Real Estate Wholesaling: How to Safeguard Your Deals from Sellers

While we’re going to talk about that, we’re going to talk about some of the important things that, if you want to get involved in wholesaling or you’re currently wholesaling property, you should be looking to make sure you’re protecting yourself on your deals.

I’m not talking about asset protection here. What I’m talking about is protecting yourself from a seller when you’re putting these deals together, to make sure you can make money off your deals. Then we’re going to go into some of the things that you might be looking for overall in building a business because my special guest, Michael Gefteas, as I said, he’s been doing it for over eight years. He’s a client, and I’m so happy to have him on. Michael?

Michael: Hey, thanks. Thanks for having me.

Clint: You and I’ve been going back and forth. You actually teach some classes down in Texas on this. You’ve brought me in before to work with your investors. This is about you, so it’d be great for people who are watching this right now if you were just to tell them a little bit about your backstory in real estate and how you got started in wholesale.

Michael: I’ve got 25 years in the corporate world. About seven or eight years ago, I said, that’s it. I need a change of pace. I got involved in real estate investing. I do fix and flips, I do buy and hold, I do wholesaling. But at the end of the day, especially with the economy changing and the interest rates, wholesaling has been a primary function, because there’s so little risk in terms of holding, rehabbing, money costs, or anything like that.

I’ve spent years. I’ve built a buyer’s list of over 50,000 strong. I have talked to thousands of sellers, and really fine tuned the way of working well with sellers and buyers in wholesaling.

Clint: For people who are watching this right now or listening in, and they don’t even know what wholesaling is, could you just describe that technique?

Michael: In its most basic form, it’s getting a contract, then turning around, and finding an end-buyer. In Texas, what we say is you’re assigning your equitable rights—it’s a very key term—because I’m (in essence) taking an end-buyer and replacing them where I was on that contract. They perform on the contract, and I get a fee in the process.

Clint: You’re tying up deals. One thing about Texas is that all contracts are freely assignable, where other states are not always that way, so you may have to do it a little differently?

Michael: Very true. Yes, absolutely.

Clint: Okay. With wholesaling in, before we talk about actually how you put one of these deals together, with this market right now, how do you think that strategy fits?

Michael: The one thing that I see people making the biggest mistake on is they don’t take into account our real ARV (after repair value). That has shifted, as you said, with the market. You need to know what your real ARV is and then work backwards.

Account for your fee, account for the rehab costs, account for all of that, so that you can market it at the right price so that you can actually find an end-buyer.

Clint: How are you finding your sellers now in this market that there’s enough meat on the bone, where an investor can come in and say, yeah, there’s value here and I’m willing to pay you for this deal?

Michael: That is the art of negotiation because there are some deals that you just need to say no to. If you get a bad deal under contract, it makes it much more difficult to wholesale a bad deal. You need to help really influence, negotiate, and find these, whether they’d be foreclosure, absentee landlords, somebody who just really wants to sell.

It’s been listed for six months, and they can’t sell it at their overinflated price. You need to sit down, talk with them, and negotiate it at a price that will allow you to then put some profit and assign it.

Clint: The way it works is, what you’re saying is, if I’m going to wholesale a deal, I’m finding a seller who is willing to sell me the property, or I’ll use the word discounted value. I assume that these deals do exist right now because it’s hard for a lot of people to qualify because of the increased interest rate. Sellers have to realize that.

You find a seller who hasn’t been able to move their property, you’re able to tie it up at a lower price, then you’re going to go out, and you’re going to find find an investor who’s going to pay you a fee in order to step in and close on that property at that price you’ve negotiated. Correct?

Michael: Yeah. What we do is we’ll negotiate it at a lower price than where we want to assign it so we can make the difference. The other thing is, the worse off a house is, the more I like it. The more work it needs, the more room there is for me with profit.

Some of the biggest houses I’ve made money on are houses that you would think are virtually tear downs. But if you get it at the right price, and you help the seller to understand that, even if they’re in foreclosure or they’re not in foreclosure, remember, if somebody wants top dollar, they can try and get top dollar but they’re going to sit on it for a long time. You need to find the people that need faster action and a discounted price for that.

Clint: All right. When you’ve written a contract with the seller to tie it up, and you’re out there looking for another investor, how do you stop that seller? Because you’re not using a real estate agent, the representative. How do you stop that seller from selling the property to someone else, then you lose out, or possibly you’ve already negotiated to sell to somebody else and then they’re going to lose out, and they’re going to come after you and sue you? What’s to prevent that from occurring?

Michael: There’s something in Texas I do what’s called a memorandum of contract. I don’t do it on every deal, though. I only do it if I feel as though the seller may be going sideways on me, or there may be a problem, because there are also a lot of unscrupulous buyers that will come in knowing you have a contract, especially if you market it. Now, they’re going to go after your seller and try and offer them a little bit more to entice them to not form on that contract.

I put a memorandum of contract that gets registered with the county, and it shows it’s a notarized document that I actually have a legally binding contract on that property. But here’s the caveat. You can’t put a memorandum of contract if you do not have a fully legally binding contract. You need to be ready, willing, and able to perform. You can’t just go tying this up willy-nilly because otherwise, at that point, it could come back and bite you.

Clint: A slander in title. All right, explain to people, what is a memorandum of contract?

Michael: Basically, it’s a one- or two-piece of paper. It’s submitted to the county, it gets notarized and it says, I, Michael Gefteas, have a legally binding contract with the seller or whoever it is to purchase this contract. Typically, what you’re going to do is attach the actual signed page. Here in Texas, we use a track contract with the buyer signature and the seller signature on that to prove that you do, in fact, have a fully executed contract.

Clint: This gets recorded against the property. And the reason why that is important?

Michael: Is because a title company is going into or at least they should, in their title search, go ahead. This will come up against that property as a cloud on title of some sort. There is a little bit of a time delay from when you actually file with the county till the time it gets recorded and showing up. If a house is getting foreclosed on (let’s say) next week, and I file an MOC today, there’s a high likelihood that by the time it gets in the county system, it won’t show up in a title search. So you need to do this as soon as you think there’s a problem.

Clint: Or why not just file it every single time? Because you mentioned that you don’t do this with every seller.

Michael: There are a lot of contracts. I don’t even know how many hundreds of contracts we get a year. First of all, there’s a cost associated with it. Second of all, just from a paperwork point of view, you don’t want to go adding this undue burden needlessly. You need to be focused on making deals and making money, not on needless paperwork.

Again, I’ll only do it for one of two reasons. Either the seller may be going sideways on me, or it is such an amazing deal that I just want to ensure that the money that I’m going to make on that doesn’t disappear.

Clint: I’m going to put on my attorney hat now and I’m going to explain to people why this is important, what you just said. When you file a memorandum of contract against someone’s property, you are putting essentially a mark against their title.

As Michael stated, if you’re not ready/able to perform on that, you have to be able to come up with the cash itself or have someone that you know, an investor that’s really strong, is going to be able to buy this deal, are already committed to you on it, because now you’ve slandered their title. If you slander the title, they can sue you for that because you’ve just prevented them from selling that property to a third-party. That’s what he means by the risk.

I think the second statement he made is that you don’t do it on every deal. The reason why you wouldn’t do it on every deal is because if you don’t go through with the deal, then you have to file a what?

Michael: If you don’t go through with the deal, then they can come after you for that.

Clint: You have to release it. If you don’t release it, because that’s still going to stay on their title, when they go to sell it again, that’s going to create a problem for them. You can get sued that way.

This technique, I think, is genius. It’s awesome to tie up those deals that are really important to you that you know you can go through on this deal, and you want to stop a seller from realizing, hey, I screwed up. I should have asked more for this property. Then they go out there and find someone else and tell you, well, just go ahead and sue me if you don’t like it.

We know that, hey, we’re in the business of selling real estate. We’re not in the business of suing people. It’s too expensive to do that. The sellers know that. That’s why I think it’s a good idea to protect yourself.

You and I have talked about this before. Let’s say that you file that memorandum of contract, and the seller still goes through with it, or the title company refuses to honor it when they contact you, then what happens?

Michael: The first thing I do is if I get to the point where I file a memorandum of contract, I am upfront and I tell the seller that. The reason why I tell the seller I filed a memorandum of contract is because I’m doing everything I can to prevent it from escalating. I don’t want to have to reach that point of having to now take a bigger level of action.

Guys, keep in mind, if they do not go through a title company, MOC isn’t going to protect you because it’s usually not a title search in that regard. But it will still stay against the title.

If what happens is a title company has, for whatever reason, missed it or ignored it—usually they miss it—then what I do is I will reach out to the actual escrow officer, prove that I had a legitimate MOC, prove that I had a legally binding contract, and say, you need to make this right somehow. Usually, that is with them paying some fee to make you go away.

Clint: I know that you’ve run into this problem with title companies before who threatened or basically told you they were going to ignore it.

Michael: Yes. I actually had a very major title company referred to me as a dumb investor, that I had no idea of what I was talking about and dared me to sue them. So I did. Not only did I sue them, but I sued their seller, and I sued their buyer. I brought them all into the lawsuit to enact the maximum chance of success on this.

Clint: What happened?

Michael: They ended up writing me a check for five times the original amount I would have settled for.

Clint: I would assume being an attorney that you’ve got the buyer who wants to close on the property, the seller who wants to close on the property, and the title company doesn’t want to get crossways there because they’re going to be on the hook. They’re negotiating behind the scenes saying, we got to make this guy go away, because it’s going to screw up our deal completely. They’re not going to be able to get title insurance, because the title company won’t then insure it. That’s awesome that it turned out for you in that manner.

Michael: I do want to warn people, though. Guys, you better be really sure when you put an MOC because I’ve gone up against people who’ve left MOCs on for years. The first thing I will do is I will get an attorney involved, I will demand that they provide everything that they were ready, willing, and able, and that it was the seller that defaulted and not the buyer. This is not a toy. You better be prepared to back this up if you put it on. But if you do it right, and you do it legally, it’s a powerful tool.

Clint: As they stated, because it’s so powerful, there’s also a risk to it while you have to understand when to use it, when not to use it, and how to properly use it as well.

Michael: Exactly.

Clint: Anything else about wholesaling that you think people are considering getting started in, or maybe they’ve been doing it for a while that you’re seeing right now that you think they should be aware of?

Michael: Guys, your reputation is everything. I will tell you that most of my buyers are repeat buyers. The reason being is because I’m not going to put out a deal with bad numbers. I’m going to put out a deal with good numbers. I want there to be enough meat on the bone for them to make money because if they make money, they’re happy, and they’re going to come back and buy more from me.

Make sure that your word is everything. Remember that there’s a higher level that you need to operate than being legally correct. You need to be morally and ethically correct. What I say by that is I don’t daisy chain other deals.

I’m not going to see somebody promote a deal on Facebook, and then I’m just going to turn around to flip it and try and offer it for more. I’m only going to offer deals I’m actually a party to or have a JV on, so that you can control it, it’s the right messaging, it’s the right numbers, because again, my name is now tied to that. And reputation is everything.

Clint: When you’re talking about investors, that brings up another question. For somebody who is considering starting this, how did they find the investors that are going to buy their properties?

Michael: That is a lot of work. I mentioned I had 50,000 people on my buyers list. That’s been almost a full-time job going on eight years now. You could go to your local auction and start asking people there, hey, do you want to get on my buyers list?

You could email people, message them and say, oh, we’re in the same Facebook group. Can I add you to my list? However, guys, do not simply scrape email addresses off of Facebook and add them to your buyers list because not only is that a violation of terms of service, and depending upon what state of the country you live in, it could be construed as illegal, it will absolutely get you blacklisted in email domains, and that is the worst practice you can do. So don’t just add people to a list willy-nilly.

Clint: What it sounds like is what you need to do is understand that if you’re going to wholesale property, you need to build out a business. You’ve got to have proper procedures in place to ensure that you’re not screwing it up. You have support that goes around it as well.

You created a site called mojomichael.com. I think it’d be great if you could tell them, people who are watching this and listening in right now, what is the purpose of that site? How can it help me as a real estate investor?

Michael: I have taken everything I have done personally, for eight years. I have knocked on thousands of doors, I have talked to thousands of sellers, and I’ve boxed it into a turnkey concierge solution. What we’re going to do is we’re going to have professionally-trained lead callers that I have personally hired and trained. They are going to call the motivated sellers lists, the foreclosure lists.

Whatever list you want, they’re going to book you warm appointments. They’re going to put it into a CRM. You’re going to get notified. Then what you need to do is you need to contact me and our turnkey power team, because we’re going to help you analyze the deal, we’re going to help you close the deal, contract the deal, if you want to assign it, you want to fix and flip it, whatever it is, we’ve got people there ready to help you be successful.

Here’s what I liken this to. If you try and have a hat for everything you do in a business, you’re not going to be successful. I hired Anderson because I didn’t want to have them mess with my taxes, my bookkeeping, my legal, my LLC creation. I let you guys handle that. That makes me more successful.

You can’t be the person that’s spending all this time calling and still has time to close deals, still have time to manage deals, still have time to find new people. You need to partner with the right people, and that will make you more scalable and successful.

Clint: With Mojo Michael—I’ve been through the site and I’ve looked at it—you’re helping people find the leads, and you’re also helping them put the deals together. Because if I’m just getting started and I realized, hey, this is an opportunity for me to make extra cash, but I don’t know enough about it, you’re going to come in there, hold my hand, and walk me through that. Of course, I’m going to pay for the service that I get, right?

Michael: Yes, correct. There is a monthly flat charge for the service. There’s no signup fee. There are no additional costs for me to help you. There’s no additional cost to use our power team, but we are there to make you scalable and successful.

Frankly, there are a lot of people that do this full-time. There are a lot of people that have W-2 jobs. They just want to focus on the warm appointments and not calling 250 people a day hoping somebody picks up.

Clint: Yeah, because you just don’t have the time for that, and it’s getting that person that interest. Getting someone the setter. Really, what he’s talking about is, there’s a skill in doing that in getting some that actually is willing to talk to you to take that next step. That’s typically a committed buyer, someone that’s already raised their hand (or a seller, that is), and they’re willing to move forward.

That’s important. You built up the systems. As you stated, I’ve watched your business grow. These are the same systems you’ve used in growing your own cup.

Michael: Absolutely. That’s a tried and true proven system that I know works through trial and error. I guess the biggest thing that I’m trying to convey, I remember what it was like to be a new investor like it was yesterday. It was overwhelming, it was scary. I’ve made so many mistakes. Putting Mojo Michael together is an effort to keep the new investors from making the same mistakes I’ve made and to help them hit the ground running.

Clint: Awesome. Hey, I appreciate you coming on in sharing that story about the memorandum contract and explaining to wholesalers how important that is to look at utilizing that tool, but you also talked about the risks involved if you’re going to go down that road. You have to use it carefully, but it is a tool that I think every wholesaler needs to be aware of, so that they can protect themselves in those situations. Is there anything else you’d like to leave?

Michael: Guys, don’t ever dare somebody to sue you if you’re not prepared for them to sue you.

Clint: Nice, or have a good attorney on your side either, right?

Michael: Exactly.

Clint: Michael, thanks for coming on.

Michael: Thanks, Clint.