Episode Transcript
[00:00:00] Hey everybody, and welcome back to trust this. This week's edition will be an ask Joe anything.
[00:00:11] Many ask me anything.
[00:00:13] For those of you who are new to this podcast, I just want to let you know who I am. I'm Joe Siegel. I'm a lawyer here in Orlando, Florida. Practice mostly real estate, land trust law. It's what we do. A lot of llcs, formation, private lender, representation, deeding, things like that. Anything related to real estate, except anything that takes us to court. We don't do anything in court when we are related to real estate and practicing law. So that's who I am. Trust this is our podcast. We have several different series. We have the master series where I sit down and talk with entrepreneurs and their journey and where they are, where they were, how they got where they are today, some of their best habits. We have another series called tactics and strategies where I talk to professionals in their field about typically something to do with real estate, real estate, investing, real estate practice, networking, things like that, and share that with our listeners. And then we also have the ask Joe anything, which is what we're doing today. And we get in questions all the time. We have a newsletter that goes out every week at 815 am on Friday morning. It goes out to about a few, a little over 4000 people, a little over 3000 of you read it every week. And in that newsletter, I discuss topics that may not be getting a lot of press coverage in the what we call the mainstream press or even the industry press. And I read those all week long. Pull those out. We typically write a couple of articles contextualizing, aggregating and contextualizing the news that happened in the past week related to real estate and law and how that all comes together to affect you and your business of real estate. And then I have another panel in that newsletter where we pulled together just some links to various articles that may have not warranted a full blown discussion, contextualizing discussion. But we're going to go ahead and give you a link to them, to the original source of the story so you can read it and catch up there. And then the last panel of the newsletter I typically go through and discuss some sort of eternal verity related to life in general or entrepreneurship, business ownership, leadership, something to that effect. And we get a lot of good feedback on that. If you do not subscribe to the newsletter, we will put a link down in this podcast or video, however you may be viewing this that will allow you to link and sign up for the newsletter because we get a lot of great feedback on the newsletter. So we'd love to see you there. I talk about a lot of things in the newsletter. We write about a lot of things in the newsletter that we never talk about here.
[00:03:16] Just happens that this week we're going to be talking about a lot of things that arose from the newsletter last week. And we're now in June, early June, mid June, 2024. In case you may be watching this podcast, weeks, months, days from now, years from now. So this is where we are today, what I'm talking about. And we're talking about last week's questions that came out of last week's newsletter. Maybe it was just links to the stories that were there or something I actually discussed and contextualized aggregated in some of the articles. So we're going to talk about some of those as well.
[00:04:01] But first and foremost, we're going to talk about wholesaling because I had a link to an article last week that got a lot of buzz, created a lot of buzz, a lot of questions to me about wholesaling in general. So I want to talk to you about wholesaling when it comes to real estate. And first I'm going to explain what wholesaling is in real estate. And so wholesaling is when someone goes out and you may have seen this, you may have gotten these, it's emails, postcards, texts, I want to buy your house.
[00:04:44] And these are usually real estate investors. And what they do is they get sellers and owners, property owners. A lot of people who may have gotten the property through probate, they may have gotten the property through, they may hold the property, and they don't live in the same state, they don't live in the same county, and it's got a tenant and the tenants are nightmares to deal with. So they just want to get rid of this property. They've got code enforcement violations. It's typically distressed properties in some way. They are getting ready to fall behind on the mortgage. They just have to move for whatever reason. So there's, there's just lots and lots of reasons why an owner really needs to get rid of their, their house, their property, their real estate. And that's where a lot of our clients typically, I mean, we've represented a lot of wholesalers over the years, and they will go ahead and get a contract and they'll, they'll make an offer. And yes, these offers are usually well below market because the wholesaler is promising that they will close within a certain amount of time. As long as the property meets their suitability requirements. They will go ahead and they will close quickly, no questions asked. They're not worried about the code enforcement violations and the crazy tenant and all these other issues, the bad roof, the non functioning air conditioning, the aluminum wiring, the termite damage. They are going to go, hey, we're just going to get this under contract and the wholesaler gets it under contract with the owner, typically at a very low price. And then they go out and on Facebook, marketplace and other places not on the MLS, typically because they're not allowed to do that. We'll get to that later. But they list their contract for sale. Typically the buyers, the end buyers who have signed up for these lists, they are flippers. They're people who renovate and flip, or they're buy and hold investors, people who want to buy it, fix it up and hold it as a rental. We call that the borer method. They buy it, renovate it, refinance it and rent it and says, brrr. So they will buy the house from these wholesalers, but they don't really buy the house from the wholesaler. What happens is they buy an assignment of the contract from the wholesaler and they agree that at closing they will step in and buy the house at closing from the original owner. And then that wholesaler will get a fee, an assignment fee for assigning their contract at closing. Now there are two or three different models at work here, business models at work you've got wholesalers and wholesalers have to spend a lot of their money and a lot of their energy on marketing. A lot of pay per click ads on Google, a lot of Facebook ads. They spend just inordinate amounts of money. I've had clients who spent as much as, you know, 200, 5300 thousand dollars a month on advertising, just trying to get sellers, maybe in one state, maybe in multiple states to contact them as a lead to potentially sell them, go under contract to sell them the house. So wholesalers put a lot of their emphasis and energy and money into marketing to get those sellers to come to them. And then they turn around, put a lot of money in their marketing to end buyers. Now the other model is the buy and flip. So these are folks who will typically say, okay, wholesaler, you found me a house that I want to buy. So I'm going to go ahead and pay you a fee for finding that house and I'm gonna go ahead and close and I'm gonna buy this house and all of my energy and money is gonna go into fixing this house up, renovating it, making it pretty again, making it livable. Making it insurable, and they will fix it up. And this is where a lot of the tv shows on like HGTV and other channels, Discovery, a and e, they focus on the flippers because they buy the houses, they go in, and the drama is typically in renovating this house, tearing it apart, finding all the problems. You never know what you have until you open the wall. You know, there's that old saying, so they will get the house, they'll fix it up, and then they turn around and sell it for a profit. That's actually a very high risk proposition because number one, you don't know what you're going to find when you start renovating it. It could be a lot more expensive to fix it up than you originally expected while you're fixing it up. It could take a month, it could take three months, it could take six months to get this property renovated. And during that time, interest rates could go through the roof. And now you can't sell the property for what you expected to be able to sell it for, or you can't sell it at all. So there's a lot more risk in that buy and flip, buy, renovate and flip model of real estate investing. Then there's the third model where people who are buying it, renovating it, renting it and refinancing it, the Brrrr model. Those people are also typically potential buyers from a wholesaler. They will take an assignment of contract from a wholesaler because they're going to buy it, renovate it for a long term hold or maybe short term rentals, Airbnb, whatever, home away, VrBO and they will put that property up for rent. And once it's up for rent, now it has cash flow, now they can go to a lender, refinance it, pull their cash out of it and go buy something else while they're meanwhile getting rent off of this property. That's a little bit lower risk because they pretty much know what rent they're going to be able to get. They know how much money they're going to put in it to fix it up, and they know what the after repair value, the ARV of that house will be once they buy it and fix it up. So they're going to understand and their risk is going to be lower. And they're also planning to hold it for a much longer period of time. Unlike the flipper that plans to hold the property for maybe a few weeks to months at most while they do the renovation and sell it, the BRrr, the burr buyer maybe plan to hold this thing for five to 20 years until they're too old to hold property and they're ready to retire and get rid of it after they build up their entire portfolio. So those are different models, and those are typically the buyers who buy from wholesalers. So again, the wholesaler goes out, they get a seller who just wants to get rid of their property for whatever reason, they get it under contract, and then they turn around, and on a non public forum or not an exclusive forum, they tend to say, hey, I've got an off market property under contract, and I'll assign the contract at a purchase price of x. And it's usually higher, of course, than what they are paying the seller to go through the closing. They may go through two closings where they buy it from the seller, and then they turn around immediately sell it to their end buyer, the other investor, or they just do an assignment or contract right there on the settlement statement. So there's a couple of ways to structure that closing. I did closings for over 20 years. Most of the time, we just did an assignment of contract and showed an assignment fee being paid to the wholesaler on the settlement statement is how we handled that.
[00:12:19] So that is what wholesaling is and how it works. Now, what happened that, the link to the story that I gave last week was that a property got under contract with a wholesaler, and then the seller pulled out and the wholesaler recorded in 2020 in the middle of COVID don't forget when this happened, a memorandum of agreement that you know, well, we have a contract to buy this house. So it clouds the title, is what we call, they cloud the title. This is an extremely common occurrence, and it's a typical practice of what wholesalers do. Wholesalers will get the seller to sign a memorandum of agreement, or some wholesalers simply sign the memorandum of agreement. And that brings me to my first issue here on memorandums of using memorandums of agreement or memoranda of agreements as a wholesaler. Number one, I advocate it always have. However, that's given with two caveats. Number one, if the wholesaler is using the standard far or far bar contract that is typically used for real estate purchases in Florida for conventional purchases, there is a paragraph in that contract that says, neither party shall record any memorandum of the agreement or the contract itself, or the contract itself cannot be recorded in any event, because it's not notarized. Only notarized documents, typically, or certain court documents, are allowed to be recorded on the public records where all title documents are recorded in Florida.
[00:14:04] But what they will do is some wholesalers, they just sign it. They sign their own. Once a sell goes sideways, the seller, for whatever reason, is saying, oh, I've changed my mind, I can't do it. In this case, it was in 2020. So I'm assuming probably Covid happened, and the seller just said, okay, I'm not gonna sell the property.
[00:14:27] And so they, the wholesaler recorded this memorandum, which again, I advocate for, I recommend, I've always recommended to wholesalers. And in fact, we even have a form, memorandum of agreement that is part of our investor dot kit that we sell to real estate investors, and we encourage them get it signed by the seller when they sign the contract. If you do not have a notary with you at the time you sign the contract, use a remote online notary. Have a relationship. There are plenty of companies out there that do remote online notarization. We'll put some links down to notarize.com, comma node, recam.com, many others in the comments below in our, in our show notes. But use a remote online notary. And in that way, while you are getting the contract signed by the seller to sell the property, then go ahead and sign this memorandum of agreement. And it's notarized online. Boom. And it's ready to be e recorded in the county where the property is located. So it's there and it's ready to go, and there's no question. So if the seller then tries to back out, it's recorded. Or you can go ahead and record it at that point and go, well, it's kind of hard for the seller to object because the seller signed it saying that there is a contract with us and this is important. The reason I, I recommend getting a memorandum of agreement signed is because we've, I've literally sat in a closing before with a gentleman who had sold his property through wholesalers. He was the owner of the property. They're not, not an investor. And he had signed at least four different contracts with four different wholesalers. And some had recorded memorandums of agreement, some had not. Some were signed by the seller, some were not. And I asked the guy, I said, hey, what, what were you thinking signing all these contracts? You signed four different contracts to sell the property? He said, well, I just figured I'd sign them on whoever closes first gets it. So number two here, as a seller, don't do that.
[00:16:38] That is not kosher. It's not right. You have signed an agreement with someone. You can't go out and then just sign another contract because here's where it comes in. At closing, the that end buyer is going to get title insurance, and you are, as the seller, you are going to sign an affidavit that says to the title company, under penalties of perjury under oath, there are no other contracts outstanding to sell this property. Among other things, this, this affidavit will say lots of things, but one of them will say, there are no other contracts out there. If you've signed three or four contracts, and now you show up to closing and close on the first one that was able to close, and you sign that contract, and then after closing, other buyers, the other wholesale buyers or regular buyers come along and say, wait, I had a contract on that property. You've just committed insurance fraud, title insurance fraud. By doing that. You've committed perjury because you lied on that affidavit. That's not just a civil offense, that's a potential criminal offense. So sellers must be very careful. So, getting back to what I had the story posted to is they had recorded this in 2020, in 2024, four years later, and after Covid's over, after the market in Florida has gone up 40, 50% on prices, on values, property values in some places, the lady decides, okay, well, I'm gonna sell the property now. I'm gonna sell it. And the title company comes back and says, well, wait, there's this memorandum agreement. It's got to be cleared up before you can close.
[00:18:21] I probably would not agree with that title company. I don't work for them, don't know who they were. But the memorandum of agreement or any contract is typically only good for one year from the date it was made or recorded. So the fact that four years later, it's still out there and they're going, well, we've got to pay this off. We got to make this go away, or you can't close.
[00:18:45] I don't agree with them, number one.
[00:18:49] And we actually ran across that in 20 plus years of closings. I ran across that very often where there would be agreements out there or documents out there in the chain of title, and we would run across them. And I would go back and argue as an attorney, as a real estate attorney, I would argue with my title insurance underwriter as to why it should not stop closing and that we really did not need to even worry about it. But for whatever reason, this title company is like, well, it's, we know it's four years old, but we have to, you know, our underwriter says we got to do it. And they didn't want to go argue. So they just went ahead and got into it. So it created a whole thing and became a news report on television. So just ugly.
[00:19:31] And it made this investor look bad for doing what is a very common practice in Florida or actually any state. I also practice in north and South Carolina.
[00:19:41] And memorandums of agreement are typical so long as the contract does not have any prohibition on recording either the agreement itself or a memorandum, that the agreement exists as it happened in this case. So I just throw that out there that, you know, number one, I recommend using memorandums agreement. However, best case or best practice is for that memorandum to also be signed by the seller, by the property owner, and before a notary public, whether that's online or in person, physically present, and get that recorded in all cases. It'd be great if you record it in every case, but if you don't record in every case, at least record it whenever it starts going bad, whenever a seller acts like they're going to pull out of a closing.
[00:20:36] So that's number one.
[00:20:40] Number two is wholesaling in general.
[00:20:45] And this is, this is where I want to turn when we talk about wholesaling in general.
[00:20:51] There's been some letter, not, there's been legislation in South Carolina, and you may have seen it, there was an opinion, a column written on bigger pockets.com, and I read it and it argues that wholesaling is at an end in the state of South Carolina because this law has now passed.
[00:21:17] And I, I could not disagree more. Like I said, I'm, I'm also an attorney in South Carolina. Been licensed there since the late nineties. Did, I've done, been listed on hundreds of real estate closings in South Carolina over the years. Didn't do any wholesale closings or real estate investor closings in South Carolina. But I do not agree with the writer of that column that this is the end of wholesaling as we've seen it. I understand that some lawyers are concerned about closing deals where wholesaling is involved. But I looked at the statute. The statute to me simply says it simply codifies what I have recommended to be the best practice since I've been dealing with wholesalers anywhere. And that best practice comes down to how you advertise what you have under contract.
[00:22:18] Where, where wholesalers get in trouble is when they advertise property for sale, they put it on Craigslist, Facebook, Marketplace, Google. They put it on their website and it says property for sale. Well licensed realtors are out there all the time reading ads like that. Because they want to see if someone has a house for sale by owner because at that point they are going to solicit them to see if they can list their house on the MLS, the multiple listing service for sale. And they're going to contact you and if you're the wholesaler, they're going to contact you and you're going to say, well no, I don't really own the house. Are you going to tell them who you are? And they're going to compare who you are to who shows up in the tax records as the owner of the property and they're going to go, wait, you don't own the property and you just listed this for sale. You're practicing real estate without a license. I'm going to report you and I have represented wholesalers and investors who have done that and gotten in trouble with the Department of Business and Professional Regulation and Florida Real Estate Commission in the past because they listed a property for sale that they did not own and they got, they got caught. So for that reason, you must always advertise. This is an assignment of contract. I am listing an off market property only and I am not listing the property for sale. I'm listing the contract for assignment for a fee. And that's really what this South Carolina statute, this new statute in South Carolina says. It's all it says. You just cannot advertise the property for sale. The buy. The same token, as I've told wholesalers countless times, if you do not own the property, meaning you have a deed to the property, you cannot put it on the MLS, that is a violation of the multiple listing service rules, period. If you are a realtor and you have a wholesaler that comes to you and says I want you to list all of my wholesale properties on the MLS, you probably cannot do that unless you enter into the agreement directly with the true owner of the property. Right now, simply having a contract on a property does not give rise to equitable rights that give you any right to sell anything.
[00:24:43] Putting the property into trust and then having the trustee sign an operating agreement, not an operating agreement, signing a listing agreement, maybe, maybe so long as you are listed as a beneficiary. But at that point the seller has already transferred title to you. They just did it through a trust. So these are all going to be things that, you know, you would want to sit down with the lawyer and talk about how this is structured and how it is documented to make sure you are not getting yourself in trouble. Because when DBPR or Frac goes after an unlicensed person. For the unlicensed practice of real estate, it's ugly.
[00:25:23] Worse is when they are going after a licensed agent or licensed broker who is assisting a wholesaler, an unlicensed person to sell or auction or lease property that they have no right to do. So. Either way, it causes problems. So again, in South Carolina, I don't think this is really going to be that big of an issue. It's simply codifying the advice I've given to everybody. With that said, I would point out and remind wholesalers and real estate investors of MVP Realty.
[00:26:02] And for those of you who read our newsletter faithfully, you probably know exactly what I'm talking about when I talk about, when I say MVP realty. If you've been in real estate in Florida or pretty much any state anymore, you understand what we mean when we say MVP realty. MVP Realty is a realty group out of Palm Beach, Florida, that their model was advertising that, hey, if you need a loan, a little loan, not a loan. If you need cash now, we will give you cash now anywhere from 500 up to, I think it was maybe four or $5,000. They would pay you this money in exchange for that. You don't sign a note, you don't sign a promise to pay the money back. There's no requirement you ever pay this money back. However, that money they pay you is for a very, very long term listing agreement, which means that the seller, the owner of that property, just said, hey, you gave me $1,000 and I've signed all this documentation and it has given you a 2030, 40 year listing agreement. So if I sell this house, anytime within this next few decades, I have to one give you the opportunity to list the property for sale. And even if I don't, you get paid. You get paid a commission when this house sells, and they did it first down in South Florida, then it spread up through Florida, then it spread into other states. Well, since that has happened, and they always recorded a memorandum of agreement that was notarized online at the time they signed all the other paperwork. So when the seller signed all the paperwork, they were before a notary public online, usually out of Texas or Virginia, and the documentation was then recorded the memorandum of agreement, which in this case was a memorandum of a listing agreement, a compensation agreement for MVP realty to get paid. MVP did this through multiple states. And since that has happened, multiple states have passed laws now that have made it illegal, including Florida, to enter into a listing agreement like that for that long period of time to record anything like this.
[00:28:16] So wholesalers have to be very careful about how their memorandum of agreement is written to make sure it complies with this new statute here in Florida, as well as, I believe, 27 or 28 other states that have passed similar laws to put MVP out of business. And MVP actually is in bankruptcy at this point. What they were doing is they were selling their rights to those payments on the secondary market to investors, and that all collapsed. It all collapsed. But what I'm trying to point out there is they relied on memorandums of agreement. It was just, instead of, hey, we have a contract to buy this house, it was, hey, we have a contract to list this house and we get compensated from that. It was signed by the sellers, the owners of the property. It was put of record, and it still got extreme blowback from attorneys general all over the country, from title companies, from legislators. So when that happened, it put them out of business.
[00:29:21] And this is what I would warn the entire wholesaling industry about, not just here in Florida, is be prepared for more legislative and regulatory scrutiny, not because of what happened in this story I link to, but because of what happened with MVP.
[00:29:43] The problem is, though, if wholesalers are out there recording memorandums of agreement and they're not signed by the seller and they're, and they're being brought up four years later, five years later, as clouds on title and they're still demanding money to be paid to release them, it is just like waving a red cape in front of a bull to say, come get me, attorney general, come get me. In the case of Florida, it may be the Department of Agriculture, because they do consumer protection laws and consumer affairs. It may be DBPR, it may be FRIC, it may be the Florida association of realtors, and it may be all of them. But having worked in other industries as a lawyer, having worked for other industries over the years that are extremely regulated, wholesaling and real estate investing has sort of been this wild west of entrepreneurship, this wild west, unregulated for the most part way of doing business, and it's really just constrained by some rules of ethics that local real estate investment associations have in place.
[00:31:04] I would just warn you, seeing what has happened in other industries, timeshare, for instance, where it was a wild west that is now extremely regulated, wholesalers and real estate investors just need to be careful of the perception of the public out there when things start going sideways, to be sure to nip it in the bud sooner rather than later, because you could be drawing unwanted attention to the industry's practices. Just like happened in South Carolina, where they have now passed a law because so many, the association of realtors in South Carolina came after it. Now they have a model statute that can be used in multiple states. And other attorneys generals, they meet once or twice a year. Attorneys generals from all over the state, all over the country, real estate regulators from all over the country. They come together at conventions and they meet and they talk about what they are seeing.
[00:32:12] At one point they were all talking about MVP realty, 40 year listing agreements. There's a problem. It's causing liens on people's title. They didn't realize what they were signing. It's notarized. Yes, it's signed by the owner. But these poor consumers didn't know what they were signing and we have to protect them.
[00:32:32] Right or wrong, it's what happened.
[00:32:36] And wholesalers need to be aware of that, understand the bigger picture and see that when something starts going bad, spot it sooner rather than later.
[00:32:50] Nip it in the bud and maybe forego that thousand dollars that you were going to make there in the interest of preserving your ability to continue doing business for another 1015, 2030 years as you have been doing it. So that's my $0.10 out there on wholesaling and regulation and how that's all going to look as we go and how it fits in with MVP and everything else that we've got going on out there.
[00:33:29] Thanks for listening to this edition of trust this if you got something out of it, please press like and subscribe and give us a five star review to help us reach others who can benefit from this series. Until next time, keep aspiring to a better life.
