Oh, That's F***ing Adorable | Wholesaler Wants $25,000 To Release Memorandum of Contract

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If you’re new to my channel my name is RJ Bates III. Myself and my partner Cassi DeHaas are the founders of Titanium Investments.

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Chapters

• 0:05 Memorandum of Contract Misuse in Wholesaling
• 9:20 Decision Making in Wholesaling Ethics

Transcript

Speaker 0: 0:05

Welcome back to oh, that's Fucking Adorable the series where I share my pain, deals that went bad and hopefully you guys can learn from my lessons. Now, on today's episode, we're going to be talking about a wholesale deal that we did in 2021 that went south because of a previous wholesaler filing a memorandum of contract. Now, before we get into the memorandum of contract, let's backtrack and give a full kind of snapshot of what took place on this wholesale transaction. And this was back when we were doing a lot of SMS texting. So we pulled a list inside of batch leads, we skip traced it. Then we did text message marking SMS, started the conversation through SMS, eventually got on the phone with this seller and we locked up this contract in Euless, texas, which is here in DFW. It's right in our backyard. It's an area in which we have plenty of buyers right.

Speaker 0: 0:58

We knew that this was going to be a good deal. The property was slightly distressed, but it was kind of a borderline hotel deal where it didn't need a ton of work. That being said, we got it under contract. We then did recon. We got pictures on the property. We then started our dispositions process. We had multiple showings with our buyers Simultaneous to that taking place. We also opened up title with Fidelity National Title with Dana Draper, who we've been using since our very first wholesale deal. We then got a full price offer from one of our known buyers and we assigned the deal to that buyer. They deposited non-refundable earnest money and everything seemed like it was gonna move crystal clean, right, no issues whatsoever, right, picture perfect wholesale transaction. However, when the title commitment came back, we identified that there had been a memorandum of contract filed 15 months prior to this date Super frustrating.

Speaker 0: 1:54

Right Now, let's talk about what is a memorandum of contract. A memorandum of contract is a mechanism that you could file that protects the buyer. How does it protect the buyer? It clouds title and prevents the seller from selling the property to another buyer. It gives the buyer leverage to be bought out if the seller wants to sell to someone else, and it minimizes the risk of the seller backing out of the sale. Now, that is the technical usage of a memorandum of contract. However, what we have seen in the decade of doing wholesaling is that memorandums shortened for memos. Memos are misused in the wholesaling realm, where some people actually teach that you should file a memo on every single property. Now, here at Titanium. We adamantly disagree with that. It is a tool to protect you as the buyer when you fear that a seller is going to go around you or sell to someone else. However, filing a memo on every single property and, if you do end up terminating the contract for whatever reason, not releasing the memorandum, is a misuse of the power of a memo, and that's what we see a lot of times Now in this scenario.

Speaker 0: 3:07

Here's what happened. There was an IRS lien for back taxes filed on this property, so the previous wholesaler decided that they were going to get an appraisal done on the property and try to fight those back taxes and try to prove that, due to the property value, the property was not worth enough to cover the mortgage and the back IRS taxes. Okay, legitimate solution. However, in the span of 15 months, what ended up happening was zero solution and zero negotiating with the IRS to lower these back taxes was done by the wholesaler and or the seller, and what ended up happening is the amount owed on the lien just continued to rise and it got to a ridiculous point to where now what was kind of upside down was significantly upside down. At this point, the wholesaler actually, instead of trying to help the seller and solve the problem, got greedy and decided that they were just going to cloud title and wait on someone else to come along and try to solve the problem and get paid.

Speaker 0: 4:12

This is the misuse of the power of filing a memorandum. Now there's other things that you have to do when you file a memorandum. To actually make it legally binding One, there has to be an actual purchase and sell agreement with earnest money deposited, as well, as you need to prove that, during this entire time that the memo is filed, you were doing everything in your power to have the deal closed and you were prepared to close, meaning you have funds available to close on that deal, and not only that deal, but every other contract that you had during the time that that memorandum was filed. Now, in this case, we actually knew this wholesaler. We had previously met him at an event, and what was strange to me is that he filed the memorandum not in his company's name, in which the purchase and sell agreement was actually signed. He actually filed it in his own personal name. Now, I think this was an attempt to get around having to prove that he had the financial wherewithal to close on every single deal that his company had under contract during that time. But also it's a little bit strange because there wasn't a purchase and sell agreement actually signed in his name. Now, I'm not an attorney, I don't know all the rules, I'm just reading between the lines here, but it just felt like shady business.

Speaker 0: 5:29

At the end of the day, we had a $15,000 assignment on this deal. We were prepared to get this closed. The only thing that we needed to get out of the way was this memorandum. This is also including the IRS lien, all right. So we were actually ready to get this closed. However, we had to get this memorandum cleared. This felt like this was gonna be a pretty simple conversation, so I actually called up this wholesaler and just said hey, we're under contract this property in Euless Texas. You guys had it under contract 15 months ago. You guys filed a memo I'm assuming you just forgot to release it, since it was so long ago and he said no, actually we're prepared to close on this deal. And I'm like, if you're prepared to close, why haven't you closed at this point? Well, the problem was is that he actually signed a contract for a much higher amount, and so, in order to get this closed or the amount that he had it under contract for. He needed those IRS lien to be lowered down, so it wasn't a closable deal for him. So he said just pay me $25,000 and I'll release the memorandum.

Speaker 0: 6:34

This is again where I have a problem with how wholesalers misuse memos. We have a motivated seller that is actually at this point, was down to the deadline and was staring, losing their property due to the IRS lien, and we have someone that is under contract for 15 months. There's absolutely no way that they were working on trying to get this deal closed over the past 15 months, because otherwise they would have come up with a solution. It took us less than two weeks to come up with a solution for the seller and get it to the closing table, and the only thing that was holding us back was this wholesaler. Now Cassie and I both had very candid conversations with this wholesaler and eventually called him on what he was trying to accomplish here, which was to just get paid for previously having this property under contract, Not because all of the work that he had done, but just simply based on the fact that I had this property under contract. I couldn't solve the seller's problem, so I filed a memo.

Speaker 0: 7:32

Now, inevitably, he did release the memo, but he also wanted to get paid, and that is where I have an issue. Your job is to contract the deal with the seller, solve the problem and then move the closing table. If you don't know how to do your job, then get out of the way. Now, in this scenario, we did get the memo removed and we ended up getting the deal closed, but for a much less assignment fee. We made sure everyone was happy and ultimately, our objective was to just make sure that the seller did not lose his property. We wanted to make sure that the deal made it to the closing table. That's our job, and so, at the end of the day, if I need to make less money to make that go down, that's okay. I want to be able to sleep well at night and know that I took care of the sellers that trusted my company, and I don't want to be like that wholesaler.

Speaker 0: 8:24

So here's my thing If you're a wholesaler and you're thinking about implementing the strategy of filing memorandums on every single property, I want you to really think about what you're doing to the other party the seller involved and potentially hindering them from being able to move their property in the future. Had this person not signed a contract with us, I don't know what would have happened, because essentially, what I had to do was leverage the fact that I'm well known in this area and in this industry and sort of threaten this wholesaler that I would bash him if he did not remove the memorandum. Now, I don't like doing that. That's not really my personality, and it got kind of heated in the conversation, but really all I was saying was dude, you're going to cause this seller to lose their property if you don't do the right thing. I'm not okay with that taking place in our industry. It needs to be resolved.

Speaker 0: 9:20

So ultimately for you as a wholesaler, you need to make a decision. If you're going to file a memorandum, one, I think you need to consult with an attorney about all of the implications that can come down with filing memorandums and also all of the responsibilities. What do you actually need to do to have a legally binding memorandum? Point being here, sellers can come back and go after you if you cloud title on their property and you did not do everything on your side correctly when filing that memorandum. So you need to understand your obligations, and I'm assuming that it's different throughout the different states. Okay, this is why I'm saying you need to consult an attorney. I'm sure you guys are going to have plenty of questions on this inside the comments and I'll try to best answer them as I can, but ultimately, what I think you need to do is talk to a real estate attorney to understand, and or you could just be like us and others in this industry that feel like filing a memorandum is really not necessary.

Speaker 0: 10:21

I can't remember the last time we filed a memorandum, and very rarely do we ever have a seller go around us and try to sell the property to someone else.

Speaker 0: 10:30

Now, you can take that for what it is, but I think it's due to the how we handle our business and how we talk to sellers and how we actually close deals. So ultimately, we had a $15,000 assignment fee that we made much less I can't remember the exact amount because this is about four years ago, but I think it was just a couple of thousand dollars in order to cover some of the IRS liens and get rid of this memorandum and some other things that had to take place. We didn't walk away with the profit that we deserve or what we earned as a wholesaler, but at the end of the day, we got the deal closed and that's the most important thing. So, as a wholesaler, make a decision. Do you want to be the one that clouds title unnecessarily and gets in the way of sellers being able to move their properties, or do you just want to do things ethically and not have to be one of those types of wholesalers?