The Dangers of Brokering

transfer-property-before-bankruptcy

When you start off in the real estate investing world most “gurus” or educational speakers suggest going into wholesaling or brokering. They talk about the benefits and ease of assigning a contract or mortgage for quick cash. The concept is great and works for many investors, but the negatives that are involved are almost never discussed.

My company, Seasoned Funding, LLC had success in a joint venture deal with two other investors, wholesaling a contract on a house in Central Florida in January of this year but we ran into our first real experience brokering a note this past week. It was a juicy non-performing note deal in Sanford, FL that was listed on a tape we had received from one of our direct contacts. We are in no way shape or form, exclusive to this tape, but took the time to go through and see if there was anything worthwhile. After doing some light due diligence we knew we had a deal. I decided to drive out to the property take some pictures to see it’s current condition and had a local realtor from our REIA group pull comparables and give me a valuation.

The following day we put in our offer and within an hour, it was accepted at $26,000! I immediately pulled an O&E report, which can cost anywhere from $50 – $100 and created a flyer to help us advertise through Postlets. We inserted the deal into our email-advertising host, Mailchimp, and blasted it out to all note investors, real estate investors, and connections our company has acquired on LinkedIn.

Within 30 minutes I received 3 emails inquiring for more information on the NPN. I knew this deal was going to close quickly! The inquiries continued the following day and that night, I met with a fellow investor who was interested in the deal.

Somehow, with all of the advertising our company did on this note, fellow note investors or the people that sent us inquiries discovered who the direct source was and went to the source placing a higher bid than our accepted price, yet lower than our assignment fee (even though our fee was only discussed with 4 people). The timeline for closing had not been discussed with the fund manager after our offer was accepted, and I assumed that I had the typical due diligence period of about 2 – 7 days. Two days after our offer was accepted, the fund manager called to state that because of the increased interest and bids on this note within the last 24 hours if we were not able to have the money wired to the fund by the close of the business week, (which at this point was the following afternoon), we would lose the deal.

?????

We were fuming! We understood the funds perspectives and were EXTREMELY thankful that they stuck to their word and honored our offer, but we just couldn’t believe that even though a NDA was filled out and NO fund names were disclosed, a fellow investor(s) had no qualms going behind our backs and jeopardizing the deal for our company who did the brunt of the work.

We called the investor we had met with the previous night and disclosed what was happening and why the sudden urgency to close. Luckily, he was extremely understanding, and got to work with his SDIRA to get all of the paperwork completed to get the funding wired by deadline. Even with the sudden urgency, the fund wasn’t able to provide the SDIRA with all of the paperwork they wanted/needed in order to fund, something that happens quiet frequently when investing with NPN’s and SDIRA’s.

When we heard the news we immediately figured we’d not only lost the deal, but lost $100 from pulling the O&E but to our surprise, the fund manager commended our work and agreed to extend the closing date to the following business day using one of our other inquiring investors that they had previously done business with.

We found out that the “inquiring investor” was in fact the one who went directly to the source in an attempt to cut us out and was attempting to continue to do so. We spoke with the investor on Friday, in which they said “yes” to our fee and interest in closing, but then told us they had no interest in the deal on Tuesday (expected closing day). We found out from the fund manager directly that they were now trying to buy the deal for the price we had negotiated leaving no fee at all, even though we had come to an agreement on a fee price Thursday! The fund manager once again stuck to his word and told the investor unless the fee was included, they were not able to purchase the note. He allowed us 2 more days to contact one of our other funders and were able to close the deal for our original asking fee, $6,000! It took a lot longer than expected, and had more complications than I could have ever predicted but we luckily were able to close – all thanks to the fund manager!

Point blank, there are some people that are selfish and unethical. I understand the reason you get into investing is to make money, but I have trouble understanding how a fellow investor could do that to a company that’s simply trying to do the same thing. If you ask me, if someone does the work in finding the deal, crunching the numbers, and pulling/doing due diligence; they deserve a fee.What I want investors to learn from this story is how to better protect themselves when trying to wholesale or broker a deal. If you don’t advertise, the deal won’t be sold but if you advertise you run the risk of other investors attempting to “cut you out of the deal”; it’s a double edged sword.

So here are a few steps we’re going to make sure we are taking in the future to better protect ourselves:

  1. Have ALL inquiring investors fill out an NDA (that has been approved/drafted by an attorney to properly protect you) before giving ANY information out. No matter how badly you want to close or need the leads, if they’re serious, they’ll take the time to sign it and wait for the information. You can state the area (provide pictures and details) but don’t give them everything right away.
  2. When advertising – DO NOT list the address until an NDA has been signed and returned and you’ve spoken face-to-face or over the phone with the inquiring investor(s).
  3. Have a clause within the NDA or a separate agreement that states they will not go directly to the source(s) if it is disclosed or discovered. Remind them of this fact when you send the NDA or have the NDA returned.
  4. If at all possible, discuss having the entire “marked up” price funded directly to the seller. After they have received the funds, they will wire you your fee. This will keep an investor from knowing your negotiated price and keep them from attempting to negotiate your fee down.
  5. If your fund is not willing/able to accept the “marked up” price and wire you your fee, get a brokering or wholesaling agreement signed stating that if they want to follow through with this deal they must agree to pay you a the agreed upon fee.
  6. Try not to disclose the source of the deal if at all possible! Delete their name from any Sale/Purchase Agreements or any documents that could eventually tell the inquiring investor(s) where it is coming from until they are ready to wire the money to close.

Now these are not always going to protect you. People will do what they want to do, ethical or not, but I’m hoping by taking this steps and being smart about your investments you can learn from our mistake and get another deal under your belt.

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