We are receiving calls, at least weekly, from people asking us if we do "Wholesale Closings". First, this is not a legal term and, in fact, when we were discussing the subject with our underwriter's general counsel, he didn't even know what it was!
There are a number of new seminars that are being offered that teach people about "Wholesale” closings where they say, "you can make tons of money in real estate and you don't even have to use one penny of your own money!" Can it be done? Yes. Is it rare? Yes! Does Downtown Title Services (and the majority of experienced title companies) close on these so-called "Wholesale” closings? No! As any experienced real estate professional knows, buying and selling real estate is never as easy as it looks.
“Wholesaling”, is also known as “Flipping”. You’ve heard that term many times. It is unclear why the new term has made its way into the real estate vernacular, except possibly to draw in naive parties with the promise of the next “get rich quick” scheme. Or maybe it is just to distinguish the type of Flipping that is being taught.
Generally, people think of Flipping a house as buying a run-down house, fixing it up and then quickly re-selling the house for a profit. The Wholesale Flipping is done in one of two ways. The first way is that you enter into a contract without the intent of actually buying the property. The contract is fully assignable, so that during the inspection period (typically contracted for 30 – 60 days), you find someone that wants the property and who is willing to pay you an “assignment fee” to assign the contract over to them and then they close on the property. The assignment fee isn’t actually paid to you when you assign the contract. Instead the contract is assigned for a higher price and the difference in the original price and the new price is paid to you at closing.
The other method is especially troublesome for title companies. You again place a property under contract and during the inspection period you find someone who is willing to buy the property for more money. In this case, you don’t assign the contract, but rather, you enter into another contract with the new person for a “simultaneous” closing. Then, at closing you don’t actually bring your own funds, instead you use the funds from the second closing, to fund the first closing and you keep the difference. This was a somewhat widespread practice amongst some fast and loose property investors, prior to the market crash in 2008.
The practice of assigning a contract to someone who is willing to pay more is perfectly legal. If you can find someone who is willing to pay a premium for the property and the owner of the property is kept fully informed of what is going on, then there is no problem. The only issue is that for unlicensed, non-realtors, this practice can be a bit dangerous especially if there is any hint that the assignment fee is actually a commission, which is an unlawful payment under the Florida statutes.
The practice of “simultaneous” closings is a bit tricky. In some states it is illegal. We are not of aware of any laws in Florida that make this practice illegal here. However, it is in violation of a title agent’s underwriter’s requirements under the title commitment. The title commitment specifically states that for each transaction the purchase price must be paid. In other words, the payment for each transaction must be processed through the title agent’s escrow account, no matter how quickly it goes in and out. Second, each transaction must have a deed that is recorded and therefore, title insurance must be paid for each transaction and documentary stamps and recording fees must be paid for each transaction as well. The “Wholesale Flipper” is trying to get around this requirement by insisting that no deed be recorded for the first transaction and therefore, no fees should be paid.
Any title agent that agrees to close the transaction under the terms of the Wholesale Flipper (meaning, no funds, no first deed and no fees) is in jeopardy of having their underwriter cancel their agency license to issue title policies. Policy issuance is the lifeblood of a title company and this risk is too great. Title companies are audited, at least on a yearly basis, by their underwriters and simultaneous closings raise a red flag and are sure to be reviewed during the audit process. Experienced title agents know that it is never a good idea to take on any closing that might cause them lose their underwriter.
In addition, “Wholesale Flippers” may well find themselves involved in a messy legal battle if, for any reason, the first transaction does not close resulting in the second buyer not be able to close as well. The “Wholesale Flippers” need to ensure that both contracts contain specific terms regarding rights, obligations, contingencies, etc., however, inexperienced real estate investors who have taken a two-hour seminar do not have the proper knowledge to review and revise contracts to cover all areas of “simultaneous” closings.
On a side note, the speakers at these seminars all claim to have a lot of experience doing this and they offer many ideas on how to locate sellers, but it is interesting that at these seminars the speakers tell the students that they will need to find a title company that is willing to do these types of closings. The fact that they are telling the students that “some” title companies won’t do these closings should raise a big red flag. Second, sure a person might find one or two people who are willing to pay more for a contract that you found first, but how long is that going to last? Wouldn’t you eventually just gain a bad reputation as someone who is not bringing any value to the transaction, and who instead is just trying to play the middleman for a contract that could have been obtained directly for a lower price?