Case Study with RJ Bates III: Wholesale Deals Gone Bad

In today's case study RJ Bates III discusses two deal Titanium Investments attempted to wholesale that went horribly wrong. He explains how the projects were not what was expected and how he had to make a decision to lose money for the sake of doing the right thing. Wholesaling real estate is normally referred to as a great strategy due to the lack of liability but in this episode RJ explains how that is not always the case. 

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Transcript

Speaker 1: 0:01

Well, it's not real estate investors, entrepreneurs and agents doing long length place, unlocking the secrets to real estate investing and entrepreneurship. Welcome there, that titanium vault hosted by RJ banks. But third, here's RJ.

Speaker 2: 0:26

Hey guys, welcome the titanium volt. I'm your host, RJ Bates, sitting down with today with you to go over another case study. This will be case study number three. And today we are going to discuss wholesale deals that went bad and where it pay attention really costs us money. Um, I feel like this is important for us to go over because you know, so far we've Kinda gone over victories, but you know, it's a reality of our business that not every deal is going to go exactly the way you want it to and that there is a potential risk at losing money on these deals. Um, even in wholesaling. So the first one that I'm going to go over is a deal that happened way back in 2015. Um, and the reason why is cause I kind of want to go over how we turned a negative situation into a positive. Um, and case study number two. I talked about, you know, our first Hawaii flip and how the wholesaler got that property from hubzone.com and then how our, on our second flip, we got our, that property from Hubs Zoo. Um, I think hubs zoo is a great opportunity for you to find, you know, potentially, uh, wholesale deals, flips, rentals, whatever it is for next to$0 million for marketing to acquire those properties. And, uh, you know, back in 2015 when we were really just getting started, we didn't have a, a very large marketing budget, so we had to be pretty scrappy on how we found deals and hubs. Who was one of those? And, uh, we found a property in walks a Hatchi, Texas. Um, the numbers were, you know, right at 70% of the ARV minus repairs, um, and also minus our wholesale fee. And, uh, you know, everything checked out, you know, the, the rehab seemed accurate. Uh, we went, walked the property, we won the auction. So we, we got the property under contract. And what ended up happening was, is we took the information that was provided to us from hubs to the seller and also tax records as facts. And we didn't verify all of those facts. And the main one was the square footage of the property. Um, county tax records had the property at 4,000 square feet. And in reality, the property was only 3000 square feet. And just for the lack of experience or going through this particular situation, I never once thought like, hey, they have the square footage wrong. And so we went out, we want the property, we verified the Rehab, we thought everything checked out, and we marketed the property, we got it under contract. We sold it to a gentleman who lives in California and he deposited his nonrefundable earnest money. So he put up 5,000, I think on this one. Um, we had to put up$3,000 earnest money and he put up 5,000 nonrefundable. And when his hard money lender went out to do the appraisal on the property, they came back and said, hey, there's a problem. Uh, this property is only 3000 square feet, not 4,000 square feet. Now, in hindsight, looking back, we were very lucky about this situation in the fact that, you know, our buyer didn't end up with a property that was missing a thousand square feet. That would have been horrendous for us as a wholesaler and maintaining that relationship and then also for our buyer. I mean, that would have been crippling for him. Um, once the appraiser called him and told them that there were square footage missing, you know, he called me, it was seven o'clock on a, on a summer night. And, um, I'll never forget, I was actually at Walmart and, and I was super pumped because at the time, you know, we, we didn't have a whole lot of deal flow and we were making a$20,000 wholesale fee on this property. So I felt like king of the world at the moment, and you know, we were gonna close in about a week or so, and so that was going to be a huge victory for us. And he called me and he said, hey, we're missing a thousand square feet. And I just could not believe it. You know, I was like, that cannot be the case. There's no way I will go out there and I'll hand measure it. And so I went out there, I measured it, and sure enough, we were missing a thousand square feet at this point in time. What really salvaged the relationship is I called our buyer and I said, I am so sorry. I am going to immediately release your earnest money back to you. And this buyer being a pretty seasoned buyer, um, was like, aren't you slightly concerned about the fact that the seller will release the earnest money to you? And I said, look, that's our fault. We should have performed better due diligence. I'm giving you your money back. I want to do more deals with you. We'll get you, you know, we'll, we'll make it up on another deal. Um, that is the right square footage. And, um, you know, we had to do quite a bit of arguing with the sellers and with Hubs Zoo, uh, but hubs who did make it correct and they did release our earnest money back to us. And, uh, from that relationship, if I'm, I'm pretty sure I've mentioned this in other episodes of the titanium vault, but, um, we wholesale quite a bit of properties. That gentleman, uh, we ended up co wholesaling quite a few properties together. Now we own, you know, I can't even tell you the exact number. It's probably close to a hundred properties together. Um, and, and it all started from us doing the right thing in a difficult situation immediately without even, you know, contemplating another way, just taking care of him, making sure he was made whole. So that's example number one of a wholesale deal going bad in taking care of your buyer. Now let's talk about case study number two in this episode of where we actually did lose earnest money. So this was a deal that is in fort worth, Texas. And this was a couple of years later. So we were a little bit more experience. And this property set on a street called golf club circle. And the reason why is because it was on a golf course. Okay. And so this is a, you know, the backyard was very minimal and it was right on the middle of a fairway of a golf course in Fort Worth, Texas. And same thing. We, uh, we put in an offer, uh, we got it accepted. I think we started off with pre high earnest money for it. I mean, I can't remember the exact reason why I think it's because something had previously happened to the sellers. Um, and they were a little bit skiddish and there was a realtor involved in the, you know, the realtor one made sure that we were legit. And so they asked for a pretty substantial amount of earnest money up front, which we didn't care because we knew we were getting a good deal. Um, we wholesaled the property. We, we, uh, you know, we assigned our, our vested interests are equitable interest in the contract to a buyer from Canada. Um, this is going to be our first deal together. And so he put up$5,000 nonrefundable earnest money. And then he was also using a hard money lender and everything was trucking down the right path. And then the hard money lender needed more time to close, which can be a problem in the aspect of going back and asking for an extension with someone that it previously had issues closing was a little bit skiddish to begin with. And so they asked for additional earnest money to extend, which we did. And we asked our buyer to put up additional earnest money as well, which he did. So now the substantial amount increased even more. And then the day that we were supposed to close the hard money lender said I need a couple more days. So now it's getting a little bit awkward. Like what? What is really going on here in it? And it was all, you know, legitimate excuses. You know, there was things like documentation, you know, we're getting the docs ready, we're waiting on the attorneys, all of these things. And so for my standpoint, I understood it, but remember not all sellers are going to understand exactly how a real estate transaction is going down and they wanted additional earnest money and this is where it gets, it's a hard pill to swallow even for me to talk about it today. But we ended up at this point in time putting additional earnest money down that equal$21,000 in earnest money deposited on this deal and I'll never forget, I'm at the title company and we were doing a double closing. So actually t I take that back. We did not assign our equitable interests. We were doing a double close on this one and I'm at the title company and I was signing the closing documents and the hard money lender decided that he wanted to go walk the property himself one more time before sending the wire. And again going back to like the first scenario where I'm glad that they caught it. I mean as much as it stung that day when we lost the$20,000 wholesale fee, I'm glad that the hard money lender did this because when he showed up at the house, he walked on the back porch and he realized the fairway is not mowed, it is significantly overgrown and if you've ever played golf or been on a golf course, that just doesn't happen. Like golf courses just don't let their grass be become overgrown because you can't appropriately play the sport and come to find out the golf course had shut down and was being sold to become like a nature reserve or something. I mean it was like something off the wall. I mean it was no longer going to be a golf course and my, our buyer called and said, you know, have data. You try to sell me a house on a golf course and marketed as a property on a golf course when the golf course has shut down. We had no idea that was the case. We went back and looked at the seller's disclosure and there was nothing in there about the golf course being shut down, but come to find out the sellers didn't do anything wrong. They didn't tell us the golf course was shutting down, but technically that's, they didn't, they didn't have to tell us that. And we ended up in a very awkward situation where our buyer had a significant amount of earnest money down. I think he was, he was a little bit less than us. Um, which is also very rare for that to either you had like 15 or$16,000 earnest money down. We had$21,000 earnest money down. And what do you do? I mean, buyer no longer wants to buy this property because he doesn't know what the golf course being shut down is going to do to the property value. I've got$21,000. There's a real term bald. The real door was pretty aggressive, I guess is the best way to put it. And basically pointing the finger at us saying, well, that's not our fault. That's on you. And you've already extended multiple times. What are you going to do? And it was quite possibly one of the most difficult decisions that I've ever had to make. But I felt like the only thing that was fair was to tell our buyer, release your earnest money back to him. You no longer want to buy his property. I don't blame you. I wouldn't want to buy it either. So we released his earnest money to him and we went to the sellers and said, look, the only way we could purchase this property is with a significant price reduction because we don't know what the golf course closing is going to do, the property values. So we need to be secure in our purchase price. They were not willing to lower the price down to where we needed. And so I had to sign a release of earnest money and release$21,000 earnest money to the sellers and we lost$21,000 right then and there on a wholesale deal. Now I will say that opened up my eyes to being a little bit more intelligent about the amount of earnest money. See at that time, you know, business was good. We had never run into a situation like this before and I didn't really view it as like a risk. It was just like, Hey, this is what we need to do to get the deal to make our money. This is what we need to do. And then it got a little bit out of hand with the extensions. But we thought we had a significant wholesale fee come into us on the back end. So it was like, look, we have to put up$10,000 today to go make whatever we were gonna make on this deal. I don't remember the specific specifics. I think it was somewhere between 25 and 30,000. It was worth it, you know, 10,000 per week. And then, you know, you get your money back plus, you know, you're 25,$30,000 profit. It was worth it. And, uh, looking back and you know, I would make different decisions today, uh, probably negotiate a little bit harder, leverage the fact that we are a cash buyer and we were so close, not be fearful that they will, you know, terminate and not give us the extension. Um, but yeah, I mean we, we lost$21,000 on that deal. And so I just wanted to share those two case studies with you guys. Um, first and foremost to kind of make you realize that not every deal can go down exactly how you anticipate always as a wholesaler, take due diligence on your part. Just as serious as if you were the buyer, which sometimes can get a little bit hard, right? I mean, you know, you're not taking the liability of the property, but you need to approach it that way. To be an elite wholesaler, you need to take the responsibility of due diligence just like you're buying it. And also to protect herself. I mean, had we done a better job of the due diligence, we would have found those things out in our inspection periods. Luckily on the hubs who deal, we did get our money back on the golf club deal. We lost$21,000 and that was nobody's fault but her own. So I wanted to share those two case studies with you guys. I'll be learn something from those mistakes. I know we definitely did. Um, hope you're enjoying the case studies. I'd love to see some reviews and some feedback on them. And if there's anything else that you guys specifically wants to touch on, shoot us a message either on our Facebook group, the vault, or on our Facebook page, uh, the titanium vault hosted by our j Bates. Uh, that's Today's episode guys. Uh, we're going to keep coming out with these case studies. We'll have a couple more for you here in the next couple of days and we'll talk to y'all soon.

Speaker 1: 15:59

Thanks so much for listening to the titanium vault with your host RJ banks. The third for more info and to stay up to date, visit www.podcast.thetitaniumvault.comandonfacebook.com/or titanium vault. If you enjoyed the episode, please rate and review and we'll catch you next time on a time. Take Him Paul. Yes.