How to deal with wholesalers
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
[b]I have made an offer on a property through a wholesaler. Is there any reason that we can't just close through the title company with the current owner and have the wholesaler paid from the owners proceeds. I would feel more comfortable if the contract for sale were with the owner and not the wholesaler who does not own the property at this time. Wholesaler says he has Equitable title but I have no evidence of this. I have no trouble with the fee which looks to be around $5000 on a property that will sell for $23000 because I believe the property is worth what I am paying. Also asking for $5,000 earnest money. this seems excessive. I have never paid more than $1,000.
I would appreciate any thoughts on this issue.
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.
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.
You wholesalers, what went wrong in this scenario? How should it have flowed?
Your wholesaler should have established a strong rapport and legal authority to wholesale the property. I simply let sellers know that I also find properties for other investors and I will be bringing a couple of them by to see the property. The fact that your wholesaler was trying to sneak the fee by the seller means he/she didn't control the deal like they should have.
And as someone mentioned earlier, if it's a big fee ($10k + ) the wholesaler can simply do a double close.
Ibrahim, I agree, but she was trained this way, she said, by "one of the top wholesalers in the country". Who was I to question. :)
They can do a double close if they have capital, or access to transactional funding, some of these new wholesalers seem to have neither.
This particular owner was 'jittery', that's for sure. He held up the close for 30 minutes while he called the mortgage company, because he thought the payoff was wrong by a few bucks.
Double post
@David, regarding "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)."
I would have responded the same way you did. I want everything on the HUD, paid via escrow by the closing attorney. At worst case, I would have a line item and "POC" (Paid Outside of Closing) to at least identify and document where your funds ended up. That POC line is still on the HUD... just not on the attorney's disbursements page.
If the wholesaler absolutely insists on $3K outside of closing, I guess you could W-9 them as a condition of cutting the check. But I'd still want to see documentation on the use of my funds.
Michael,
speaking as a long time wholesaler, I would not be freaked out by dealing with the wholesaler. I typically do an assignment of contract, I take 1k earnest money and the rest at closing. I also use my title company, but I am transparent with the buyer. Since what the buyer is buying is my contract, it is only fair they get a copy of it if they want it. :mrgreen:
Rather than give you a breakdown of everything that went wrong in this deal, let me give you a breakdown of how I currently do deals as a wholesaler. I think that will help you to understand the flow of how the transaction should work.
1-I identify a property and negotiate a purchase price on it.
2-With signed purchase agreement in hand, I market my assignment contract to buyers looking for buy and hold property. Typically, I don't work with buyers using traditional financing-cash or hard money only for an assignment (excluding REO's, HUDs and shorts). Paying a transactional funding fee for a typical wholesale flip often doesn't make sense, unless it's a really decent spread.
3-The first buyer I come to terms with who provides a non refundable deposit to me gets the assignment contract. Some buyers do request this deposit be held in escrow with the title company, and I've got no problem with that. Those are serious buyers, and those typically close. I don't have to show you the buyer the purchase contract, that's what I bought it for not what I'm selling it for. The purchase amount between me and the seller is between me and the seller. If the deal meets your profit numbers, my assignment fee is unimportant to making the deal work, in my humble opinion.
4-As a wholesaler, we use my title company, who should be familiar with how my business transactions work. So there should be no issues about what the title company can and can't do. I turn in my signed purchase agreement and signed assignment agreement to my title company, then they work their magic.
5-The seller gets their check, I get my check and you get your house.
I will work with other wholesalers, but as someone said above, allowing other wholesalers to shop your deals is a recipe for disaster.
Look at things from the perspective of a traditional RE transaction: once an offer has been accepted buy a seller, the house is under contract, and everyone goes away until the house closes or doesn't close. At the end of the day, that's what wholesalers do, also. So by going around them to the owner directly, that's exactly what you did. You didn't know then, but now you know, so I hope you have much more success dealing with wholesalers in the future :)
Rob, they absolutely get a copy of the purchase contract, AFTER we've agreed to terms of course :)
Question Jamie. You're saying that although your end buyer is willing to 'buy your contract' they can't tell from the 'assignment fee' what the purchase price is?
Furthermore, and even more importantly, your end buyers don't care to review a contract you're assigning complete with terms they are obligated to accept should they purchase the contract?
Just read this post. By "after we've agreed to terms...." do you mean after the agreement is in writing? Or are you talking about a verbal agreement?
I am learning a great deal about wholesaling from this thread. the following is what My title company leads me to understand.
Many title companies do not like double closings. My attorney agrees that they are perfectly legal and that most "flips" are within the law. Title companies are only concerned with the appearance of fraud which is illegal whereby investers get together to artificially increase the perceived value of a property by rapidly reselling property in order to mortgage it to the hilt and then walk away. This has been a fraudulent strategy that took advantage of the recent real estate bubble.
The double close also poses additional cost because of the need for redundant filing fees and closing costs.
There is also a concern that the wholesaler may have Federal tax liens against him or his company and this would cloud his ability to transfer clear title.
Many title companies will not take part in a double close unless they are given the opportunity to review the details of the original contract to purchase. Conservative companies are concerned with the potential for fraud.
A preferred alternative to a double close would be to purchase the contract from the wholesaler with money being held by an attorney for disbursement at closing. This would add a few hundred dollars for the attorney to review the contract and hold the funds but it would most likely save money over a double close.
In this way the sale is made from the owner of record and only one title search and one title policy is necessary.
This is only my understanding of the issues surrounding the wholesaling process. Clarification is always welcome and of course I am no attorney so my understanding is bound to be somewhat flawed.
Apparently I need to know more about wholesaling before I can successfully use this potentially valuable resource.
The typical way to transfer the contract to you for purchase is via assignment. Hence, the assignment agreement and required money in escrow to show that you are serious.
Your best bet is to use an attorney as you learn more about this method of buying properties.
I didn't read all the posts so this may have been covered. As a wholesaler, if you went directly to the owner it would be the last time I ever sent a deal your way again. Even if I got paid. I'd also tell my wholesaling buddies to avoid you. If the deal raises red flags, walk away.
Just read this post. By "after we've agreed to terms...." do you mean after the agreement is in writing? Or are you talking about a verbal agreement?
What I mean is I do not hand out a copy to everyone that is walking through the home. Once I find someone, I will discuss the deal and build a relationship and bond with them. We will discuss all of the terms and agreements. I jot down all of the notes on a paper and we sign off. They give me 1k earnest money and I hand it over to my attorney to draw up the assignment. He then calls them to come in and sign the assignment and initial the contract as well and gives them copies of everything.
:mrgreen:
P.S. The reason for the terms is because sometimes they do not have enough coin for the entire fee, so there are payments involved, or I get back end juice. It all depends on the deal, I tend to get pretty creative.
Aaron: I understand your criticism however there are many would be wholesalers who are marketing properties they have no legal agreement to market. In this case there was a "daisy chain" leading to the owner of record. a wholesaler needs to be a valuable resource not just someone with a nice looking web page and a list of cash buyers. I know what I need to make putting my hard earned cash on the line. In the past I have found my own deals but I will welcome reputable knowledgeable wholesalers who earn their fee. Are you suggesting that I dispense with due diligence before I commit funds?
Ibrahim-
Just read this post. By "after we've agreed to terms...." do you mean after the agreement is in writing? Or are you talking about a verbal agreement?
If I negotiate with a seller to purchase their home at 100K, and negotiate with a buyer to buy the home at 150K, as long as the numbers of the deal work for him and his business model(typically 65-70% of As Is Value), it doesn't matter what my purchase price is. Unlike most beginning wholesalers, I built a buyer's list first, identified what it is that those buyers want, and what they look for as far as deal criteria. So when I bring a deal to my list, I'm fairly confident that the numbers will work for them.
I don't do verbals, the first buyer to sign the assignment agreement and put up a deposit gets the deal, period. Once we're locked in, they can know whatever they want, but I really can't see why any good wholesaler would disclose their purchase price to a buyer BEFORE the negotiation is over.
Doesn't seem like smart business to me, does it? That's like negotiating a salary for a new job based on what my previous salary was-we don't negotiate on those terms, we negotiate based on what my services are worth to you. At least that's how I see it.
Question Jamie. You're saying that although your end buyer is willing to 'buy your contract' they can't tell from the 'assignment fee' what the purchase price is?
They can tell what THEIR purchase price is, absolutely.
Furthermore, and even more importantly, your end buyers don't care to review a contract you're assigning complete with terms they are obligated to accept should they purchase the contract?
I've provided my buyers with copies of the contract I use PRIOR to me talking with them/taking them to see the property, so no, I haven't run into a buyer who had a concern with how much I bought the contract for. Do other wholesalers really have an issue overcoming that concern?
If so, I would suggest that they spend more time cultivating a strong working relationship with their buyers and sellers, because I'm absolutely baffled why that's even a concern.
I'm sure that there are buyers out there who will nickel and dime you at every turn, and try to find out what you have the house under contract for, I just haven't run into any, and I just don't think it would make a lot of sense to haggle with them for too long. Just find another buyer.
Quick example-my professional background is in staffing. As an agency that recruits people to work at different companies, we don't tell the recruit what the company is paying us, we negotiate a range that allows them to compensate them for their work, and allows us to make our margin. Why is this any different?
Aaron: I understand your criticism however there are many would be wholesalers who are marketing properties they have no legal agreement to market. In this case there was a "daisy chain" leading to the owner of record. a wholesaler needs to be a valuable resource not just someone with a nice looking web page and a list of cash buyers. I know what I need to make putting my hard earned cash on the line. In the past I have found my own deals but I will welcome reputable knowledgeable wholesalers who earn their fee. Are you suggesting that I dispense with due diligence before I commit funds?
Michael-based on what you've explained of your experience, though, it seems that even if there had only been one wholesaler involved, you most likely would STILL have tried to go directly to the home seller, which makes Aaron absolutely right in his assessment, from the wholesaler's perspective. In working with wholesalers in the future, I think the point is that you need to be aware of that.
Now, from your perspective, you do have a right to know how many layers their are between you and the home seller. So now that you've been through it once, just ask the question, "Are you working directly with the seller" or "how many layers are between you and the seller" or explain to the wholesaler your previous experience, and ask them about their relationship to the seller in context.
If they operate an upright and transparent business, they'll tell you. If they don't, trust your gut instinct that there's something there that doesn't work for you, and walk away.
But as far as legality is concerned, there's nothing that would preclude one wholesaler from letting another wholesaler market their deal for a cut of the assignment. YOU may not like it, but that doesn't mean that anyone involved had any less of a legal right to do what they were doing than anyone else. It's called outsourcing, and it happens every day, in every industry.
While I wouldn't handle it the way it was handled myself, there was certainly nothing wrong with the strategy, only the execution of it by the wholesaler you worked with.
Rather than continuing to rehash the problem, I think that's an effective solution for you going forward.
As far as I have read, and I may have it wrong here, Michael hasn't brought up a question of how much the wholesaler(s) were to make off the deal. He was just being smart with his money, it seems from his point of view that there were aspects of the deal that were possibly to affect him that were undisclosed. There are plenty of scams being perpetrated to separate money from hands, I'm not saying this was one, however it pays to ask questions. Perhaps this new wholesaler Michael was dealing with didn't have their processes down pat, to the point it made the end-buyer uncomfortable; if I'm not comfortable in a deal, there are plenty more to be found.