Fiduciary responsibility when wholesaling
Realtor · Chicago, IL · Member since 2019 · 222 posts · 153 votes
I have someone who is a family friend who has had their father pass away.
They want to get rid of his condo ASAP. They don’t want the trouble.
I am an agent (but a newer one) and can list the place but they would also be willing to take potentially as low as 50% fair market value in cash.
If I put it under contract then sell it myself as a wholesaler would do, am I violating my responsibility to them as an agent?
Just buy the house yourself and rent it out. If you haven't signed anything yet, then you aren't their agent yet and have no legal responsibilities. You don't need to be an agent to buy directly from another person, just skip the agent part all together and have a lawyer draft up a contract.
@Josh C.
I think you misread everything above
@Michael J Scanlon
What parts?
You said they’d take 50% and is that unethical if I do it? I laid out my reasoning why people like yourself or other new people get blinded by this word “wholesaling” and think it’s something different than it is.
Some part of this potential transaction made you think it’s unethical or you wouldn’t have asked the question. What part made you ask? Honestly Ask yourself if they called a random agent off Zillow would they net more or less than if you were involved. Now honestly ask yourself if they thought they would net less money in the same time with same effort working with a random person vs someone they trusted. Curious of your answers.
@Josh C.
I said they were willing to take as much as 50% if fair market value because that’s what the owner told me. She said she would go extremely low just to get rid of it as fast as possible
I was considering wholesaling it because there is money to be made for someone willing to wait for the right buyer
They are not willing to wait
A flipper offered them $15k so I told them at worst I could do a lot better than that.
Another realtor mentioned charging them more commission because if I list it, they want it sold ASAP.
My ideal is to offer them above fair market value in seller financing so they can immediately sell it and get more money than they ever would have on the open market but that hinges on the hoa allowing rentals.
@Josh C.
The “unethical” is because I am a realtor and I don’t know if my fiduciary responsibility is to make them the most money or to respect their wishes of getting rid of it ASAP
Make more sense?
@Josh C.
The “unethical” is because I am a realtor and I don’t know if my fiduciary responsibility is to make them the most money or to respect their wishes of getting rid of it ASAP
Make more sense?
To avoid any aura of unethical "self-dealing", provide them with a CMA for what you plan to sell it at, list it at that amount, and write in a flat commission for the amount you would otherwise make as an "assignment fee" into the listing agreement. Then they understand the value of their property and how much you are going to charge to broker it out. If they are fine with the estimated net amount of proceeds (much like having a conversation about closing cost credits), you don't have anything to worry about.
However if they want a buyer at $X because they want a fast sale, and you agree to buy it for that amount under contract and agree to close fast, you should be able to perform - be it yourself or via someone you assign to. The biggest issue here is that the seller understands your opinion of the value (so give them a CMA), and if they choose to sell it for significantly more or less than that, its certainly their prerogative to do so. They have been educated at that point and will make their own decision on how to proceed.
@Jacob Kline 🙌🏽 preach. I thought BP was about supporting folks who found deals or need some advice from a community of fellow investors...
Jealously and/or snide comments from haters just get in the way and benefit no one.
Finding great deals are awesome, and this is still a capitalist country. Let’s help each other make some money. As long as you are always honest, and ethical, it’s more than okay to profit... it’s awesome. 🤙🏽
@Michael J Scanlon If you think you can help them get rid of the house and the HoA allows renting, then propose a fair Seller Financing deal to them at the fair marketing value and get the tenant to service the loan! Oh, you get the remaining cash flow! WIN-WIN-WIN!
@Ola Dantis
That’s my hope! Waiting to hear back from them. Would love to help the family and also make it fair and help myself all at the same time.
@Ola Dantis
That’s my hope! Waiting to hear back from them. Would love to help the family and also make it fair and help myself all at the same time.
Amen to that. At the end of the day, we all know how to make money in REI isn't via selling real estate but owning real estate!
@Michael J Scanlon I'm assuming that net listings are illegal in Illinois as in almost all other states, so the main question I have for you is this:
What is the functional difference between a net listing (seller says "sell it for $XXX,XXX and you keep anything above that for commission") and wholesaling (I tell you that I'm going to buy it - but I'm really not going to. I'll assign the contract to the actual buyer and hope they can perform) or even wholetailing (I actually do buy it, mark it up without adding 10 cents worth of value, and resell it right away at a mark-up)?
On top of all that, if you are representing these people as your clients, you absolutely have a fiduciary obligation to them. They need to be fully informed as to the actual market value and how much of a haircut they'll take on the price by selling or wholesaling to you. To cover your own butt, this should all be in writing. If anything goes sideways, you'll want a paper trail.
A fiduciary must place the client's interest first and foremost above his own or that of any other party. Going after a wholesale deal on a client's property flies in the face of that entire concept because the only way a wholesaler makes a profit is by stealing equity from a seller.
I'd run this by your broker. I'd love to be a fly on the wall for that conversation!
@Charlie MacPherson
The main question I was going after though is this:
The family wants it gone ASAP
They seem more concerned about immediately getting rid of it as it is a “headache” to them, than getting anywhere near fair market value.
So my question is:
What is the definition of me acting in their best interest?
Respecting their wishes of getting rid of it ASAP in spite of price.
Or trying to get the most money for them, even though that would take longer and they want it gone immediately.
The idea of me buying it and reselling it is because there is the “buy it now” price and the actually fair market value for someone willing to wait (these condos in this complex are sitting for 150-250 days).
I can take it off their hands now at a much lower price as could anyone else. But why sell it to a random person for the same price I could buy it for? In fact, if I buy it, I can remove my commission and potentially offer a little more. Then I could wait the 150-250 days for fair market value.
Do you see my conundrum here?
@Michael J Scanlon I hear you - it looks like an opportunity to cash in. Again, if you're going to pursue it, run it by your broker. I'd be surprised if they approve it without some iron-clad documentation.
Imagine that a few months from now, another heir, niece Nancy pops up out of nowhere and claims that you took unfair advantage of the family. (BTW - has this even gone through probate yet? Do you even know who holds legal title?)
You find yourself in court and the judge asks you what the property's fair market value was. You say $100,000.
He asks what you paid for it. You say $60,000.
He asks what you did with the property. You say "I sold it".
He asks for how much. You say $100,000 - but the family wanted it sold quickly, so I was working in their best interests.
He asks why you didn't just list it at $80,000 on MLS and sell it fast. He might also ask for proof that the family knew that they were leaving $40,000 on the table. You say....what?
It's the appearance of impropriety that's the issue here. From where I sit, your motives appear not to be serving the client, but serving yourself. That's not a good place for any fiduciary to be.
My bet is that niece Nancy and her lawyers are going to eat your lunch.
@Charlie MacPherson
I’m not sure how I appear to be wanting to serve myself over the client.
I am repeatedly asking:
Do I respect their wishes of getting it sold ASAP even at a low price or do I push them to hold out for more money even though they want it gone.
I always hear though that "they want it gone fast so wholesale is the best option". I will disagree. There is zero difference between how fast a wholesale deal and a standard deal can close. The players are all the same. Either you have the title companies and lawyers and banks that can make it happen or you don't. So the time argument or condition argument are non starters to me. Especially the "contract assign" (not what you are talking about here of course) option. Because with that one the contract owner is sending it to a super secret list of 100 people vs across the world with mass advertising.
When I buy super low it is generally something that another agent called me and said "Mike, I just need you to get me something on this place they need it gone". Or I found a motivated seller and they know I am there to buy it for myself, no doubts. It really comes down to who you represent when you speak to them. If you are representing the buyer then beat them up on price and get a steal. If they came to you looking for help getting out of a situation and wanted you to be their "advocate" then you need to get it on the market by this afternoon and get them a buyer.
You can't be on the buy side against a seller and still be their fiduciary without it ever having a chance to sell on the open market. Especially for a heavily discounted price. If you list it at 50K and it doesn't sell and you drop it down by 500 a day to the price you will pay. I would accept that argument. But not even giving them a shot at someone who would pay more than you are willing to. It is why assessors and appraisers and banks are always checking "arms length transaction".
Good luck on whatever you go with!
@Michael J Scanlon It's your focus on how you can make money at this that gives the appearance of serving yourself. You're working really hard to rationalize your profit.
Again, the way to move forward is to run this by your broker - and maybe even by your local Realtor's board's legal counsel to be safe (assuming they'll answer that sort of thing - they may not)
If I were your broker (and I'm not), I'd want a very plainly worded letter, drafted by your attorney, signed and notarized by the Personal Representative of the estate and all of the heirs that the fair market value of the property is $100,000 and they are willing to accept $60,000 as a means of selling it quickly, and that they explicitly reject your recommendation of listing it on MLS for $80,000. This is the kind of thing I was thinking about when I mentioned iron-clad documentation.
I just see this as a ticking time bomb that's waiting to blow up when niece Nancy thinks she should have had the payday instead of you. It looks exactly like a net listing, which is illegal in most states and in others, (North Carolina for one) it's legal but strongly discouraged.
@Charlie MacPherson
If the family wants x dollars to sell it ASAP, better me to give it to them than some stranger.
There will be meat left on the bone whether it’s sold to me or to some random wholesaler/flipper.
If I should push them to be patient and price higher, I will. If I should respect their wishes and get rid of it ASAP, that requires price sacrifice. It has to be priced to move which will inevitably involve a spread.
@Michael J Scanlon "If the family wants x dollars to sell it ASAP, better me to give it to them than some stranger."
BINGO.
That statement is all about me, me, me.
That's exactly what I mean when I say you're working hard to rationalize your own profit. Why, exactly, is it better for the family to get the money from you rather than "some stranger"? $60K is $60K no matter who gives it to them.
Besides, you don't have to convince me. You have to convince a judge when niece Nancy sues you.
@Michael J Scanlon there you go. Seems like a no brainer. Either buy it and pay closing costs (should be less than 1k), then resell or rent it for the flow.
I just cringe when reading this. As a licensed agent, you may not pay anyone any fees or money outside of escrow or you have risked losing your license. Certainly a licensed agent can credit back to seller a portion of their commission but that happens inside escrow and is listed on the closing statement. You should not be giving advice on a topic where you advise people to violate the law or real estate licensing regulations.
To the original poster, yes, you have a fiduciary responsibility to this seller and a moral one as well. As a family friend, you should be advising them on what is best for them. That may be a quick sale, but that can also be accomplished by getting them the most money too. If it is worth $35k all day long listed on MLS, then you should offer to do that for them. If you want to buy it, nothing wrong with offering them less so long as you also offer the option to list for what it is worth on the MLS.
@Michael J Scanlon So it seems to me that the only point that this conversation hinges on is the fact that you are a realtor. If you aren't a realtor, everyone here should say go for it because its a deal - and anyone who makes money in real estate knows that the money is made at the purchase (#Deals). And most BP folks make their money doing deals just like this one. I think most here are arguing over if its ethically ok to make more money. Businesses overcharge customers everyday, its just when you know the person that you are making money off of, somehow it feels less ethical.
I personally, wouldn't wholesale - I'd do a double close at minimum. There's some complications when you say you intend to buy a house by have absolutely no funds to actually buy it.
In your case, check with your broker on regulations, disclose that you are a realtor, and get the deal done.
Oh and then get rid of your license...It's so much easier to invest in real estate without all the self-imposed rules :)
If you haven't signed anything with the seller saying you are acting in their interest, how do you have any special responsibility to them???
I have someone who is a family friend who has had their father pass away.
They want to get rid of his condo ASAP. They don’t want the trouble.
I am an agent (but a newer one) and can list the place but they would also be willing to take potentially as low as 50% fair market value in cash.
If I put it under contract then sell it myself as a wholesaler would do, am I violating my responsibility to them as an agent?
If you don't have all the cash to buy it, get a hard money loan and buy it yourself. Since the seller is open to a quick sale at 50% of market, give them what they want.
I am also a licensed real estate agent but I use my license to invest not really to sell properties for others.
@Michael J Scanlon I would advise you not to do it because it’s gonna make you look like a sketchy agent.
@Mark Johnson
"If you haven't signed anything with the seller saying you are acting in their interest, how do you have any special responsibility to them???"
Implied Agency Definition. An implied agency in real estate is an agency that has been formed based on the conduct of the principal (or client) and the agent.
So if they came to him and said "I want you to help us out of this problem and we know you know a lot about RE and we trust you". The implication is that he is working in their best interest (Hence the entire post is about the fiduciary responsibilities) and not his own. If your nephews baseball team asks you to be an accountant and you take all of the money out of their account and buy "we buy houses cash" signs. You have broken your "implied agency" with that team. If you decide to sell the hotdogs at the game for $1.50 cents more and pocket the extra .50, you have broken your implied fiduciary responsibilities. Yes even if it wasn't in writing.
I second the first part of this - you should be asking your broker for guidance and not an internet forum.
As far as the second part (not wanting to approach your broker about this), I think if you don't want to approach them then that is a clear indication that you are doing something below board.
As a licensee you have responsibilities to treat all consumers fairly, regardless of whether they are a client or not. Do the right thing: put their interests first and list this property on the MLS to get them the best deal possible.
@Joe Norman
But this goes back to the original question that nobody seems to want to answer
If their priority is getting rid of it ASAP (and condos in this complex are sitting for 150-250 days), then what exactly is the best interest of the family?
If they want it gone ASAP, they’re going to have to accept a lowball offer.
So what is my responsibility to them? To push them to hold out for the best offer? Or honor their wishes to offload it ASAP?
Offloading it ASAP will result in cash offers that are 50-70% of the lowest fair market value for this property (50-70% of about $32-36k)
But if it sits on the market for 150-250 days then it could reach $50-80k. But that does not seem to be the family’s priority.
So then my question comes back around of: it some random flipper is offering them 50-70% of that and I can match it, then have I not done everything in my power to do my best for them yet I can still procure the property without them sacrificing anything.
It seems as though most responses are ignoring that the family wants it gone ASAP.
If you are offering them $25,200 (70% of 36,000) and you 100% honestly do not believe that if you listed it you could get at least $25,201 tonight, then you are fine.
As far as ASAP, I know every agent on here has sold houses in 1 day. Especially a well below market value one.