What prevents a buyer from circumventing wholesaler?

Question

If I put a home under contract and intend to wholesale the property, what prevents an unscrupulous buyer from intentionally tying up the home, backing out of the purchase during the option at the last moment, and then buying it directly from the seller a short time later after it falls out of contract with the wholesaler?

If a buyer used the option period and backed out, it seems there is a good chance a wholesaler wouldn't have time to have another buyer purchase the home during the wholesaler's option period.  In an event like that, couldn't the buyer purchase directly from the seller less the wholesale fee?

Other than getting a lousy reputation, what prevents a buyer of a wholesale deal from doing this?

Jerry Puckett · Answer

I require a pretty steep non refundable deposit from my buyers if I've never worked with them before. My assignment form spells out clearly that they are not to conspire with the seller, and that all communication goes through me. If they do back out for ANY reason, I've already gotten paid. The money isn't in escrow, it's in my pocket.

I have heard this fear as a recurrent theme from many a new wholesaler, but the fact of the matter is that if you're providing quality deals, your buyers will not want to burn their bridges with you. They'll want more deals. No one has ever gone around me, nor has it happened to any of my local colleagues. It's just not the norm.

Mike G. · Answer

@Larry N. , here are my thoughts:

1.) Yes, the buyer will want to see the property.  And yes, they could try to work a deal with the seller behind your back.  However, you have a contract to buy the property, which the potential buyer doesn't.  You could make it an issue if you wanted, or just move on to the next deal and spread the word about the unethical buyer.

2.) Yes, I think this would be difficult to do.  As a rehabber, I would not give money directly to a wholesaler.  I would put it into escrow.

3.) A non-circumvention clause in the seller contract seems redundant to me.  They are signing a contract to sell to you.  If you don't perform, they are free to sell to someone else.  As for the memorandum of notice, this seems like a waste of time and energy to me.  Even for the person who suggested it, it was only useful once.  Seems like a lot of paranoia for an occasional event.  And if the seller decides to sell to someone else, why get entangled in a negative situation?  Just move on.

James Vermillion · Answer

Here is a good thread where this exact thing happened, a good read if you haven't seen it yet:

https://www.biggerpockets.com/forums/311/topics/83152

Sam Craven · Answer

In texas I file a memorandum of notice of contract (or something like that) every time i put a house under contract (wholesale or flip).

This has saved me once.  I had a house under contract, marketed the house and another investor went directly to the home owner to attempt to negotiate the deal.  Homeowner called me and told me she didnt want to sell anymore and called me a criminal.

About 5 days later i get a call from a different title co than the one i had opened title, asking what the memorandum meant.  I informed them that it meant i had an equitable stake in the property, that it was under contract and i intended to close on it.  Sent in a copy of the contract with a little note informing them that i was willing to take legal action against them should they attempt to close on the property.

2 weeks later i get a call from the home owner who was very friendly this time wondering if we were still going to close that Friday, and i did.

Account Closed · Answer

Nothing can prevent someone from trying to go around you.  Your contracts with both the seller and buyer are supposed to be binding.  But if buyer goes so far as to enter into a contract with you, wait out a closing date AND then negotiate and new deal with the seller?  That's what earnest money is for.  Get your buyer's earnest money tied up in escrow.  While it's difficult to keep earnest money, it will stay in escrow for a long time if both parties don't release it.

I've heard lots of theories over the years about "clouding title".  I've recorded a fair amount of agreements and contracts and leases.  Since the docs need to be notarized in order to be recorded, it puts the seller on alert that I plan to record the docs and that I think the contract is binding.  But recording a contract won't prevent the seller from selling to someone else if 1) the new buyer has cash and doesn't care about title insurance (and the buyer isn't afraid of being sued), 2) the end date in the contract passes, then the contract no longer clouds title, 3) title chooses to disregard recorded contract, lease or memorandum.  Which I have seen them do.

Best bet is make sure your seller understands and agrees that that your contract is binding, and make sure your buyer plans to perform by requiring max. earnest money.

Tim G. · Answer

I've had it happen to me.

The buyer gets black listed and their reputation tarnished among the community. The seller knew I was bringing in partners on the deal and was just very confused. The deal was hot enough it closed in days and I was happy to fund a NON REFUNDABLE deposit to the seller to assure them I was the real deal.

Still closed the deal, it was stressful and hurt to have someone try that but they better be GOOD to try and pull off a stunt like that.

Larry N. · Answer

Great information on this thread!

Questions:

(1.)  So one would get the 'pretty steep non refundable deposit' from the buyer at time of signing the assignment agreement?

If so, wouldn't the buyer want to go see the property first, before signing the assignment agreement, and possibly dealing behind your back with the seller at the property?

(2.)  It was mentioned earlier to have the buyer pay you in 'your pocket' the non refundable deposit, directly to you instead of putting it in escrow. It seems like this would be difficult to do, since must people will not give money to a stranger instead of going through a title company and escrow.

(3.)  So in addition, we should also have non circumvent clauses in both the seller contract and the buyer assignment agreement and file the memorandum of notice of contract at the court house?

Thanks!

Ray Strickland · Answer

I use the method that Jerry Puckett mentioned and so far I have not had any issues.

I willing be also looking into Sam Craven's suggestion.

Jerry Puckett · Answer

The difference being that in the thread cited, there was no contract

In that thread, Braden C. expressed it best: NEVER market a property until it is under contract. It's not just smart, it's the law....you cannot market a property you do not have an equitable interest in if you are unlicensed.

Just because this jack ass got the phone number, does not mean he is going to get the deal. I'd have gone to the owners and made my offer too.

What prevents a buyer from circumventing wholesaler?

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