Wholesalers: Should You Get Earnest Mone...

money Hey guys, this is JP Moses back again with an important lesson that I want to share with you. It’s important because it has caused us to change our company policy based on this one fact. It’s worked for us, and quite frankly, it can apply to all of you who are reading this.

This has to do with how we get earnest money deposits from anyone that we assign a deal to. This means anyone – across the board.

Let me bring you in on an interesting story about two deals that almost didn’t happen. They are the Brownsford Cove and Court Street deals.

Brownsford Cove Deal

Brownsford Cove is a fantastic house in Memphis with a high-profit margin in an area known as Bartlett. It was a sweetheart deal, and we had a lot of interest right from the get-go. It was very easy for us to sell.

The guy we sold to, the one who was the quickest to pull the trigger, was a guy that we are now referring to – not so affectionately – as Mr. X. It turns out that Mr. X was not a cash buyer. In fact, he was another wholesaler in disguise.

I have said this before, and I want to repeat it here...

I have no qualms with co-wholesalers. We love when other wholesalers are trying to wholesale our deals, but we have specific parameters for that. That includes not raising the price compared to what we're advertising, so that we're on the same page in our marketing. As a professional courtesy, we want to know if another wholesaler wants to wholesale our deals. We need to be in the loop on that.

Not so with Mr. X. He tried to pull the wool over our eyes and pass himself off as a cash buyer.

There's a reason why, as a wholesaler, you might present yourself as a cash buyer to a mom-and-pop investor. You don't want to explain the ins and outs of wholesaling and risk confusing them. (You’ve probably heard the saying that ‘a confused mind always says no.’)

However, when dealing with another investor, then you're dealing with a colleague who understands the industry. If you're a wholesaler and you want to wholesale their deal by co-wholesaling, at least you should let them know that that's your intent.

Mr. X Had No Buyer

Mr. X did not do that in this situation. He never told us that he was a wholesaler. We had to figure it out ourselves after being strung along. Interestingly enough, he couldn't seem to find a buyer for our property. So after he failed to close several times, we pulled away…

Find We had buyers lining up because it was a really great deal. And now we had to move fast. Because of that, we monetized a $25,000 fee.

I'm not complaining about our profit, but we still left $5,000 on the table. It turns out we could have made another $5,000 with a buyer if we had had a little more time to get it on his radar, but he was out of town.

I'm not crying over spilled milk here. I'm a firm believer that we learn lessons from every missed step and every stumble we have, and we extracted a lot of good lessons out of this. The main consequence for us was we made $5,000 less than we could have.

Let's pause on Brownsford Cove now and talk about Court Street…

The Court Street Deal

In this case, our cash buyer was a player and he was not a co-wholesaler, but apparently this guy didn't understand the basics of assigning a contract. We didn't realize this until we had been under contract with him for over a month.

The morning of the closing, he actually called me and informed me he had no intention of paying our "commission." As you can imagine that was quite a conversation.

I am not making a commission; I'm not a Realtor. This is an assignment fee, which was spelled out in very clear terms that he apparently didn't read. Or, perhaps, he simply did not understand. Things quickly got personal and yucky; he very nearly walked away entirely from the deal.

In the end his partner – whom we had never talked to before – called and acted as intermediary. We did end up going to the closing table and we made our $6,000 profit. But we came close to being $1,000 in the hole and we were just about to write it off.

Lesson to Be Learned

We were very grateful that we ended up making money on this. Look, $6,000 is certainly better than nothing. But there’s a lesson to be learned from both of these deals…

rich It's because of the common lesson between these two that we have initiated a new company policy. That lesson is that these two buyers had no skin in the game.

To require earnest money from our cash buyer always seemed confusing when we were doing an assignment of contract. It was hard to figure out. But I determined that I needed to work through this and create a clause to get earnest money on every deal. And I did.

The Clause that Works

Now I’m going to give you the exact clause that I use and you can duplicate it. This is our current standard assignment agreement. Remember that the Assignee is my end buyer; I am the Assignor, the giver of the assignment.

EARNEST MONEY: Assignee has paid (or will pay within two business days after signing this agreement) an earnest money deposit of $2,000 by check or wire, to be held in escrow and made payable directly to [YOUR TITLE COMPANY'S NAME] located at [YOUR TITLE COMPANY'S ADDRESS]. This earnest money is NON-REFUNDABLE to Assignee unless clear, insurable title is non-conveyable or the property owner is not available to close within the time period of the original purchase contract. If closing does not occur for any other reason, then earnest money shall be dispersed to Assignor. This assignment is not considered valid until Assignee’s earnest money has been received by holder.

{Mogul Elite – Download a PDF of my Clause in the Power Pack Tools section of this lesson. Be sure to have your own attorney review it.}

Obviously, I’m not an attorney, and I didn't have an attorney draw the clause up. I wrote it myself and I'm comfortable doing that. I encourage you to run it by your own real estate attorney before you apply this to your own assignment contract.

Once you've done that, and you use this or something very similar, the bottom line is you're going to have your end buyer make out a $2,000 check to your title company. In the memo section of that check, note that it is a non-refundable deposit. Even have them initial that if you can.

Your assignment agreement should state that it's a non-refundable deposit.

Why it Works

When you assign your contract, your end buyer is going to be engaged in 2 contracts:

One is the original purchase contract wherein he is stepping into your shoes, so to speak. He steps into your place in your original purchase agreement with the seller.
The second contract that he is under, is your assignment contract. This earnest money deposit – this is important for you to understand – is not an earnest money deposit for the real estate purchase. It is earnest money specifically for the assignment contract.

Fair for Everyone

This was the part that was a bit confusing for me... I finally had a couple of my mentors help me through it.

The seller is not going to get that $2,000. This is not to his benefit. It is for your benefit if this deal doesn't close. The way it's phrased here is very fair to everyone. It does give your buyer their earnest money back if, for some reason, the seller screws up the deal or if there's a bad title, but otherwise they're putting skin in the game.

This would have made a big difference in Brownsford Cove and the Court Street deals.

When things get weird, people are a lot less likely to simply walk away if they have some skin in the game – if they have at least a couple thousand bucks that they stand to lose. They're a lot more likely to work with you and to shoot straight with you. And I think it would've made a huge difference in these deals.

Try it and See

Try this in your own deals and see if it doesn’t make a big difference. When you come across some less-than-cooperative buyers, you’ll be glad you did.