Wholesale horror stories

A couple of months ago, a client brought me an offer to finance. I was chasing a wholesale deal and the preliminary buy/sell numbers looked excellent. I started building his file, which I anticipated would be a no down payment deal with a quick close in 2 weeks. So, I feel the contract. As a standard practice, we always review the contract to make sure there aren’t any issues that could derail a deal, and when reviewing this client’s file, everything seemed fine except for the name of the buyer. The wholesaler had prepared the contract using his company name instead of using a “disposable” LLC (see below). I’ve seen this before, and it usually doesn’t cause any problems if you schedule a double shutdown; however, before he could notify the customer, the wholesaler had received an addendum from the seller adding the customer to the contract. The result: both the wholesaler and the final buyer, the customer, were included in the contract! In other words, the client, unbeknownst to him, has just landed a partner.

As you probably know, the title to the property has to match the deed of trust, and both documents match the names of the buyers on the contract. This being the case, we had to fight to qualify the wholesaler since he is now the client’s partner, which completely changed the financing strategy. Most importantly, he had to have a heart to heart with the client. Did you want a partner? Was the wholesaler even willing to be a partner? Ultimately, the wholesaler agreed to sign the promissory note and deed of trust, but he immediately stopped claiming the deed from my client after closing and gracefully withdrew from being a partner in the deal. Pretty easy, right?

Wait, what about the insurance? The insurance would probably be a simple fix, similar to Escritura, but what about the note? By signing, the wholesaler, without knowing it himself, was going to be responsible for repaying the loan without being part of the deal! More red flags. Did I mention we only had 2 weeks to get this done? Time was moving fast and nothing was fitting. After many more emails and many phone calls, the deal ended up falling apart for many reasons, including the seller being unwilling to rewrite the contract, allowing for proper wholesale, and the two new “partners” not being around. Agree to structure the deal. among them. The worst thing is that both parties had deposited large deposit checks. Last I heard everyone was trying to get their money back.

The moral of the story, before attempting to wholesale a deal, make sure you fully understand how to properly structure the transfer. Here are a couple of ways to structure a wholesale sale:

Assignment. The easiest and best way to structure a wholesale sale is to make an allowance; simple, clean and easy. Typically, a one page contract assignment will suffice, as long as the contract is assignable, as most private seller offerings are.

“Disposable” LLC. If you’re buying a bank REO and the bank doesn’t allow assignments, the next best strategy would be to use that “disposable” LLC I mentioned above, or alternatively a trust. Under the “disposable” LLC method, a wholesaler creates a new LLC for the sole purpose of purchasing and transferring ownership of the property. The wholesaler simply sells his share of the LLC to the buyer, and from the bank’s point of view, the buyer remains the same (ie, the “disposable” LLC).

Double Closure. An alternative and less desirable form of wholesale would be through a double closure. This alternative results in two closings at the same time: the first results in the sale of the property from the seller to the wholesaler, and the second results in the sale of the property from the wholesaler to the ultimate buyer. As I mentioned earlier, this method is the least desirable and should be avoided if possible, due to the added costs of an additional closure, as well as the management of all the moving parts associated with the second closure.

If you have any questions about any of these methods, or if you have a horror or success story of your own that you’d like to share, we’d love to hear from you!