Dangers in Illegal Contracts

 The State of Virginia has passed a law prohibiting certain types of real estate transactions to helps Virginians avoid entering into misleading contracts by requiring that the buyer on the contract is the actual purchaser. Although the practice has been outlawed, many are still engaging in these schemes.  

The purchasing style the law is prohibiting is more commonly known as "wholesaling." In this transaction a "buyer" or "real estate investor" will represent themselves as the individual or company purchasing the property.  They will generally claim to be a cash buyer and push to sign the contract immediately. They will often meet your asking price or even offer you a higher amount, sometimes without physically viewing the property. 

The problem for the seller  lies in the details. The "buyer" never intends to be the one to purchase the property. It is their intention to sell the contract, or rights to the contract, to an actual investor for a profit. These individuals are known in the real estate industry as "wholesale investors" and "wholesalers". 

If they are not able to immediately find an end buyer to cover the contractual purchase price, they will reduce the offer based on either the finance or  inspection clause in the contract.  This leaves the seller with a greatly reduced profit or sometimes no profit at all. 

If another buyer is not ultimately found, the home is often not purchased at all.

This is highly frustrating for a seller in any situation, however, it can be devastating in circumstances of imminent necessity; for example foreclosure or a contingency in a contract for the purchase another home.    

Below you will learn what to lookout for to help you spot a "wholesale investor" or "wholesaler." Being able to identify the common strategies will help you ensure that you get what you agreed upon and everything goes smoothly. 

A blind offer is when a person agrees to pay a price for a piece of real estate without ever actually seeing it. This is considered a poor business strategy to seasoned real estate professionals and investors as the amount one is willing to pay is always dependent upon the condition of the property. 

If you receive a blind offer, this could be in the form of a phone call, email, or text message, there is a good chance that this is not a reliable proposal and there is little intention of the price remaining firm at this amount. This sentiment is generally also true for offers that come in higher than expected or when there is a willingness to continue to increase the amount.

One should always get the best offer possible when selling their home. However, when an offer is made it is important to know that the buyer can actually purchase the home.

When one receives a contract or even a verbal offer, it is a good practice to request proof of funds. This is simply a document showing that the buyer has the ability to pay what they are offering. The best method for verification is a bank statement or screenshot of their account balance. If one offers an approval letter or commitment letter, be certain that it is coming from a reputable bank or financial institution. There are websites where a person or business can obtain a commitment letter without actually applying for funding. 

If a buyer claims to be remiss about sharing their financial information, remember, this is a standard practice in real estate. If a real estate agent was representing you, they would also require this information. 

Most legitimate buyers will want to have a contractor or home inspector view the home and will request a time for that. However, a general component of "wholesaling" real estate, the wholesale buyer must bring multiple other potential buyers into the property in order to secure the actual purchaser in the end. This will result in requesting numerous times for access or several hours of access to the home. The request is generally based on the inspection or finance portions of the contract. 

They may tell you they will need to bring in their contractors on a few occasions and their business or financial partners for several other times.  

When a contract is signed to purchase real estate one must also provide consideration, which means money. This is known as an EMD or earnest money deposit. This amount is held in escrow by the closing agent (title company or attorney). This deposit is held as insurance that the parties involved (the seller and the buyer) adhere to the contract. In the event the buyer does not buy the property due to no fault of the seller, the seller is entitled to the escrowed deposit. 

Since the wholesale buyer does not intend to be the actual purchaser of the property, they cannot make the offer with absolute certainty that they will ultimately fulfill their contractual obligations.  Hence, it is in their best interest to offer an extremely low amount in escrow, sometimes as little as one dollar. The average is $1,000-$5,000 depending on the purchase price. An amount below that, could be a red flag. 

Most people do not have a real estate attorney or title company that they use regularly. As a result, they often use the one the real estate professional recommends. This is normal and common. 

However, it is best practice for the buyer and seller to use separate closing agents. This allows you both to have representation if things don't go as planned. 

When one is intending to have a third party as the ultimate buyer, it behooves them to keep all of the parties as close to the chest as possible. This is achieved by requiring that all parties utilize the closing agent they have selected. That individual or firm is familiar with making sure that the multiple parties do not find out about one another. 

To offer in contrast, if we are purchasing your home and you do not have an attorney or title company you prefer, you may select any of the closing agent which we work and we will automatically utilize another.