relationships based on trust is lost. Wholesalers, by the very nature of their business, should be looking for fewer, better, more reliable relationships (the Jerry Maguire effect). Instead road blocks are put up. New Guru's pop-up teaching crazy things based on mistrust and legitimate buyers like yourself see no reason to build a relationship let alone pull the trigger with the wholesaler.
You are making a good decision to deal directly with owners or, as David noted, deal mostly on REO's with banks. You may be lucky enough to find a solid wholesaler in your area who understands the value you bring to the equation and will work with in a way where you both win. We are lucky today to have one wholesaler...just one in all our years of business that we deal with and he makes an incredible living with us and maybe two other people buying his properties.
Best of luck on your future deals.
Chris
Originally posted by David Beard:
There IS alot of confusion out there. I've been mainly buying REO, SS, and bankruptcy court properties.I did my first deal with a wholesaler recently. She assigned me the contract for a reasonable fee, a standard practice especially for wholesalers who don't have the cash to double-close. She wanted to be paid her fee prior to closing, when we executed the assignment document. I said absolutely not, what if the seller flakes out and refuses to close. She said she would then return my fee (I didn't know her from Adam at that point), and that she was taught to do it this way by her mentor, a major wholesaler in the area, and that if she didn't collect the fee I could cut her out of the deal. (I can't even think in such devious tems, but I guess it happens.)
I suggested putting her fee on the HUD, but she didn't want her seller to know what was going on, thought he might get upset and abort the whole deal. I was to be introduced to her seller at the closing as her "money partner".
I suggested that the title company could hold the money and disburse it to her after closing. The title company couldn't do this, they told us, but only after I'd cut a cashiers check to the title company. So it was pretty frustrating. Our "workaround" was for me to let her hold the cashiers check until after closing, at which time I exchanged that check for another made out to her.
You wholesalers, what went wrong in this scenario? How should it have flowed?
David,
It was her responsiblity to either have the fee put on the hud or to double close. If it was a regular wholesale deal then title should have been able to double close using your funds, she wouldn't have to bring anything to the table.
If it was a shortsale, she would have had to get transactional funding to double close.
Either way, she should have had this laid out in her plan when she approached you. As a wholesaler and Investor myself, I never ask my end buyers to do anything but sign a purchase agreement if they are ready to buy.
It sounds like lack of experience got the best of her.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes14y
Michael,
Something that you might be able to propose to the parties to get you to buy directly from the seller.
Ask the wholesaler to prepare a "Conditional Release from Contract", wherein the wholesaler gets paid for signing that release, and where one of the conditions is that the owner be able to sign a contract with you for the purchase amount you want.
There is an attorney in the Pittsburgh area named Brad Dornish who has produced such a document in his wholesaling home-study coursework; cost of that course ~$100.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Thanks for the idea Steve: I will let you know how it turns out.
The wholesaler is working out an arrangement with the owner of record and I will be sending the owner an offer directly and he will arrange to pay the wholesaler from proceeds. - 14yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by Michael Lauther:
Thanks for the idea Steve: I will let you know how it turns out.
The wholesaler is working out an arrangement with the owner of record and I will be sending the owner an offer directly and he will arrange to pay the wholesaler from proceeds.Congratulations - I hope the deal works out the way you intended it to work out!
Chris
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
So this is how it turned out.
I'm afraid I have alienated the wholesaler, this is his partial response
"However, the biggest issue you have in all of this, Mr. Lauther, is that despite my repeated requests of you to deal directly with me, you have continued to contact (the property owner) to induce him to breach his contract with me and deal directly with you. Your conduct has given me a cause of action against you known as a tortuous interference with contractual relationships.
I am not stating this because I want to get involved in some action against to you but to stress upon you the importance of complying with my request to deal with me and only with me directly. I must insist that you cease and desist from any further contact with (the property owner) his agents, associates, contractors and assigns immediately."
I replied by wishing him well.
I have several questions regarding this failed attempt to use a wholesaler.
Is there any restriction regarding contacting the owner of record, property manager, or any other party.
I was perfectly willing to deal
through the wholesaler and never tried to circumvent his contract, but I was not able to determine his legal equitable interest.Is there some document that I should have been given to determine this?
I am only inquiring so that if I should ever entertain another property I could avoid a repeat of this unpleasant situation.
The threatening tactics of this wholesaler precludes me from considering any property he is associated with but I am sure my inexperience added to this deal falling through.
- Real Estate Investor · Baltimore, MD · Member since 2008 · 619 posts · 75 votes14y
Michael, the seller stated he was in contract with the wholesaler?
- Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes14y
Originally posted by Michael Lauther:
I was perfectly willing to deal
through the wholesaler and never tried to circumvent his contract, but I was not able to determine his legal equitable interest.Is there some document that I should have been given to determine this?
Michael the wholesaler should have simply produced a copy of the contract he was assigning. It's unbelievable, if I'm reading you correctly, that the wholesaler wanted you to agree to purchase a contract (which is what an assignment of contract is) without actually producing the contract.
The assignment contract he signed with wholesaler #1 along with the original purchase and sale contract (given to him by the 1st wholesaler and signed by the 1st wholesaler and actual owner) is evidence of 'equitable interest'. He should have had no reason not to produce it UNLESS (as suggested above) he was doing a double closing. In that case he would just need to produce a standard purchase and sale contract.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Terry, I had direct phone communication with the owner of record of the property and with the wholesaler in an attempt to understand the nature of the proposed transaction. They were both aware of my communications.
Ibrahim, this wholesaler was not as far as I can tell offering an assignment of contract but was instead asking for EM to be held by the title company. I did not understand the details and when I suggested we deal directly with the owner of record having his fee paid at closing by this owner, he accused me of not dealing in good faith, and threatened legal action . There was never any indication that he would be cut out of the deal but rather than try to fix all these misunderstandings it would be prudent for me to find another deal.
I am a bit disturbed about his accusations as my reputation is important to me and I have written to him to that effect.
Thank you all for your input, and I willnow go back to the drawing board to find out how to deal with wholesalers. They can be a great resource and I need to know what to expect.
- Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes14y
Michael if you were dealing with a wholesaler and he charged a "fee" then more than likely he was looking to either assign the contract or sell you the property via double close. In either case he may have very well had equitable interest in the property. If he was assigning and looking for an assignment fee then the contract between the owner and 1st wholesaler, along with the assignment agreement (or the p&s contract) between the 1st wholesaler and 2nd wholesaler should have been proof of 'equitable interest'. Even if it wasn't, a title co. was going to hold your $5k, I'm presuming, subject to the 2nd wholesaler's equitable interest being verified.
Additionally, you stated the following:
"It turns out the party who was billed as the owner was in fact another wholesaler who had a contract to purchase or in some way control the property in question. This sent up red flags for me so I located the owner through a property search and found he in fact is in some arrangement with the 2nd wholesaler."
Unless you had permission from the wholesaler to deal directly with the owner then you were stepping out of line and possibly interfering with a contract as the wholesaler charged. As a rehabber and wholesaler myself I can say that that kind of behavior is frowned upon and can soil your reputation.
As a rehabber I have a rule when dealing with wholesalers (as most rehabbers do): I go through the wholesaler or I don't do the deal at all. I've known a few rehabbers who like to use the excuse that because the wholesaler wasn't really the owner or because the deal was confusing they felt it was ok to bypass the wholesaler. Not saying that you thought the same thing here. Just letting you know that wholesalers (at least some of them) can bring good deals and you don't want to get in the habit of biting the hands that feed you.
It should have been in the assignment contract that if the deal didn't close because of the seller or wholesaler, the buyer gets the money back. If the deal doesn't close because of the buyer, then the assignment fee is kept by the wholesaler. This is to make sure the buyer has skin in the game and doesn't flake, but is not hurt if the seller is the one that flakes.
The seller may balk at handing over the assignment fee -- and it's a perfectly reasonable fear, especially for the first deal. In this case, the money should be put into escrow with the title company or a lawyer.
Hope that helps!
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Thanks, Roy, yes I "balked" at handing over $3,000 to an unknown person, would have been an idiot otherwise.
The title company closing the transaction would not(said they COULD not) hold the assignment fee. Didn't get all the details as to the 'legalities thereto'. They recommended another lawyer/title company that I could try to use for this purpose (all at the last minute), but we were able to work it out in the end. (The wholesaler essentially trusted me after I told her I had bought several properties in the area this year.)
You're singing from the same hymn book as my wholesaler, in saying that I should have paid her the assignment fee directly, prior to close. This seems at odds with what a couple of agent friends told me (they said it should be on the HUD, or else a double close). I don't really like this quasi-sneaky crap with the owner, comically calling me the "money partner" (almost made me chuckle).
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