should I get seller in foreclosure sign option purchase agreement to flip his house?

Question

Home owner facing foreclosure who did not make a mortgage payment for 39 months called me to buy his house CASH AND CLOSE FAST.

I got him interested in signing option purchase agreement which indicate that he can also find his own buyer while I am trying to find an end buyer.

I want to know if this type of agreement is better than just a standard contract detailing the below terms.

I talked to him to accept the following on the option agreement that was turn later to contract when I found end buyer.

full price  142,500

his walk away money : 22,500   @ closing

reinstating his loan : 70,500

I found cash partner to assign the contract to, for a fee payable @ closing .

is

Bill Gulley · Answer

@Mary B. LOL,  Hope not.

I have sold, as the owner or as a lender tons of properties under the banner being waved by wholesalers as a strategy or business model.

Pretty simple, properties that are held that can't be retailed for one reason or another are sold at it's market value for what it is. These properties are sold to "dealers" landlords or rehabbers or to someone who can buy who generally has the intension of curing the issue that keeps the property from being retailed.

Damage Goods Sale, you go to the grocery store and there in the isle is a basket of a variety of foods with damaged packaging. The can of beans is dented, the pancake mix box is crushed on the top. These items can't be sold at full retail price because in their current condition they are not marketable at that retail price.

The same is true for anything we buy, no one pays full blue book retail price for a wrecked car!

Every time a property sells on the MLS, the seller receives less than the market value, not just from the soft costs of selling like title search and settlement fees, but the Realtor takes a cut who listed and sold the property. The seller sells at MV but always receives less. So, saying you buy under market is not really a true statement as the seller sells at a value netting them what is acceptable.

Wholesaling does not require a genius to figure out that a house that is damaged or has issues needs to be sold at a lower price to get rid of it. It's simply a point of negotiation to determine the price with an owner. If that buyer negotiates a good price they may be able to convince someone else to pay a bit more to make a profit. Middlemen or straw man deals were probably done when man began walking the earth, trading a spear for a rock tied on a stick or for something more valuable.

Gurus simply took a theory as old as trade itself, spun it, repackaged it and presented it as a simple strategy to make money in RE. Totally, soooo laughable.

There is nothing wrong with buying and selling or assigning a contract, so long as it is an acceptable practice and is done in a manner that does not violate law.

In the above case, the foreclosure sets a situation where being a straw man or middleman can put that operator in a position of violating federal law.

Another issue with being a straw man is the aspect of dealing in good faith. If you tell a seller/owner you're going to flip the contract to get the property sold, that is just fine. Problem is, gurus and the ignorant or scared middleman who can't explain what's going on has found a short cut, by deceiving the seller into thinking that the middleman is actually buying the property with some wild lie or story about "getting a partner" to approve the deal or some other story.

What that does is it places a property under contract under false pretense. Putting a property under contract puts an obligation on the seller to sell, they may not contract with others unless they give notice of the pending sale, few buyers bother with back up contracts.

So, the property is taken off the market and the seller waits for the buyer to perform.

What the seller is not informed of is that his whizbang wheeler dealer doesn't have two nickels to rub together, has no credit to obtain a loan and, doesn't even have that partner or alternative available to sell the property when the contract was made. This type of dealing is not dealing in good faith, it is not ethical and it is tortuous conduct, that means it is a legal basis to hold another liable for damages. And, sellers do hold such middlemen financially liable for losses arising from such conduct or dealing in bad faith. That means sellers sue these whizbangs.

What are the damages? For one, there will be the claim, which you can not defend against, that the seller may have had a lost sale opportunity, not at some deal price, but at full value. Loss of sale is almost a slam dunk claim, if it was on the market it probably would have sold as most all properties on the market sell, you certainly can't prove it wouldn't sell!

Consequences of other damages then arise from the loss of the sale.

In the above case, the owner loses the property in foreclosure, his credit is damaged, for years he will be paying more for credit, insurance and may lose a job or not be hired to a better job. These losses can go into the tens of thousands. The seller could have sold the property and avoided the loss had they not contracted with some whizbang dealer, you'll never be able to prove they could not have.

Not only does the owner miss out on a prime marketing window, the may hold it for a period of time where that market cycle is lost completely. That seller who had a contract at 100K with Mr. Whizbang who lied and failed to perform can sell that property for 60K and tag Mr. Whizbang for the 40K loss!

This doesn't even get into actual damages of paying mortgage payments, paying taxes, utility bills or other holding costs.

That's not near the end, what if a seller lost a purchase on a next home in another town where they were moving. They relied on your contract and moved their furniture into storage, loss of earnest money, deposits and inspections as well as loan costs, absolutely Mr. Whizbang will be paying for that just as others have, along with motel bills, eating out and every inconvenience they can think of.

All of this is from the civil side, you can be smashed like a bug in court easily if you lie, deceive and mislead a seller in a real estate contract, I have seen it happen, it does happen and it will happen again I'm sure.

Then, you have the criminal side getting involved in a foreclosure. If you lead someone to believe you are helping them avoid or manage anything in that process without the proper license or being an attorney, you can be in violation of law. If you cause the FC lender to delay any aspect you can be in violation. If anything is communicated by anyone to that lender and they spend time addressing that contract or potential sale and it turns out the contract was fraudulently made, you just caused that institution an expense and perhaps it could have led to a decision that could cause a loss to that lender, now you could be facing other charges interfering in the duties of a bank employee and banking operations, that to is a federal matter. You don't even have to cause an actual financial loss when you are dealing in matters of misrepresentation.

So, let's make it clear, I'm no friend of Mr. Whizbang........unless he deals in good faith, discloses what is actually going on, doesn't lie about have a cash buyer when there isn't one and can actually perform in his obligations as contracted, then we can be friends. :)

Mary B. · Answer

I use the option to purchase agreement often just to be sure its something I can move forward on. This way if you don't find a buyer in a week or two its no harm no foul and you walk away. Its not seriously binding so if the seller finds a better offer that's ok too. However should you find a buyer in the alotted timeframe, then you will want to get a standard purchase and sales agreement to replace the option to purchase agreement.

Kudos,

Mary

David Oldenburg · Answer

@Tae Seung Kim  I know it's been a while since you posted this, but I wanted to respond to help anyone in CA reading this thread.  I always use the California Association of Realtors (CAR) purchase agreement for all my deals.  I am also a licensed broker, so I realize not everyone has access to these forms.   Yes, this form does not allow for assignability, but I have yet to meet a seller who will refuse to sell to someone else with the exact same terms they have already agree to...your mileage may vary!

The standard inspection contingency is 17 days, meaning that you can back out for almost any reason, with no liability and get your deposit back.  However, if you remove contingencies in writing (they must be removed in writing in CA), you are typically only liable to lose the actual amount of the deposit.  I have been doing this 27 years, and I have seen hundreds of people back out of contracts, and so far (knock on wood) no one has ever lost their deposit who backed out before contingency removal, and no one has ever lost more than their deposit for backing out later.  I am sure there is a RE attorney who would have an exception, but that is my experience.

Good luck to everyone :-)

Tae Seung Kim · Answer

For any wholesalers who are worrying about seller possibly suing you for specific performance or for whatever reason because you didn't/couldn't find a buyer and you weren't able to buy their property or fulfill a promise, then couldn't you include this following into your purchase and sale agreement?

"Buyer and seller agree that, upon any default by the Buyer, Seller will keep any earnest money as full liquidated damages as sole remedy."

That way, the only worse case scenario would be that you would lose your earnest deposit money. I mean of course it wouldn't and shouldn't be a good practice to back out but this would be used as exit strategy in case you are in dire situation.

Mary B. · Answer

Bill, you're starting to sound like a wholesaler. Be careful, you might lose friends here. :-)

Kudos,

Mary

Gamal Darwish · Answer

I MEANT NONE REFUNDABLE FEE.

Gamal Darwish · Answer

The best way to approach the sellers of any situation is full disclosure with an option to purchase agreement ( standard flex agreement) which detail :

1) the option is assignable to end buyer ( for fee).

2) if buyer / optionee ( I)  is not able to find an end buyer the agreement will be null.

3) Seller has the right to cancel or find his own buyer.

4) buyer/optionee is not real estate agent and is not representing anyone in this deal.

NO LIE , NO ACT AS IF YOU ARE CASH INVESTOR, FULL DISCLOSURE, NO PURCHASE AGREEMENT WITH SELLER ( unless if you solid buyer but again you could assign your option agreement and collect the assignment fee. there is no need to get in signing purchase agreement that you fully aware that you will not close on personally).

Assigning your right to purchase your end buyer, and have him sign with the seller the  Real estate purchase Agreement, after he sign your Fee assignment agreement and place refundable part /full of FEE.

there is no law broken here, you are not acting as realtor , not lying. what you are doing is helping someone who was unable to sell via realtor or himself, someone who will lose everything if the house is lost in auction...., so finding a buyer to cash him out, saving credit is not a bad thing BUT FULL DISCLOSURE-NO PROMISE.....

these type of homes are in condition and distressed situation that realtors can not help because they are not financeable, not enough equity to pay their commission, not in move in condition for the retail buyers

thank you

Jason C. · Answer

@Dante Nava

To you and all aspiring Mr. Whizbangs out there. Rest assured, this can be an ethical way to make money while helping to bring buyers and sellers together. In my market in central Texas, most wholesale transactions involve a double close so as to avoid any sticky legal situations.

Disclaimer: I am not a wholesaler, and never want to be. I already have a 9 to 5. I'm a real estate investor, but I have purchased property from a wholesaler.

Bill Gulley · Answer

Well, it's always the few that mess things up for the majority.

The issue is the lack of an education and the assumption that gurus provide an education.

There is nothing wrong with wholesaling so long as you do it ethically and in compliance with applicable laws.

Since wholesaling is walking the narrow line of what Realtors do and the activity requires a license, yes, I'd say that effects the general reputation.

I'd think those that build a business model around this strategy may have a hard time in most communities as it is seen as selling or facilitating a sale of a property you don't own. We can cut through all the equitable interest stuff and I'm selling the rights to buy stuff, bottom line is that you're dealing in a manner to circumvent agency law to facilitate the sale of real estate.

Regardless of what business you get involved with if you devise methods of dealing that dance around the legal and acceptable practice in that industry you're starting off with a black eye.

The question becomes, why would you do it? Can you not operate as usual and customary in that business? Why do you chose not to conform and follow the intent of applicable laws? What is it about they way you operate as being better for the industry, better for the public good, that has any greater economic benefit for all concerned? I don't think there is an advantage overall in any of these aspects.

Complete this sentence: I wholesale real estate without a license because_______________________________________________.

No, you don't make more money!

Because, I can't afford to get a license;

Because I'm not smart enough to pass a test;

Because I'm too lazy to study and just want to take the easy way out;

Because I don't want to operate under the ethical constraints as a Realtor.

None of those answers reflect a great deal of professionalism upon the dealer.

I "wholesaled" a property last year and considered doing another to assist a friend of a friend but turned it over to a Realtor as that was the best method for the circumstance.  As to reputation, here is why my reputation was not at risk:

Basically, it's experience and my education along with a long history of honorable dealings, I'm not new. Any Realtor looking at me in that transaction wouldn't even mention it or even consider acting as a straw man on that deal as being unethical or violating any law. Another reason is that I have the ability to buy it, no one is going to hammer me if I change my mind or simply decide to pass it on to someone I know. Especially since it cost the seller less than listing it.

But, if I were to advertise to home owners, sought out sellers, began contracting as a business venture, tied up properties taking them off the market, didn't have the ability to close the deals, went out seeking buyers by flipping those contracts, my reputation would be mud! Flipping a contract as a matter of circumstance and doing it as a business model are two entirely different things. I wouldn't do that.

Last issue, what wholesalers do is known as a "net listing" in the industry, it is an illegal and unethical practice for a licensee to take sale proceeds above a certain amount agreed to by an owner to accept from a transaction. Realtors are deemed to have a greater degree of knowledge than a homeowner and are able to identify the value of a property. From that angle negotiating with an owner convincing them of a lower value is unethical and fails to represent the best interests of the public. Tell the owner the truth as to value and agree to a 12% RE commission, that isn't unethical or illegal, so long as the owner is aware of the transaction. The way most wholesalers conduct their business is along the lines of doing a net listing, if you're in the business of RE, you too have a greater knowledge of RE than the general public. What's good for the goose is good for the gander, so building a business model along these lines is seen in the same light.  :)

Dante Nava · Answer

As an aspiring Mr. Whizbang, I really appreciate your post @Bill Gulley. Some of those are definitely aspects you don't think about when making your grand plans for the future. When your intent is to make money with the added bonus of genuinely helping people, not knowing what you don't know but learning as you go is the only those of us "without two nickles to rub together" is what we have to go by. Are Wholesalers typically crappy people that give this "profession" a bad name and anyone in it is tainted, or is it the actual act of being the middle man that's looked down upon?

My understanding of it is that in some markets wholesalers are one of the best ways for finding good deals and are helping sellers out of homes they would have otherwise lost or not known what to do with.

So am I a bad guy? If not, other than honesty (which is my intent) can I do to not be seen as a bad guy?