Lessons learned from wholesale deal turned into lawsuit

[John Chapman]

This is a kind embarrassing/bizarre story, but I figured I'd share it since everyone and there brother is getting into wholesaling.  Basically, I was approached about buying a buy-and-hold home from a wholesaler in a decent area.  I wasn't super excited but didn't have anything else going on.  Long story short, we agreed to do a double close instead of an assignment and, despite assurances from the wholesaler that the seller was on board with this, the seller absolutely freaked before closing when he found out the wholesaler was selling the home to me for an instant profit.  He accused the wholesaler of breaching the contract because there was a title insurance premium pass through doc he had to sign that identified me as the end buyer.   Days on the phone trying to save the deal, and it ultimately falls apart and seller refuses to close.  What makes matters worse is that the seller then demands my $5000 earnest money.  (The seller was a complete crook and had pulled this type of scam before, tying up earnest money to extort some sort of settlement.)  

I had enough, had the wholesaler assign me his claim, and sued the seller in state court.  I'm a litigator so I did it myself.  In the end, the seller settled with me and sold me the home, but this was only after I aggressively litigated the case.  (Attorney fees would have easily been $15,000 if I had paid someone else to do it.)

Here's what I took away from the lesson:

• Wholesaling sure seems like a lot of work to avoid licensing requirements.  All of this likely could have been avoided if I could have simply directly paid the wholesaler a referral fee, but I couldn't do that because he didn't have a license.  
• Even if a wholesaler fully discloses that he is reselling the home or assigning the contract for a fee, there is going to be a certain percentage of sellers who are going to freak out and be pissed.  This blows up deals and leaves the wholesaler in a bad place.
• The chances of a wholesale deal blowing up are higher simply by virtue of the fact that there are additional parties involved.
• Wholesaling should only be done by sophisticated and experienced investors who are selling to other sophisticated and experienced investors.  There's just too much that can go wrong.  Yes, many wholesale deals will go through and maybe my experience was just a "one in a million" type experience, but I suspect a higher percentage of these deals go south than straight buy/sell type transactions. 
• When it goes bad on a wholesale deal, it can go really, really bad.  If my lawsuit hadn't gone well against the seller, I would have absolutely sued the wholesaler.

I left out a lot of details but I should qualify that I made mistakes as well, the biggest one being that I agreed that my earnest money could be pledged to the underlying contract.  

I should also add that I'm not bashing wholesalers.  There are definitely good ones out there.  Just thought I'd share my experience and observations since I see so many people wanting to get into this field.