Earnest Money vs Direct Deposit?

Question

Hello there!

I need some clarity from you more seasoned investors. I have been working with a wholesaler company in the Houston area. I have one deal going on with them (assignment of contract) and trying to get the second one going. For this second one, they want to do a double close, they did the first one an assignment "as a favor" to get the relationship going. Here's the thing, it is the wholesalers "standard practice" to lock in the deal with a 5K deposit paid directly to them and to double close. In the event that they can't provide clear title, the would refund the money, but if I walk out of the deal, they keep it. Me and my associates are asking that the title company holds the deposit until closing, as an extra layer of protection for both parties. Wholesaler is against this, claiming that at that point the deposit would be considered earnest money, and both parties would have a claim to it.

Am I missing something or why does this feel off? Wouldn't it be in everyone's best interest to have the title company involved?

Let me know your thoughts below. Thanks!

Wayne Brooks · Answer

Yep....to the title company directly, period. I don’t care what your “policy” is. Some people’s “policy” is just to scam you or rip you off.

Stone Saathoff · Answer

@Arturo FuentesEarnest money is really designed for traditional transactions. For a wholesale transaction, down payments are more appropriate. Most people don't take into account that there is often a vulnerable seller that is relying on a timely closing. If the deposit is held by title and there’s an escrow dispute due to a buyer simply going non-responsive, the seller is affected. This way, we can ensure that doesn’t happen because the transaction is free to move forward.

Arturo Fuentes · Answer

@Stone Saathoff Thanks for reaching out! I would love to understand your position better. Why wouldn't you want to have the title company hold the deposit until closing?

Stone Saathoff · Answer

Disclaimer: I work for New Western in San Antonio

We do a 5K deposit that is only refundable due to title issues. I have personally had 3 deals fall apart due to title issues in my career and I had the 5K deposits refunded to my buyers each time on the same day they terminated. Nothing to be concerned about.

Arturo Fuentes · Answer

Hi all,

Thanks for your responses and opinions.

@Kyle J.We stayed firm on our position on only going through escrow. They didn't like that and walked away. Probably best for everyone. You do have a great point, even if I were to sue them if things went south, it would be very hard to collect that money. Thank you for your thoughts!

@Wayne Brooks Thank you! Definitely not wiring the money directly.

@Mark Sewell No, this is Myers, the Home Buyers.

@Joe Splitrock Thanks! That's the exact reason why we wanted to have the title company hold the money. Wholesaler decided to walk away, which is a very good indication that this wouldn't have worked for us.

@David M. They claim that's their standard practice, and if we want to work with them, we have to adhere to it. Don't think we'll be working with them in the future.

@Jason Hirko Yeah, it seems like this big wholesaler groups have practices like these in place, therefore I thought I was missing something and this shouldn't be a big deal. But after reading all of your opinions, I'm positive that this is not the right way to do things. Thank you for your opinion!

Jason Hirko · Answer

@Arturo Fuentes Both the non-refundable $5k deposit and the double close are standard New Western/Net Worth practices. And both of those big wholesale shops still continue to find buyers for their 'deals.'  So if you want to set your own terms, you'll have to wait until everyone else has already passed on it, which would be a bad sign.

David M. · Answer

@Arturo Fuentes

Definitely only hand over money into escrow.

Also, why do they want to force a double close?  Shouldn’t that be a backup strategy?  Smells fishy to me... but I’ve never worked with a wholesaler..

Good luck

Joe Splitrock · Answer

@Arturo Fuentes it is in your best interest if a neutral third party holds the money. The contract dictates who has claim to it. Having a third party hold the money just means if you dispute his right, that you can tie up the money until it is resolved.

Mark Sewell · Answer

Is this New Western?

Kyle J. · Answer

Some wholesalers ask for their fee up front, but personally there's no way I'd hand over $5,000 to a wholesaler outside of escrow.  That's a lot of money and good luck getting it back if the deal doesn't close.

Seriously, what's your recourse if they just refuse to give it back to you?  Are you going to take them to court?  And then what would you do even if you won?  How in the world would you collect from this person who likely has no assets of their own?  I know you don't want to think about it going bad, but you have to assume that it could.

I'd tell him that you will only do one of two things: #1 - Pay the fee now to the title company, or (if they continue to assert they don't want it paid to the title company) #2 - You can just hold onto it until it's time to wire the rest of the money for the purchase and they can get paid at closing.

Earnest Money vs Direct Deposit?

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