Funded half a 50k deposit on a 2.4M assignment, and the deposit is gone

I was looking for income that didn't turn into a second job, which is how I ended up wiring 25k to be the passive half of somebody else's luxury wholesale deal.

The setup. An operator I'd met twice had a distressed estate under contract at 2.35M, big house, long-empty, water damage on one wing. He said the plan was to assign at 2.52M, so a 170k fee, split 50/50. The seller wanted a 50k earnest money deposit and he had 25k. I put up the other 25k.

The deposit went hard after a 10 day inspection window. I knew that going in and I thought I understood it. What I did not understand is that on the day it went hard, there was no named buyer. There was a list, and there were "two guys very interested," and one of them turned out to be a broker who wanted to list it.

45 day close. Around day 30 the price talk started drifting down, 2.46, then 2.42. Day 45 came and nobody closed. Seller kept the 50k, which is what the contract said. My 25k went with it.

The house sold about five months later for 2.28M to somebody else.

Total cost: 25k and about seven months of thinking I had something coming. What I'd do differently is simple. I don't fund earnest money again until there is a named end buyer with verified funds and a signed assignment sitting there. "We have a list" is worth nothing, and I paid 25k to learn what it's worth.

4 replies

1marcus_hale41CG4A

What did you actually get for the 25k? I mean on paper. Was there a joint venture agreement, a note, a membership interest in an entity that held the contract? Was your money identified as yours inside the escrow, or did it go to him and then to escrow as one 50k wire? Because the answer decides whether you lost a deposit or made an unsecured loan to a guy you'd met twice. I ask because I've read three of these agreements for friends and two of them gave the funder no claim on anything at all.

1wendy_park48CapitalPRO7

I'd push back on the lesson slightly. The buyer pool mattered, but look at the ending: the house sold for 2.28M. He had it at 2.35M. There was never a 170k spread in that contract, and probably never a positive one. So a named buyer with verified funds would have shown up, run their own numbers, and offered something below 2.35, and you'd have watched the same 50k die a few weeks earlier. The 25k was lost at underwriting, before anybody thought about disposition. Water damage on a wing of a house that size is a number a GC gives you in writing, and the fact that nobody in the story ever quotes that number is what I'd fix first.

1angela_burkeServicePRO6

fathom's right that the price was wrong, and I still think the sequence is the thing that killed it. On high-end distressed the buyer comes first. I run a small team doing dispositions for two operators, and the rule we work to is that nothing goes hard until two buyers have walked the property and one has given us a number in writing. Not "very interested." A number.

The second problem is the 45 days. A luxury cash buyer takes four to six weeks just to get their own contractor through a damaged 2M plus house and come back with a scope. Your deposit went hard at day 10 and the buyer's own diligence hadn't started. That contract needed 75 to 90 days or a soft deposit for longer, and if the seller wouldn't give it, that's information about the seller's other options.

So the two questions I'd ask before wiring anything on a deal like this: which two buyers have walked it, and what does the GC's written scope say. If the answer to either is a story instead of a document, the fee doesn't exist yet. Both answers were missing here, and 25k is roughly what that costs.

Funded half a 50k deposit on a 2.4M assignment, and the deposit is gone

4 replies