Wholesaling and the nonrefundable deposits

[Albert Yamoah]

Concerning wholesaling and the nonrefundable deposit:

1.) Why do wholesalers implement these (especially if the deal is a legitimate deal)?

2.) How can a new real estate investor convince a wholesaler that a nonrefundable deposit is actually bad for business?

My feeling is that if a wholesaler truly has a deal, a nonrefundable deposit is unnecessary and redundant. I see them everywhere here in Dallas and many of the deals are actually not deals (some are even MLS listed). Just wondering how an investor might get around these.

[Hattie Dizmond]

There's a lot of really "mixed up" language here.  Let's try to clarify...

• Wholesaler "John" finds a property, gets it under contract, generally offering some amount of Earnest Money (EM), and - depending on the situation &/or location - a small, non-refundable option fee for a short due diligence period. 
• John presents the property to potential Investor Buyer(s).  He includes the property address, Offering Price, high-level estimates and any terms (including deposits).
• Investor "Bob" is interested in the property, performs the initial financial analysis, and determines this could be a good opportunity for him.
• Bob notifies John he would like to view the property and sets up a time to do a walk through with his contractor.  (Bob also has the option to have a home inspection done, before committing to the property.)
• Bob & John walk through the property with the contractor, and Bob performs any other due diligence he feels is required.  The contractor completes an estimate, based on the walk through and notifies Bob, who determines he wants this property.  (If applicable, the inspection report is completed as well.  If the contractor &/or inspector find anything net new, John has the option of going back to seller to either negotiate a lower price or kill the deal, losing only the small option fee.)
• Bob notifies John he wants the property, signs an Assignment Contract with John and presents John with a cashier's check for the required non-refundable deposit.  That amount is deducted from John's wholesale fee, by the title company, at closing.
• Bob is now the buyer of record for the property and will work directly with the seller.

Bob doesn't put up the non-refundable deposit UNTIL he has completed his due diligence and has decided to move forward with the purchase.  If Bob is a "real investor", he has this process down and can complete that work in just a couple of days. 

The other option for wholesalers, if a buyer wants the property taken off the market, but still needs the remainder of the Option Period to complete their due diligence is to have the "non-refundable" deposit held in escrow, with the terms clearly spelled out.  This is helpful in cases where there may be something out of the ordinary that needs to be fully inspected, prior to locking up the property.  It basically gives Bob the same ability to kill the deal that the any other buyer would have with the option period.  I would charge Bob exactly what the Option Fee would cost me to get out of the deal.  However, if there is something major - big foundation issues, lead paint, asbestos, sub-foundation leak, etc. - that may take more time to fully inspect, I'm not going to hold my buyer hostage. 

The key point is that the deposit isn't made, until Bob decides to buy.