MAREI Q & A: Daisy Chain from Hell

So the other day I got a call from a MAREI member who I have seen at quite a few networking events.  This member is a “wholesaler”.

Here’s how the conversation went sort of:

Wholesaler:  “I have a package of houses, would you be interested in them?”

Me:  “I don’t know, what are the addresses? ”

Wholesaler:  “There are 30 of them.”

Me: “Can you send me a list so I can look at them?”

That’s where the discussion went to   XXX.

Wholesaler:  “I can send you an, um, form.  I need you to sign it first so I can make sure I get paid.”

When I hear about this “form” so “I can get paid” and I do quite often on calls, I realize several one of several things, so my next question was.  Are they on MLS.

Many people buying houses from the MLS to wholesale want me to agree to buy the house from them and to pay them before I know the address.  So I can’t go around them and buy the house off the MLS.   If this is the case, my response is, please don’t try  to wholesale me houses off the MLS and sign any forms.

Here’s why.

I sign your form that says I will agree to pay the wholesaler some amount if I ever buy this particular house.  Then the wholesaler sends me the house and I say, no way, you want too much money.  The wholesaler can’t find anyone to pay their price so the abandon their contract on the property and the listing agent puts it back on the market.  I then go look at it six months later when the price is now in the correct range, make an offer and buy it.  And here comes the wholesaler with their form that says I agreed to pay them if I bought that house.

So no, in that case I am not going to sign your form.

My next question is then, do you have these properties under contract to buy or have some kind of option on them?  I know that the answer will be NO, because if they did have a contract to buy them of some sort, I would not be asked to sign some form.

The Wholesaler knows a guy, who knows about a seller with some properties and everyone involved is shopping the list with forms to see if anyone would be interested.  Sorry, I don’t want to work with a guy, who knows a girl, who knows a cousin of the person who wants to sell these houses.  I want to work directly with the person who can sell me the houses.

When you get into a Daisy Chain, with everyone sitting with a hand out wanting to get paid, there is no deal.

Then let’s look at the legal implications.

To market and sell a real estate property in almost every state in the country, Kansas and Missouri included, it is a STATE LAW that you can sell your own properties, but to do it for a third party AND GET PAID, that you must be a licensed real estate broker.  You can be an agent, but even agents can’t get paid directly, the fees must go first to the Real Estate Broker, who then pay a fee to the licensed agents in their employee.

So marketing house that you do not own and do not have a purchase or option contract on is ILLEGAL unless you are a licensed real estate agent working under the supervision of a real estate broker (or are the broker) and have a valid listing agreement with the owner of the property.

The next question that comes is . . . but how do I get paid as a wholesaler?

There are several ways:

1.  The best way is to go get a real estate license, work under a broker and earn a real estate commission.  This is the cleanest most legal way to be a wholesaler.

2.  Go out and buy a property and then market it.  Also very clean, but the closing fees can be a bit more and can’t be done if you can’t find funding.

3.  Assign the contract:  Which means you have to find a great deal that is 100% a no brainer.  Get it under a valid contract to purchase, probably with some out clauses in the contract or option.  Then go find someone who will pay you an assignment fee to take your place in the contract (note you can now market the contract, but not the house as you do not own it).

That’s it, the only, legal ways to get paid for selling real estate in Kansas or Missouri.

So what are some out clauses.

“I agree to buy this property for X on Y date, if and only if I can find someone to buy the house from me.”  No this is not a pretty clause, but I have had sellers sign off.

“I am buying this property to resell.  If I can’t find a buyer by Y date I am going to cancel this purchase contract.”  I have had sellers sign this.

This week we wrote an option contract with no option fee, that give us the right to buy a house for Y for 2 weeks.  If we don’t turn that into a purchase contract in 2 weeks, we can walk and the seller can walk.  But it gives us the right to buy and thus to market for our contract for 2 weeks.

So if you have to get some form signed before you can give me an address, I am going to have to respectfully pass.  I would also recommend to spend more time on education rather than trying to sell through a daisy chain . . . ask me how I know. . . . Been there, done that and I have never, ever, ever had a daisy chain deal work out.  Nor have I really ever heard of anyone having a Daisy Chain work out.