IC ELesson: How Wholesalers Get Sued

In my lectures about wholesaling, I often say, “Wholesalers don’t get LLCs because they need the asset protection; because of the short-term nature of our deals and the fact that our buyers are professional investors, we’re not as subject to liability as people with tenants or who sell to emotional homeowners. We get LLCs because of the favorable tax treatment.”

The truth is, though, that I HAVE seen wholesalers—or at least people who would call themselves wholesalers if you asked them—get sued. I’ve seen others who SHOULD get sued, but don’t. Unfortunately, in most of these cases, what the purported wholesaler did was so heinous, ignorant, and unfair that they SHOULD have been sued, and lost. Because their behavior bordered on the criminal, it’s unlikely that an LLC would have protected them anyway.

Buyer Be Really Really ‘Ware

As you know if you’ve attended my oh-so-excellent wholesaling academy, I am a firm believer that once a buyer has paid you to step into your shoes as purchaser in a contract, he can’t get a refund just because he changes his mind.

As you also know, though, I encourage you to:

  1. Get a title search so that you know your seller can actually sell BEFORE you get an assignment fee from a buyer
  2. Don’t spend your assignment fee until the deal between the buyer and seller has closed
  3. Be ready to return your assignment fee if the seller can’t or won’t close.

A few years ago, I was asked for advice by a local investor who had given a “wholesaler” $10,000 for an assignment of a contract. This wholesaler was reasonably well-known in the area; she was, in fact, on the local REIA board of directors.

The problem was, the buyer had paid the fee 9 months earlier and had never received an assignment of the contract and, when he asked about what was going on, was met with the story that the property owner had decided to list the house instead of fulfilling her contract with the wholesaler.

Unfortunate, but it does happen; the ugly part is that the wholesaler refused give back the buyer’s money, based on a clause in her assignment agreement that basically said:

“It is agreed between assignor and assignee that fee is for consultation about this deal and therefore shall be non-refundable under any circumstances”

Yes, the buyer signed the agreement, and yes, he shouldn’t have.

But on the other hand, it’s your job as a wholesaler to bring the deal to closing. If you haven’t, or can’t, you haven’t earned anything. I bet this clause seemed like a great idea to the wholesaler, because it protects her to the nth degree, but the reality is that courts often decide against defendants who have prepared contracts that are so one-sided that there’s no protection for the other party at all.

In fact, this same “wholesaler” did this same thing to another local buyer, was sued, lost, and then the truth came out—that she didn’t even have the property she took the money for under contract and  that she was too broke to repay the money.

Incidentally, while the courts sometimes can’t provide satisfaction for the harmed party—last I heard, this chick was declaring bankruptcy, so the buyer will never collect—it’s sometimes possible to get such bad guys removed from the local investor community through other means. In this case, the buyer brought an ethics complaint against the wholesaler with the local association. Many groups have, but don’t advertise, such a process to remove people from the group and it’s probably underutilized. In this case, the gal resigned from the association rather than face the process of the hearing, so, at the very least, she hasn’t been able to do a lot more damage.

If It Quacks Like a Duck…

This story was relayed to me by the wholesaler who DID it, and still couldn’t understand what the problem was.

Apparently, she put a property under contract with a seller for, say $280,000.

She advertised the deal for $300,000, and quickly found a buyer—one who had never bought from a wholesaler before, didn’t understand that what she was buying was a contract and not a property (the wholesaler’s fault, I’m sure), and wanted to make sure she didn’t lose the deal by “putting down” $35,000 instead of the $20,000 the wholesaler was asking.

And the wholesaler took it.

Understand what happened here: the wholesaler took a $35,000 assignment fee to assign a $280,000 contract for $300,000.

According to the wholesaler, it was her intention To bring $15,000 to closing to give to the seller, so that the buyer would end up exactly where she expected to be, but it never got that far, because when the buyer’s attorney did the title search and explained to the buyer that the person she’d given $35k to wasn’t the owner, the buyer freaked out and literally called the police, accusing the wholesaler of stealing $35,000 from her.

Even after talking to the wholesaler about this for a good 10 minutes, I have NO idea what she was thinking when she accepted $35,000 for a $20,000 wholesale fee. Her excuse was, “I figured she’d be less likely to walk away if she put more money down”, which tells me that the wholesaler herself might have been mentally conflating her role in the transaction—that sounds like something a property owner, not a wholesaler, would say.

The reality is, once the wholesaler got the $20,000 wholesale fee and assigned the contract, no amount of additional money would make the deal safe for her. She’s out of the deal at that point, and holding on to another $15,000 on behalf of the seller is something that an agent, but not a wholesaler, might do.

Her 2nd mistake was, clearly, not being clear enough with the buyer about what was going on. I’d guess that she wasn’t using my purchase agreement for assignment, which clearly outlines the details of the transaction to any buyer and would have resulted in a better outcome, even if that better outcome was an inexperienced buyer backing out of a deal she was uncomfortable with.

If you’re thinking, “These two idiots just don’t understand what wholesalers actually do”, you’re right—and that’s a huge problem with our business right now. It’s presented as a strategy with a super-low barrier to entry (“Just buy my course, and it’ll put your business on instant autopilot!”) and with no particular expertise needed. That’s insane, of course; there’s no such thing as a business that can produce a 6 figure income part time that doesn’t also require that you UNDERSTAND it.

Please don’t make the mistake these folks made. Learn your business, take advantage of the coaching you’re already entitled to when you don’t know the answer to a question that’s in your mind.

You and all the rest of us will be better off for it.

How the wholesaler thought that this was reasonable behavior is completely beyond me—and, in the end, the result is going to be a lawsuit that the wholesaler will lose, the loss of a good buyer to the wholesaler, and the loss of the wholesaler’s reputation with anyone who this unhappy buyer talks to.

The second “wholesalers behaving badly” thing DID happen to me.

A wholesaler called me last week about a property in a good resale area that he wanted $35,000 for. I quickly comped it, called the wholesaler, and left a message saying that I would probably buy it, and was on my way there. I drove an hour in rush hour traffic to see the property, evaluated it, and called the wholesaler back to tell him I wanted it. I then proceeded to spend another hour driving around taking pictures of comps, at which point the wholesaler called me back and told me that he had sold it—before I even left the house—to someone who had said “I’ll take it, but if I look at it tomorrow and it’s messed up, I won’t take it.”

So what’s wrong with this scenario? Not that the wholesaler sold the property to someone else—it happens. It’s that the wholesaler knew I was on my way, knew that the property was already sold, and allowed me to waste a bunch of time evaluating a property that wasn’t available.

Folks, let me remind you again that you’re in the business of selling great deals to people who want to make money off of those deals, and for making it easy for them to do business with you. Think of your business as what it is—a business—and deliver the product that your customers are expecting and the service they deserve.

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