The Story Of The Wrecked Wholesale Deal

One of the students that I am working with texted me about a potential deal this last week.
“They want $24k.” That was all I needed to hear. Well, that and the address which showed that it was in a decent part of town and not a war zone.

The next text mentioned how they came up with the $24k figure. There are eight heirs and they each are ok with $3,000. That’s not much but the house is in complete disrepair and they owe back taxes that are forcing them to move quickly. I was glad to hear that they were reasonable with the asking price.

The Problem With Multiple Heirs

In my experience, when there are a lot of heirs, there are a lot of problems. So this statement about each of the 8 heirs wanting $3k sank my excitement. When there are that many heirs you are almost guaranteed to run into some difficulties that are almost always deal breakers.

This is how it usually goes. You will typically have one or two of the heirs that have always taken care of everything. They are the ones that go over and check on the elder family members before they pass. They are the ones that keep the house up as much as they can and give of themselves for their loved ones. They put up the money and time to take care of things.

Then, you have the other heirs. They are usually the ones that are too busy or have their own problems and aren’t ever willing to lift a finger.

The reason I bring this up is because the ones that have put forth all of the effort over all of those years are the ones that are willing to accept a reasonable offer and move on. It’s almost always the ones that never lifted a finger that tend to start seeing dollars signs and end up being hold outs that want way more than the house is worth.

How The Deal Unfolded

We viewed the house and confirmed that it did indeed need a complete remodel. It was a small house, so the numbers weren’t outrageous. Our intentions were to wholesale the house.

One of the heirs lived at the house and he really liked to talk. That’s not a bad thing and what he had to say was mostly interesting. We spent about 30 minutes, or maybe even about an hour talking to him in the front yard. The reason I bring it up is for a little foreshadowing.

I figured a landlord would be interested at about $30,000. In order to make sure there was room to negotiate with an end buyer, we ended up negotiating with the heir that was calling the shots until an offer of $20,000 was accepted. There was no will, so an affidavit of heirship would need to be completed to be able to sell the house. Instead of having an executor (or executrix) that would sign for the estate, all heirs would have to sign.

With the price agreed upon with all heirs, my student (let’s call him Larry) had a contract signed and had it receipted at a local title company.

He had set a closing date about 4 weeks out to give us time to get the title work done and handle any problems that might pop up (as is likely when there are so many heirs – and one of the heirs had already been deceased…yea, it gets hairy).

Houston, We Have a Problem

So Larry immediately starts pushing the deal to the small list of buyers he had started building and posted an ad on craigslist. He had asked me whether he should include the property address and I told him to go ahead so as to avoid a lot of calls just to get the address (but not on the craigslist ad, just the emails sent to his small list).

Then I get a text message from Larry. The message stated that a couple of the heirs wanted more money now and would not do the deal.

I thought about it for a while and thought it strange that they would change their mind so soon. Now, Larry had just started pushing the deal, I wonder if…

Yes, he confirmed it. The heir that was living at the house was approached by another investor, even though all investors were told not to bother the tenants.

I had incorrectly figured that with a small list, this shouldn’t be a problem. I figured wrong.

Larry was attempting to assign the contract for $32,000, so that is what he was asking in his email and on the craigslist ad.

Now Larry wasn’t told that another investor had talked to the heir living there, that is just assumed because that heir was now demanding $32,000.

So it appears that the other investor is attempting to either make a deal directly with the sellers or just simply ruined it by informing the heir living at the house that that is what it is attempting to be sold for.

Either way, it’s become a problem that could kill the deal.

What Should Have Been Done To Avoid This

What could have been done to avoid this?

I’ve given it a little thought since this happened. Could this have been avoided? Yes, I believe so. But it wouldn’t have been easy.

Here are some of the options I’ve considered:

Not giving out the address through email
This was what I thought about first. I told him to go ahead and give it out and then wondered if that was a mistake when I found out we had a problem. After some consideration though, this was not the problem. If the address was not given out in the email, interested buyers would have still called or asked for the address.

You can’t expect someone to be able to analyze a deal without the address. Well I guess you could just give them the block and the details of the house, but if you are that worried about giving out the address, you might as well find a way to close on the deal first, before attempting to sell it.
Contacting investors one at a time
If you offered the deal up to one investor at a time by giving them a certain amount of time to have an exclusive opportunity to buy it, would this have been avoided? Maybe. They may have believed that you would know it was them that was screwing up the deal and not done it. Or, they would have done it anyway. I believe some people would.

Besides, if you don’t know who the real players are and you are just giving every person that says they are an active investor 12-24 hours exclusive rights to the deal, you are going to be wasting a lot of precious time. Most of them will be actively trying to find fault in the deal so that they can feel good about turning it down. Many inexperienced investors are afraid to commit to wholesale deals. Many get a strong urge to urinate all over themselves when put on the spot to make a big decision. It’s understandable and I’m not suggesting it’s wrong to get that urge.
Only contacting investors that I trust
I could have found a buyer for Larry for the deal most likely. But, that would defeat the purpose of him learning how to do things and building his own buyers list. I wanted him to do the work and figure out some strategies on his own. So even if this deal does completely fall apart and never close, he still is walking away with some lessons learned.
Recording a memorandum of agreement
This is where you record a memorandum at the county courthouse that says that you have a valid contract on the property. Please check with competent legal counsel before doing this. This clouds title and ‘MAY’ prevent the seller from being able to sell to someone else. Some title companies might ignore it, so it’s not a guaranteed solution.

What happens is the title company doing a title search for the new buyer (that stole the deal) would come across this cloud on title and need it to be released in order to issue title insurance. They would contact you to have you release it. This is when you would tell them how much you want as compensation to release it.
Threatening sellers with a lawsuit
Of course, if your contract is worded correctly (doesn’t give the seller an easy out), you could sue for non-performance. It’s not worth it though, in my opinion. Besides, I don’t want to force a seller to sell to me, especially with a deal like this.
Closing on the deal before finding a buyer
To me this is the only real 100% guaranteed option to avoid someone from coming in and stealing the deal, provided the seller doesn’t actively try to find other people to sell to before you close. There are all sorts of extra costs in doing this and you will end up in the chain of title. For those reasons, I only want to do that for deals that have a huge profit spread to make it worth while. You’re taking on a lot more risk.

What To Take Away From This

I hate to say it, but a lot of people just cannot be trusted. It stinks that we all need to be on guard about this, but it’s reality. Everything you do with your wholesale deals needs to be with the assumption that someone will try to steal it from you, or at least ruin it for you.

But this doesn’t mean to never trust anybody. You should trust people but keep an eye on them.

It gets much easier to wholesale after you’ve been in the business a little while and have networked with a lot of other investors. You will find a small group of buyers that you will likely sell 95% of your deals to. These will be people that you absolutely trust. When you have this group (even if it’s just one or two investors), your life becomes so much easier.

You’ll be glad to know that Larry is working on sorting this out with the hold out. We’re optimistic.

If you have any stores about wrecked deals, I’d love to hear about them. Please share them in the comments below.
Photo: bernat…

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.