Wholesale Contract - Is this legal?

Wholesaling
7yFollow

Wholesale Contract - Is this legal?

Thomas Moran
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

0Reply
198 views

Most Popular Reply

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.

23Reply
See this reply in the discussion

102 Replies

Jump to latestLatest
  • Thomas Moran
    OP
    Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
    7y

    @Jordan L. Webster

    I’m not trying to take a moral stance on this one way or another. Some people say wholesalers are snakes, some say they provide relief to desperate sellers and a valuable service to investors. 

    The point i’d like to make is it seems as if he’s done something wrong in the hard money lenders eyes because he didn’t disclose his assignment fee in the contract. Now I don’t know if that’s the case or not, but maybe it would give me a bargaining chip with this guy. Maybe not. Either way I’ll chalk it up to experience. 

    Ps. Doing a title search ASAP 


    0Reply
  • Jordan L. Webster
    Rental Property Investor · Anchorage, AK · Member since 2018 · 28 posts · 15 votes
    7y

    @Thomas Moran

    Right, that part is interesting. I don’t see how legally that can be wrong but your right that’s a good lesson learned for future deals. I hope it works out well for you! The wholesaler should hear your issue with the fee and try to work with you if he wants to stay in wholesaling long term.

    0Reply
  • Jordan L. Webster
    Rental Property Investor · Anchorage, AK · Member since 2018 · 28 posts · 15 votes
    7y

    @Thomas Moran

    How did you find out the margin he’s making?

    0Reply
  • Thomas Moran
    OP
    Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
    7y

    @Jordan L. Webster

    The lender wanted the assigned contract and the original purchase of sale agreement to approval the funds, so I asked him for it.  

    0Reply
  • Jordan L. Webster
    Rental Property Investor · Anchorage, AK · Member since 2018 · 28 posts · 15 votes
    7y

    @Thomas Moran

    Good to know, I’ve never used a wholesaler but if I do I’ll definitely put seeing those docs as requirement!

    1Reply
  • Kevin Cascante
    Flipper/Rehabber · Member since 2019 · 6 posts · 6 votes
    7y

    @Thomas Moran 100% legal. It’s called an “assignment fee”. Just make sure you state in contract that terms and conditions shall bind all successors, heirs, administrators, trustees, executors, and assignees of the respected parties. No matter the name you buy it under, it can be changed at anytime. At the end of the day, if the buyer is motivated to sell it shouldn’t event matter especially if it’s a cash deal.

    1Reply
  • Jared Jackson
    Member since 2018 · 3 posts · 20 votes
    7y

    @Thomas Moran

    Wholesalers don’t always disclose the fee in the contract prior to closing because they want to negotiate the price of the house not the amount of their fee. There is nothing illegal about how he did it. If he really didn’t want you to know he would’ve done a double close.

    1Reply
  • Kevin Cascante
    Flipper/Rehabber · Member since 2019 · 6 posts · 6 votes
    7y

    @Thomas Moran sorry I didn’t read the full post. Usually if the buyer backs off a deal the seller keeps the earnest money deposit if it’s already in the escrow account. Hope that helps! Trust me that wholesaling is a real thing and the margins seem unreal but it’s the real deal!

    0Reply
  • Thomas Moran
    OP
    Rental Property Investor · Raleigh, NC · Member since 2019 · 85 posts · 32 votes
    7y

    @Kevin Cascante

    Thanks for the reply. In most cases the earnest money is gone if the buyer backs out - which I understand. The problem with this one is (which I should have consulted an attorney prior, but hindsight is 20/20) is that it says any litigation resulting from the breach of this contract is covered by the buyer aka regardless of the circumstances I am stuffed, and must close. 

    0Reply
  • Kevin Cascante
    Flipper/Rehabber · Member since 2019 · 6 posts · 6 votes
    7y

    @Thomas Moran he either really needs the money or knows something about the property that you don’t. Should have said something about it when going over the offer. If the margin is huge though I would take it anyways. You’ll sell it to a buyer within days and make your money!

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Thomas Moran:

    @Kevin Cascante

    Thanks for the reply. In most cases the earnest money is gone if the buyer backs out - which I understand. The problem with this one is (which I should have consulted an attorney prior, but hindsight is 20/20) is that it says any litigation resulting from the breach of this contract is covered by the buyer aka regardless of the circumstances I am stuffed, and must close. 

    Thomas just because the contract says that does not matter a JUDGE has to rule and this will never see the light of a court house you would both HIM its even more expensive will spend 10 to 20k to get in front of a judge.. not going to happen.. this is just something you learn over the years..  I have done well over 4,000 transactions in 45 years.. and all sorts of funky stuff.. and I have NEVER seen the inside of a court room.. except on a specific performance case two years ago when a seller would not sell.. and the only reason I went all in on it.. was I put up 40k in EM to pay their back tax's and they would not give it back to me or sell the property.  and to do that I had to put up an additional 120k in cash let it sit in escrow for 2 years plus pay about 20k in legal fee's which the judge did not award me a dime.. sometimes they will most of the times they wont.. in theory I get what the contract says.. but with a wholesaler who does not even own the house what are his damages.. this just goes away.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Kevin Cascante
    Flipper/Rehabber · Member since 2019 · 6 posts · 6 votes
    7y

    @Jay Hinrichs this is also a whole nother business. Wholesaling is simple but it isn’t easy which is why it’s so rewarding with huge profits. If it was easy everyone would be doing it!!!

    1Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    7y

    @Thomas Moran Signing any contract bonds you to the terms stipulated in that contract; however if you don't follow through and lose your EMD I highly doubt the wholesaler will be suing you for damages under the state law of wholesaling.

    0Reply
  • Orlando Guzman
    Biloxi, MS · Member since 2016 · 73 posts · 42 votes
    7y

    @Thomas Moran want to know if it's legal, contact your State's Real Estate Commission .

    1Reply
  • Shelly F.
    Crystal Lake, IL · Member since 2017 · 19 posts · 11 votes
    7y

    @Thomas Moran Great job for jumping in!! I’m planning to buy my first deal this year too! I hear the hardest part is just getting started...! :)

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y
    Originally posted by @Orlando Guzman:

    @Thomas Moran want to know if it's legal, contact your State's Real Estate Commission .

    I agree. See what the state has to say about this broker.

    0Reply
  • Zoran Stanoev
    Real Estate Broker · Chicago, IL · Member since 2015 · 147 posts · 73 votes
    7y

    @Thomas Moran

    I can understand why you’d be a little unsettled but do your due diligence and see what happens. If there is an issue the wholesaler is hiding, you’ll find it. Obviously, if the wholesaler tries to limit your ability to conduct proper due diligence, that’s a red flag. Good luck.

    0Reply
  • Irina Belkofer
    Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes
    7y

    Calling to RE authorities would be some kind of retaliation.

    Off course, it will help to get out of this contract but there won’t be any deals with that wholesaler or maybe some affiliated to him.

    I'd rather checked out why the seller agree on 20% of what the house worth in this condition? Or is $200K ARV and you need another $70-80K in improvements?

    I'd do all the inspections including structural engineer, search title if the seller is the legitimate owner, definitely would clear the title chain and ask few brokers for their CMA/BPO. It might sound too complicated but you might be wrong about ARVas well as the seller might know something about the house which makes sense for him to get just $40K and walk away.....after all, you might end up not with light cosmetic improvements but serious structural damages.

    Anyway, someone is wrong in their estimate: you or seller. Wholeseller might know but he won’t disclose (he’s not licensed to do so and neither is seller under these circumstances)

    Just check out EVERY detail and if you don’t want the property after all - the Division of REis working 5 days/week

    0Reply
  • Brendan F. Nagle
    Member since 2018 · 104 posts · 94 votes
    7y

    @Thomas Moran

    Not a lawyer.

    With most real estate law. Does this sound fair to both parties? If not, is it enforceable? Depending on the state, wholesalers are legal, grey area, or not. How can you be responsible for an assignment fee that you didn’t know the value of?

    In future, don’t sign anything with language that paints you in a corner. A lawyer to look over the current contract after and some real in your state legal advice may save you thousands in the near future.

    0Reply
  • Julie N.
    Real Estate Investor · Unionville, CT · Member since 2016 · 260 posts · 167 votes
    7y

    @Thomas Moran I’m guessing you agree to purchase the house since it was a good deal. So who cares how much the other guy makes on it? He did all the leg work to bring it to you. You probably could have done the same thing if you wanted to. If it’s still a deal then why pull out?

    1Reply
  • Kyle Pierce
    Flipper/Rehabber · Lehi, UT · Member since 2016 · 86 posts · 64 votes
    7y

    @Thomas Moran I flip and wholesale. Have bought plenty of properties from wholesalers. If you have done your due diligence and signed an assignment contract with the wholesaler and your going to make good money from flipping, you shouldn’t care what the wholesaler is making. He spent time and money to bring you that deal. The people saying the wholesaler is ripping off the seller don’t have any idea what the circumstances were with the seller. There are plenty of reasons why he could have got a good deal on it.

    If you’re thinking about backing out just because the wholesaler is making a good profit, that’s just dumb. If you think you need more margin or you made a mistake in evaluating the house then just go to the wholesaler and see if he’ll give you a price drop. If he doesn’t, then you’ll have to decide if it’s worth losing your EM to back out. But it sounds like a good deal, so I would thank the wholesaler for the deal and go flip it

    7Reply
  • David Mann
    Real Estate Professional · Leavenworth, KS · Member since 2017 · 10 posts · 7 votes
    7y

    @Thomas Moran Double check your numbers. I have yet to see a real deal from a wholesaler. They like to rip off first time investers. I am sure not all are like that.

    2Reply
  • Stephanie Salas
    Las Vegas, NV · Member since 2019 · 29 posts · 31 votes
    7y

    @Thomas Moran

    It seems like you would be able to back out of the deal and lose your EMD.

    0Reply
  • Jeff Cichocki
    Lender · All 50 States · Member since 2015 · 401 posts · 250 votes
    7y

    This may sound like a rant, but it's not. I just want to point out a few things tgst it seems many people in this post are missing.

    First... I'm not a wholesaler.

    Second... Those of you ripping on the wholesaler for his profit, dont. You're assuming that the seller got ripped off. Do want to know how you know he didn't... He said yes to the offer. When a seller says yes, they are accepting the deal. Whether or not he could have gotten more is irrelevant he said yes. He accepted. He had his reasons. Those reasons are his and no one else's.

    Third... I'm a hml in Wisconsin and I think It's ridiculous that your hml has an issue with this. Based on the numbers provided, if they give the loan, the are very secure. This is a low LTV deal. Hml's give asset based loans. Is this a good asset? Sounds like it to me. They should stop worrying about it.

    Fourth... Stop criticizing what everyone else is making. Its irrelevant. Is it a good deal for you. If it is, you say yes. If you say yes, you close (unless you discover some serious issues during your due diligence). It's called character and integrity. We need more of this morning in our industry. Yes there are shady wholesalers. But there are also shady flippers, contractors, landlords, agents and retail buyers. The majority are good honest people. The rest need to just be identified and avoided.

    Hopefully my comments help keep everyone focused on what's important. Do good business with good people and all these issues go away.

    4Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Kevin Cascante:

    @Jay Hinrichs this is also a whole nother business. Wholesaling is simple but it isn’t easy which is why it’s so rewarding with huge profits. If it was easy everyone would be doing it!!! 

    I am fully aware of what wholesaling is and the money made in it.. I probably fund over a 100 transactions a year that have some wholesaler or daisy chain of wholesalers on the huds.. so not my first Rodeo.. the issue on this one is obvious .. and this is why IL made it mandatory to get a license and in Oregon its illegal to assign contracts if your business purpose is solely to assign contracts and most states the laws read that way but are not enforced .. but that's changing to many stories like this were the public get royally screwed.  IE the seller ..  I get it.. I have made my fair share of wind falls on deals.. the difference is we bought them and owned them for a time.. And usually did something of value to create bigger spreads.. not just lied to a seller about the true value of their ONLY asset .. We can rationalize it any way we want does not make it right. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free