Real Estate E&O Claims Spotlight: Wholesaling: What Can Go Wrong?

Purchasing homes for the purpose of increasing their value and reselling them at a profit, also referred to as wholesale, is a popular practice that can be beneficial for both the buyer and the real estate agent involved in the transaction. However, if it is not done properly, with complete communication and transparency between all the involved parties, it could lead to incredibly costly and time-consuming claims for real estate agents and their companies. Let’s take a look at one of our recent claims to see what can go wrong in this process and what agents should be mindful of.

The Claim

In May of 2018, an individual (“The Buyer”) began communicating with a real estate agent and property manager (“The Selling Agent”) in an effort to find homes to renovate and resell. After viewing several homes, the Investor opted to purchase a single-family home (“the Property”) for $52,000 on June 13, 2018, after being informed by the Selling Agent that purchasing, renovating, and reselling this Property would yield a potential profit margin of $60,000.

On June 19, 2018, the Buyer and the Selling Agent entered into a contract surrounding their plans for the home. This contract stated that:

  • The Buyer would be responsible for providing money to purchase the Property, to provide $61,500 in “rehabilitation money” to renovate the Property, and to sign an exclusive listing agreement with the Selling Agent for the home’s future sale.
  • The Project Manager would assist in purchasing the Property,  handle all rehabilitation work to prepare the property for resale, to have the Property ready for sale in no more than 100 days from the date of purchase, to provide the Buyer with receipts for bookkeeping purposes, and to market and sell the Property for a flat commission of $1,000.
  • Upon sale of the Property, the Buyer agreed to provide the Selling Agent 50% of the net profit within 2 business days of closing.

Though the home was purchased and the Buyer provided the Selling Agent with installment payments totalling $58,545 for property renovations (upon Selling Agent’s request), no rehabilitation was performed at the Property, and the Selling Agent did not pull any permits for future renovations. As a result of this, the Selling Agent did not have the property ready for sale in 100 days or under, and did not market and list the property. The Selling Agent also did not produce any receipts for the Buyer.

In addition, though the Buyer provided the Selling Agent with money to renovate the Property, it was not used for that purpose. The Selling Agent converted the money for her own use, and has not refunded the Buyer for the expense, even though the money was not used for its intended purpose.

As a result of this situation, the Buyer has filed a complaint against the Selling Agent as well as her real estate brokerage firm (“The Firm”) and its two brokers-in-charge (“The Brokers”) for failing to adequately supervise the Selling Agent in her transactions.

What Went Wrong?

The Buyer and the Selling Agent had a legally binding agreement. While the Buyer followed through with what was required of him, the Selling Agent did not. The Buyer provided the Selling Agent with money, but she did not get the permits for renovations, did not handle any rehabilitation of the Property, and did not list it and sell it within the agreed-upon period. As a result, the Buyer has lost money, resources, and time, and is now seeking damages from the Selling Agent as well as The Firm and The Brokers.

When engaging with clients in the wholesale process, it is crucial that agents communicate with their clients and are completely informed on what is expected of them and when it is expected to be completed. It was never made clear what happened to make the Selling Agent fail to obtain permits, initiate renovations, and re-sell the Property, but because the Selling Agent had a legally binding contract with the Buyer, the Selling Agent and her company are now on the bad side of a claim.

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