Wholesale Contract - Is this legal?

Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes

Hi BP -

May or may not be in a debacle here so I wanted to consult the community. I am under contract via an assigned contract through a wholesaler. I just figured out the obscene margin that he is making (which doesn't necessarily bother me), and it begs the question why is the seller taking such a hit on equity? Is there something about the house I don't know?

I am going to sleep on it, but I am thinking about exiting the deal. He made me sign a contract that effictively states, "forfiting of earnest money does not release you from the contract, and you can still be forced to close". Now is this legal? I've never heard of anything like this before, and I've never done wholesaling. I had no intention on bailing on the deal, but it's very anxiety provoking to be trapped.

Thanks in advance. -Tom

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Cole Raiford

Rental Property Investor · Gulfport, MS · Member since 2018 · 113 posts · 133 votes

@Thomas Moran whats the ARV of the property? I mean, I get that the assignment fee is really high, but are you getting the house well under market value or not? If it's a good buy for you then you should just be happy and not worry about what the wholesaler is making. If you aren't getting a good buy then that's on you and you shouldn't have agreed to the purchase price in the first place.

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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
7y
the seller was probably misled by the unlicensed broker
9 Reply
Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Thomas Moran I'm no lawyer, but if you signed it, you've agreed to it. Of course they cant make you close, but they could seek damages from you if you dont. How much depends on a lot of things, and there is no way to know what a judge may award them.
3 Reply
Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y
Why would that not be legal? You entered into a contract to purchase the property. Sometimes people will take that earnest money as liquidated damages if you default on the contract. Here the contract simply is stating that that is not an option.
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Derrick E.
Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes
7y
I despise wholesalers. I'm sure there are a few good ones out there, but I don't trust any of them.
8 Reply
Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y
He’s saying he can come after you for the balance of his assignment...not that the seller can make you buy.
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Thomas Moran
OP
Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
7y
Thanks all who responded on this. Always learn something from every post.

@Wayne Brooks you make an interesting point...the assignment fee was not disclosed but it turns out it is more than the asking price of the property itself over 60k. The hard money lender says they have a problem with those margins and it should have been stated up front.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y
@Thomas Moran Interesting.....how do you have an assignment contract, without knowing how much the assignment fee is? I’ve seen bs assignment contracts where the “fee” was the total price, not the actual assignment fee, but of course that doesn’t make sense since you still have to pay the original contracted purchase price to the actual seller.
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Thomas Moran
OP
Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
7y
@Wayne Brooks
It's interesting you say that because that's exactly what he did. It says offered at 107k but he paid 41k for it I found out later because my HML asked for both contracts. This seems like it should be regulated lol
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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
7y
Originally posted by @Thomas Moran:
@Wayne Brooks
It's interesting you say that because that's exactly what he did. It says offered at 107k but he paid 41k for it I found out later because my HML asked for both contracts. This seems like it should be regulated lol

This is another example of wholesalers stealing equity from sellers. They are a public nuisance.
5 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Thomas Moran:
@Wayne Brooks
It's interesting you say that because that's exactly what he did. It says offered at 107k but he paid 41k for it I found out later because my HML asked for both contracts. This seems like it should be regulated lol
Ya for all those who say wholesaler provide a service to sellers.. what complete Bull SEEEEt this is yet another example of violating the ten commandments :) do unto others.. how would this guy/gal like it if someone did that to his mother.
threats of specific performance from a wholesaler 99% is just hot air unless U have actually given them money just walk away.. they may huff and puff and send a lawyer letter but they don't have the stones to sue..

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Cole Raiford
Rental Property Investor · Gulfport, MS · Member since 2018 · 113 posts · 133 votes
7y
@Thomas Moran whats the ARV of the property? I mean, I get that the assignment fee is really high, but are you getting the house well under market value or not? If it's a good buy for you then you should just be happy and not worry about what the wholesaler is making. If you aren't getting a good buy then that's on you and you shouldn't have agreed to the purchase price in the first place.
23 Reply
Jared Jackson
Member since 2018 · 3 posts · 20 votes
7y
It seems like you’re more concerned with the wholesalers deal than the one you are getting. If your numbers work stay in the deal. The assignment is high... this was probably a very motivated seller that just wanted to be done with the property. Those leads don’t come everyday. But It also seems like you feel the wholesaler should have passed on some of those discounts to you as you are the one going to be taking on the risk. I don’t disagree if that’s the case. Rather than walking away from the deal (and possibly ruin your reputation) I’d try to have a conversation with him afterwards and let him know that he’d make a lot more money long term with you through multiple deals if he passed on some of those huge discounts to his investors rather than taking it all to himself. Wholesalers who want to stay in business provide value to the investors and still make plenty of money for themselves. But even with the huge assignment fee you are probably still getting the property way below market value so just keep it moving.
16 Reply
Thomas Moran
OP
Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
7y
Again, thanks to everyone who has chimed in.

@Jared Jackson @Cole Raiford

Both of you make a great point and the ARV should be just shy of 200k after a light rehab. So it will be a good deal. At this point I don't want to lose sight of the forest for the trees and will probably proceed in closing. It just disheartening that the HML expresses disdain for the wholesalers transparency on assignment fees and the excessive margin on the deal.

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Thomas Moran
OP
Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
7y
Also full disclosure...this is my first investment property ever so it would have been stressful enough even with a licensed agent and something off the MLS. Oh well - you gotta have thick skin I suppose.
1 Reply
Cole Raiford
Rental Property Investor · Gulfport, MS · Member since 2018 · 113 posts · 133 votes
7y
@Thomas Moran if the ARV really is $200K and you are getting it at $107K and it only needs a light rehab you need to close and not worry about the wholesaler.
15 Reply
Brendan F. Nagle
Member since 2018 · 104 posts · 94 votes
7y
@Thomas Moran
With the numbers presented. Seller to wholesaler 41. Wholesaler to you 107. Light rehab and it’s worth 200.??? Sirens are going off. How did the wholesaler get a deal on contract for 1/5 the arv? Where are your comps. What inspections are being done.
The big question is you are worried about the language in the wholesaler contract. The statement that they can come after you for the assignment fee of 60. It may be time to call a lawyer. The hml lender has done you a favor raising a stink about this.
6 Reply
Thomas Moran
OP
Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
7y
@Brendan F. Nagle
I’m doing an inspection, appraisal and title search. Unless I’m missing something I think the seller just got robbed of a lot of equity, unfortunately. What would I call a lawyer for (at the moment at least)? I’m hoping this never reaches litigation.
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Thomas Moran
OP
Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
7y
I have done comps. On the ultra conservative side ARV is at minimum 180

@Brendan F. Nagle
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Cole Raiford:
@Thomas Moran whats the ARV of the property? I mean, I get that the assignment fee is really high, but are you getting the house well under market value or not? If it's a good buy for you then you should just be happy and not worry about what the wholesaler is making. If you aren't getting a good buy then that's on you and you shouldn't have agreed to the purchase price in the first place.
That's all well and good but what about the seller ? I wonder how that would go over in Church on Sunday ?

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Jared Jackson
Member since 2018 · 3 posts · 20 votes
7y
@Brendan F. Nagle
How did the wholesaler get a deal on contract for 1/5 the arv?
About to be foreclosed on, divorce, unwanted inheritance, probate... could be anything. I bet the wholesaler knows and that’s how he got the deal. As an investor though...who cares!?
3 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Jared Jackson:
It seems like you’re more concerned with the wholesalers deal than the one you are getting. If your numbers work stay in the deal. The assignment is high... this was probably a very motivated seller that just wanted to be done with the property. Those leads don’t come everyday. But It also seems like you feel the wholesaler should have passed on some of those discounts to you as you are the one going to be taking on the risk. I don’t disagree if that’s the case. Rather than walking away from the deal (and possibly ruin your reputation) I’d try to have a conversation with him afterwards and let him know that he’d make a lot more money long term with you through multiple deals if he passed on some of those huge discounts to his investors rather than taking it all to himself. Wholesalers who want to stay in business provide value to the investors and still make plenty of money for themselves. But even with the huge assignment fee you are probably still getting the property way below market value so just keep it moving.
you guys all miss the point its not about the deal to the end buyer its about ripping off the seller. if anything the wholesaler should be giving the seller A LOT MORE MONEY and then close the deal.. that's why the HML is balking.. and as a HML myself I would not close this deal either. I close tons of them a year with wholesalers but when something is grossly unfair to the seller I wont participate.. there is usually some sort of fraud going on> IE wholesaler wise.. its a hard pass as a lender.. and a letter to the seller would be appropriate.

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y
@Thomas Moran I suspect you may find some title or lien issue. A quick online search of county records would find any obvious issues.....which I always do before making an offer. A lot of wholesalers are totally incompetent and never do this.
1 Reply
Jerryll Noorden
Flipper/Rehabber · Wilton, CT · Member since 2015 · 4k+ posts · 4k+ votes
7y
Originally posted by @Russell Brazil:
Why would that not be legal? You entered into a contract to purchase the property. Sometimes people will take that earnest money as liquidated damages if you default on the contract. Here the contract simply is stating that that is not an option.

Because depending on what the contract is for there are rules.

If I put someone under contract that I can beat the crap out of them without then being able to do anything about it, it is under contract yet not legal.

The real estate industry has a lot of rules that go above any contract signed.

Like the gentleman above me stated. No one can force you to close. BUT they can go after you for damages. What you need to do is severely inspect the house and find something that is wrong. There is ALWAYS something wrong. Go after that crack in the foundation. (There is always one ;) )
Ask your closing attorney for their info.
P.S. I know.. too late...
But never sign a contract that MAKES you close no matter what happens. That sentence would scare the living crap out of me. I would bishhslap any wholesaler WITH their damn contract if they ever dare to lay that on me!
Breathe Jerryll Breathe...
1 Reply
Ryan Lee
Investor · Bowie, MD · Member since 2016 · 143 posts · 51 votes
7y
@Thomas Moran
I personally think you are too concerned with what the wholesaler is making. If you are making money then great.
When we go to a store and purchase something we never complain about the margins the store makes. Why complain now?
Make your money, make a relationship with that wholesaler, and get more deals from he/she.
7 Reply
Jordan L. Webster
Rental Property Investor · Anchorage, AK · Member since 2018 · 28 posts · 15 votes
7y
Just to chime in on this since I’ve been looking into wholesaling recently and all the questions in this post have come up in my mind while researching and some things that MAYBE apply or should be thought of in situations like this.
1. Money isn’t everything, if you have a property that for one reason or another you are just absolutely done with then you want it and sometimes need it gone and somebody coming along and saying I can help you out and get this house sold for you. Well then that is a blessing.
2. Wholesalers work for that fee! From what I’m seeing wholesaling is rarely an effortless job although it may seem that way. You most likely spend hours and hours marketing, networking, searching for deals, searching for buyers, researching comps and on and on. $60k sounds pretty excessive but who knows, potentially he’s created a win, win, win situation.
3. Win, win, win! It definitely sounds like you need to ask for more details on future deals and scrutinize those contracts more. However if the seller has agreed to that price then I highly doubt that after this deal the seller won’t be better off or “in the hole” because of it. My point there is that if everyones benefiting then the wholesalers profit margin isn’t really concerning. They found the deal and made it happen and that’s what they are asking for. If they get that fee price then fine. If they don’t then they’ll be forced to lower the fee.
But to put out a disclaimer. Those few things aren’t to discredit that, that is a bit of a ridiculous profit margin for the wholesaler. From what I’ve seen that’s the type of thing that chases investors away and for good reason. That wholesaler would be highly advised to check his greediness and the overall picture.
I don’t know if any of that helps but those are some of my thoughts as I look into wholesaling as a potential option. And I’d love to hear some feedback, positive or negative.
Best of luck and God bless!
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