One of the hotly debated topics at BiggerPockets is the legality of wholesale. Laws on this are country-specific, which can be frightening for any wholesaler. Is Real Estate Wholesale Legal? No … but sometimes yes.
However, it is possible to look at it broadly to see how wholesale real estate can be legal or illegal.
(As with any business transaction, you should consult an attorney before engaging in any real estate activity.)
What is wholesale?
Wholesalers involve a third party or intermediary in real estate transactions. The wholesaler enters into a contract with the seller for a price below market value. Then the wholesaler finds a buyer for the property at a higher price and takes the difference in profit. The aim is to find a buyer before entering into the contract with the seller.
It is a short term investment strategy. A wholesaler doesn’t have to pay any fees or additional costs, which makes it very attractive.
Before jumping into wholesale because of its appeal, there are a few things you should know about whether or not real estate wholesale is legal.
First, let’s discuss a technical question.
More about BiggerPockets wholesale
Real estate wholesale can be a great option for those with limited funds to get access to real estate investments. The articles in this section contain information and experiences from dozens of investors experienced in wholesale rental property and can be an invaluable resource for an aspiring wholesaler. If you are interested in wholesale you may also be interested in The book on investing in real estate without (and low) money down by Brandon Turner, who built his rental portfolio from the ground up to over 40 units.
Real estate wholesale
Do you need a wholesale license?
No license is generally required for wholesale.
That being said, there are many nuances to the legality of wholesale trading. If you want to do this without a license, it is a good idea if you have considerable knowledge of real estate.
Getting your license is probably the best course of action if you are planning to sell real estate wholesale. But reviewing the aspects of wholesale could help you – with or without a license.
What is illegal in wholesale?
The debate on whether wholesale is illegal revolves around the term Mediation.
Although each state has its own definition, a broker is someone who helps put a deal together.
For example, the state of Florida defines it as follows:
“Broker” is a person who, for another and in return for compensation or valuable consideration, paid or promised, directly or indirectly, expressly or tacitly, or with the intention of collecting or receiving compensation or valuable consideration, evaluates, auctions, sells, exchanges, buys, leases or offers, attempts or agrees to evaluate, auction or negotiate the sale, exchange, purchase or rental of any business or business opportunity or real estate or any interest in or in relation to it .
In Washington State, brokering is defined as follows:
“Listing, selling, buying, swapping, optioning, leasing, renting real estate or any real estate interest in it …” and “Negotiating or negotiating, either directly or indirectly, for buying, selling, swapping, leasing or renting real estate or any real estate interest in it . “
Those who argue that real estate wholesale is illegal claim that the wholesaler acts as a broker in the business without being licensed.
Those who defend wholesaling without a license say that wholesaling is not an intermediary, but simply signs a contract and then assigns it to someone else. Therefore, the law does not apply to this situation. You are not selling a property, just ownership of a real estate contract.
To make matters worse, the question of “marketing” a property that you do not currently own becomes even more complicated. In most states, “marketing a property” is referred to as brokering. For example, let’s say Jim, the wholesaler, buys a property from Deborah, and Jim then sells the property to Tom for cash. If Jim didn’t know Tom but ran the ad for the house on Craigslist, is he marketing the property? Definitely, yes.
Signing a deal, marketing that deal, and then assigning that deal is a quick way to get a fine from your state government and get an offense on your files.
But what if Jim didn’t market the property? What if Jim knew Tom and told him about the deal. Is that marketing?
Increase Your Investment
Imagine being friends with hundreds of real estate investors and entrepreneurs. Now imagine if you could have a beer with each of them and casually chat about failures, successes, motivations and lessons learned. That’s our goal with The BiggerPockets Podcast.
What is the right way to wholesale real estate?
How do you protect yourself from breaking the law? Here are a few tips to help you out, but you should also speak to an attorney in your office.
1. Get a license
This is a simple solution. Nobody can blame you for brokering without a license when you have your license. A real estate license makes you appear more legitimate to potential buyers and adds to your list.
However, you are now adhered to the same ethics as other licensed real estate agents. Moving incorrectly during a wholesale business can affect your license (and reputation).
A license would keep you to a higher standard and cost you a few grand, but it’s better than getting a fine from the state for breaking the law.
2. Assign contracts
Contracting is the most common way to wholesale property. Essentially, you enter into a contract with the seller and then sell “rights” to the contract to a buyer, often for a fee.
No minimum capital is required, which can be a benefit for most investors.
Since you are not the owner of the property, you need to be careful about how you advertise it in order to stay in compliance with the law (as we address in # 5).
You also promise the seller that if you give it to another buyer, you will buy their property.
This is the most common wholesale method, but it is also the most precarious.
3. Double closing
Instead of giving up the contract, you buy the property, own it (if only for five minutes), and then sell it on to a buyer.
However, doing so is risky as two closings are now out of your control. Either the buyer or the seller can decide at the last minute not to go through with the transaction. It also requires upfront costs that can be repaid by the buyer on the second deal.
There are some moving parts with a double lock. Buyers need to understand that the first transaction must be completed before they can resell the property. This may require legal advice from you to make sure you are following all the rules.
4. Buying and selling
Buying and selling is the safest way to wholesale real estate. Once you have bought and own the property, you can do whatever you want with it – including finding an interested buyer and promoting the property however you want.
This method has more up-front costs that you should consider. Down payments and closing costs are required for any property with no guarantee. If you can’t find the next buyer, absorb the capital invested.
Once you’ve found the next buyer, especially if you’ve redeveloped the property, you will likely be making a significant profit in just a few months.
To come back to an earlier point, there is the issue of “marketing” a property that you do not currently own. Your advertising needs to be legal, but how can you ensure it?
The best way is to develop relationships with potential buyers so that you can leverage your connections when a property shows up. You can then avoid Craigslist posts or Facebook marketplace advertising or other marketing tactics that look seedy.
Illegal advertising for wholesale real estate involves ambiguous language and willful dishonesty or omission. It may also contain advertisements that you are selling the property rather than the contract of sale.
The buyer buys the transfer of a contract, not the property, from you. That has to be clear in your marketing.
Examples of legal marketing are:
- Posting a Craigslist ad that you are a wholesaler looking for potential buyers.
- Build your connections with people who want to sell and buy real estate.
- Networking with buyers at real estate auctions.
- Promote the sale of a contract to potential buyers.
Also, know if you need a real estate license in your state to advertise the property. And remember, most states are not allowed to show photos or provide specific information about a wholesale property.
Check with your local and state guidelines before designing your marketing strategy.
The truth about wholesale is: it definitely flirts with the line between legal and illegal.
If you want to see how close you can get to that line, this is your pick.
However, if you want to be sure that you are doing your wholesale business as legally as possible, either get your license or shut down the property, take the title and sell the property yourself.