Real Estate Wholesaling

Is Real Estate Wholesaling Illegal? (Maybe, But Not If You Follow These Strategies…)

Expertise: Landlording & Rental Properties, Personal Development, Real Estate News & Commentary, Business Management, Flipping Houses, Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Real Estate Wholesaling, Personal Finance, Real Estate Marketing, AskBP, Real Estate Investing Basics
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[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.

Related: The Ultimate Beginner’s Guide to Real Estate Wholesaling

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!

or

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.

Related: Is Wholesaling the Best Way to Get Started in Real Estate? An Investor’s Analysis

Conclusion

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!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments. Brandon began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, Brandon is the managing member at Open Door Capital. With nearly 300 units across four states under his belt, he continues to invest in real estate while also showing others the power and impact of financial freedom.
    Emily Decker
    Replied about 4 years ago
    i think its for the sale agent license but not sure….
    Austin Harthun from Morgan Hill, California
    Replied over 3 years ago
    Brandon, thanks for breaking this down in such a clear and concise way. This was exactly the info I was looking for.
    John Webster from Winston Salem, North Carolina
    Replied over 2 years ago
    I had somebody come after a friend for wholesaling. Saying he needed to be a agent/broker . I went to court to support him. I stood up and read a few lines mentioning that a agent/broker negotiates for a buyer/seller for compensation. Wholesaler’s aren’t negotiating for a buyer or seller for compensation. They are just plainly selling contractual rights, they are engaging in activity for themselves, not for another. The law never mentions anything about reassigning a contract. Judge looked and agreed, case was thrown out. Judge asked if I was a lawyer I said no, just helping a friend I said the law is clear. I used the realestate commission own words against them lol. Judge said I should be a lawyer and friend didn’t get In trouble. Nothing days aa person can’t market a contract just can’t market the property itself..open houses etc. It felt good I must admit. I got the stink face lol
    Austin Spangler
    Replied over 2 years ago
    Does anyone have any insight into this regarding Texas law?
    Rob Haines Rental Property Investor from Windermere, FL
    Replied over 1 year ago
    This issue always amazes me at how complicated people make it. Simply put: If you advertise and sell the LEAD (not the contract) you don’t need a real estate license. The Lead fee can be whatever price an terms you make it, no different from selling a lead to your brother for new sod. In this case you are acting as an advertising agency. If you sell the Contract itself (Subject To, etc) you may or may not need a license depending on the geographic legalities of assigning real estate contracts in the area.
    Gibran Saliba
    Replied over 1 year ago
    Depends where you live. Democrat run cities tend to come up with silly laws that are anti business. I am not saying Republicans are perfect( I say this as a Republican), but Democrats always try to expand government power to a stupid point of harming businesses needlessly. So much for being pro small business and anti big business. These anti wholesaling stances actually hurt the little guy trying to make it in the real estate industry and give power to big realty firms with billions of dollars to pay off government officials. Hell. Its probably real estate agents that make up real estate commissions that persecute wholesalers without a licence.
    Gibran Saliba
    Replied over 1 year ago
    This makes me want to run for a county commission seat and make sure I can help my fellow wholesalers as much as possible.