Do I need to sue my wholesaler?

Question

About 8 months ago I met a wholesaler. I had 25k in a HELOC. He showed me a house to buy in the suburbs of Denver to try and do my first fix and flip. My dad was going to co sign that's the only way I could get the place.  My dad backed out of co signing so I could no longer finance the place so I backed out before closing.  Wholesaler kept my 5k as commission.  He told me its OK well do another deal and you will make money.  So he sends me more homes,  I pick one. We look at it and plan that we will go 5050 on it.  He keeps picking up large checks from me. 8k, 5k, 4k, 1200. For earnest, materials, his commission.  Till I have given him all 25k.   Its been over 8 months and still hasn't closed.  Every week he tells me this monday we will close. But it never happens.        At this point I know the house will never close. I need my money back.  What should I do?

Joe Splitrock · Answer

@Crystal Wilson I am fairly certain you are the victim of a scam. This sounds like a scam, because they strung you along and sucked your money away. It could also just be an incompetent wholesaler who is in over their head, in which case it is not fraud, it is just incompetence. Odds are good they don't have your money, but try getting it back anyways. Move fast before it is gone - like today! Here is what I would do:

1. Get an attorney for civil litigation.

2. Contact your local police department and speak with their fraud division. Open a discussion with an investigator. They may tell you it is civil, but if the individual is under investigation for other fraud, you want them to know you are a victim too.

3. Contact your state real estate commission and report the individual. Many wholesalers are violating state laws, so the state may investigate.

Good luck.

Jaquetta T Ragland · Answer

@Jay Hinrichs this is good advice. I had $5k taken from me for a wholesaler...learned this lesson the hard way. Now I am very cautious of what I sign and who I give money to.

Eamonn McElroy · Answer

@Joe Splitrock

At worst, we'd probably take a capital loss, which isn't optimal, but is better than nothing.

From a bird's eye view, it doesn't appear to be a trade or business theft loss, nor a ponzi scheme.

Maybe an investment theft loss, which would be deductible as ordinary on Sch A, but the OP should consult her advisors to dial that in.  To take a theft loss for tax purposes we generally need to have no prospect of recovery, and exhaust all other avenues of collection.

Your points are good ones and I always recommend building the paper trail (substantiation) for tax.  Police report, emails back and forth with attorneys, bringing suit, etc.

Probably not worth it to issue any kind of informational report to the wholesaler....doubt OP has his tax ID.  Not worth the time.

Rey Tobar · Answer

@ Crystal Wilson I am a Detective for the local PD. We see several of these type of scams but they are all online transactions. In other words the victim never makes personal contact with the scammer, everything is done online and the scammer sends photos details of the property and continues to have the victim send as large of a portion of funds they are willing to send each time until the victim notices it was a scam. The scammer uses several bank accounts with several stolen identifiers and the funds are sent over seas. We recently had one for total of 1 million. Now for your case, did you meet the wholesaler in person, do you have documentation of all the transactions, any contracts with specific details of the deal, ect..? Yes make a report with your local PD, he may be on their radar, but keep in mind if you have no detail contracts, documentation, receipts, ect... it will be a civil case. Hope the best for you. If you have any questions, don't hesitate to reach out.

Matt M. · Answer

I've never seen a house UC for 8 months unless it was a short sale. Send him a demand letter and then sue. Get the police involved.

Joe Splitrock · Answer

You mentioned the IRS, which brings up the point of tax treatment. I don't think fraudulent fees are tax deductible, but it would be interesting to hear a CPA or tax professional chime in on this. If you are scammed out of $25,000 and never close a deal, is there any way to deduct this as a loss?

On the flip side, it seems the wholesaler would need to pay taxes on any income. IRS has established even illegally derived income is taxable. I wonder if sending the wholesaler a 1099 would be an effective strategy to legitimize the expense for tax purposes. If nothing else, it would notify the IRS that they owe taxes on that money. Even if a wholesaler legitimately takes a non-refundable deposit, they still have to pay taxes on that as income.

Theresa Harris · Answer

Did you sign any documents before handing over the money?  Was a lawyer involved? I know people don't like paying lawyers for signing, but this is exactly why you have them involved.

I agree with Joe, contact the police and get them involved.

Matthew Irish-Jones · Answer

@Crystal Wilson you should do something about it before this other random house does or does not close.  You should take the advice on this thread, get authorities involved, and get away from this wholesaler permanently.

No honest business person would hold onto someone else’s money for 8 months for a supposed closing.

This is not a person you want to do business with.

Flor Monterrosa · Answer

@Jay Hinrichs I was glad to see this response, for I dealt eith similar situation. Your response served as a good advice for the future.