Is Real Estate Wholesaling Illegal? (Maybe, But Not If You Follow These Strategies…)
[Editor’s Note: Please be aware that this material does not serve as legal advice. To safely practice wholesaling, be sure to consult Federal and State laws specific to your area before executing any deals.]
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One of the more “hotly debated” topics on BiggerPockets is concerning the legality of wholesaling. In fact, one of the most popular threads on the BiggerPockets Forums right now talks about how wholesalers in Ohio are getting fined by the State for their “illegal practices.”
Scary stuff for any wholesaler!
I am not a lawyer, and laws like this are very state-specific, but allow me to share my opinion on the subject. As with any business transaction, you should consult an attorney before engaging in any kind of real estate activity.
What’s Illegal About Wholesaling?
The essence of the debate on whether wholesaling is illegal revolves around the term “brokering.”
Although each state has its own definition, a broker is someone who helps put a deal together.
Here is how the state of Florida defines a broker:
“‘Broker’ means a person who, for another, and for a compensation or valuable consideration directly or indirectly paid or promised, expressly or impliedly, or with an intent to collect or receive a compensation or valuable consideration therefore, appraises, auctions, sells, exchanges, buys, rents, or offers, attempts or agrees to appraise, auction, or negotiate the sale, exchange, purchase, or rental of business enterprises or business opportunities or any real property or any interest in or concerning the same.” (source)
Here in Washington State (where I live), brokering is defined as the
“listing, selling, purchasing, exchanging, optioning, leasing, renting of real estate, or any real property interest therein…” and “Negotiating or offering to negotiate, either directly or indirectly, the purchase, sale, exchange, lease, or rental of real estate, or any real property interest therein.” (source)
Those who argue that real estate wholesaling is illegal claim it to be illegal because the wholesaler is acting as a “broker” in the deal without being licensed.
Those who defend wholesaling without a license say that wholesaling is not brokering, but simply signing a contract and then assigning that contract to another, and therefore the law doesn’t apply to this situation. They are not selling a property, but simply selling the ownership of a real estate contract. (Check out this video on YouTube for more on that position.)
To further complicate the situation, there is the issue of “marketing” a property that you do not currently own. Most states also include “marketing a property” as brokering. For example, if Jim the wholesaler, who buys a property from Deborah and then sells it to Tom. Had Jim put the ad for the house on Craigslist or elsewhere, is he marketing the property? Most definitely! But what if he wasn’t marketing the property? What exactly defines marketing? If Jim knew the cash buyer Tom and told him about the deal, is that marketing?
If you were to ask ten different lawyers, you might get ten different answers.
However, I do believe the way many wholesalers work could be considered illegal.
Putting a deal under contract, marketing the deal all over Craigslist, and then assigning that deal is a fast way to get fined by your state government and get a nice misdemeanor on your record!
As Dave J. asked in the forum conversation about Ohio wholesaling, “What is your intent and how comfortable are you if you have to defend that position if you find the local real estate commission asking questions?”
The Right Way to Wholesale?
Therefore, how does one protect oneself from breaking the law? Here are a few tips that I believe (again, this is my opinion. You should talk to an attorney.)
1.) Get Your License: Simple. No one can accuse you of brokering without a license if you have a your license. Yes, this might cost you a couple grand, but it’s better than getting a penalty from the state for breaking the law!
2.) Buy the Property and Then Sell the Property: We’ll talk more about this process later in this post, but rather than “assigning” the contract, simply buy the property and then re-sell it (even if you only own it for 5 minutes, through a “double close”). Again, we’ll talk about this later.
The truth about wholesaling is this: Whether or not wholesaling is illegal in your state, it definitely flirts with a line.
If you want to see how close to that line you can get, fine. That is your choice.
However, if you want to be sure that you are operating your wholesaling business as pure and solid is possible, get your license or physically close on the property, take title, and then sell it after.
Thoughts? What would you add to the debate?
Be sure to leave your comments, questions and opinions below!