One of the more hotly debated topics on BiggerPockets is the legality of wholesaling. Laws on this are state-specific, which can be scary stuff for any wholesaler. Is wholesaling real estate legal? No… but sometimes yes.
It’s possible to look at it generally, though, to see the ways wholesaling 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 wholesaling?
Wholesaling involves a third party, or middleman, in real estate transactions. The wholesaler enters a contract with the seller for a price under market value. Then, the wholesaler finds a buyer for the property at a higher price, pocketing the difference as profit. The objective is to find a buyer before the contract closes with the seller.
It’s a short-term investment strategy. There is no need for a wholesaler to pay any fees or additional costs, making it quite appealing.
Before you jump into wholesaling due to its appeal, there are a few things you should know related to whether or not wholesaling real estate is legal.
First, let’s discuss a technicality.
More on wholesaling from BiggerPockets
Do you need a license to wholesale?
A license is not required to wholesale—generally.
That being said, there’s a lot of nuance with the legality of wholesaling. If you are going to do it without a license, it’s a good idea for you to have considerable knowledge about real estate.
It’s probably best practice to get your license if you are planning to wholesale properties. But reviewing the aspects of wholesaling could help you—with or without a license.
What’s illegal about wholesaling?
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.
For example, the state of Florida defines it as:
“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 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.”
In Washington State, brokering is defined as:
“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.”
Those who argue that real estate wholesaling is illegal claim so because the wholesaler acts 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. Therefore the law doesn’t apply to this situation. They are not selling a property, only the ownership of a real estate contract.
To further complicate the situation, there is the issue of “marketing” a property that you do not currently own. Most states include “marketing a property” as brokering. For example, let’s say Jim, the wholesaler, buys a property from Deborah, and Jim then sells the property for cash to Tom. If Jim didn’t know Tom but put the ad for the house on, say, Craigslist, is he marketing the property? Most definitely, yes.
Putting a deal under contract, marketing that deal and then assigning that deal is a fast way to get fined by your state government and get a misdemeanor on your record.
But what if Jim wasn’t marketing the property? What if Jim knew Tom and told him about the deal. Is that marketing?
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 guide you, but you should also talk to an attorney in your sat.
1. Get a license
This one is a simple fix. No one can accuse you of brokering without a license if you have your license. A real estate license makes you appear more legitimate to potential buyers and expands your list.
However, you will now be held to the same ethics as other licensed real estate agents. Making a wrong move during a wholesale could impact your license (and reputation).
A license would hold you to a higher standard and cost you a couple grand, but it’s better than getting a penalty from the state for breaking the law.
2. Assign contracts
Assigning contracts is the most common way to wholesale real estate. In essence, you begin a contract with the seller and then sell “rights” of the contract to a buyer, often for a fee.
There’s no minimum capital needed, which can be a perk for most investors.
Since you do not own the property, you must be careful how you advertise it to stay within the law (as we touch on in No. 5).
Plus, you are promising the seller that you are buying their property when you are giving it to another buyer.
This is the most common wholesaling method, but it’s also the most precarious.
3. Double closing
Rather than assigning the contract, you buy the property, own it (even if only for five minutes), and then resell it to a buyer.
However, this is risky because there are now two closings out of your control. Either the buyer or the seller could choose last-minute not to go through with the transaction. It also requires upfront costs, which can be paid back by the buyer in the second close.
There are a few moving parts with a double closing. The buyers need to understand that the first transaction must go through before you can resell the property. This might require legal advice on your part to ensure you are following every rule.
4. Buying and selling
Buying and selling is the safest way to wholesale real estate. Once you buy and own the property, you can do what you want with it—including finding an interested buyer and advertising the property however you would like.
There are more upfront costs with this method, which is something to consider. Down payments and closing costs are required with each property with no guarantee. If you cannot find the next buyer, then you absorb the capital you invested.
Once you find the next buyer, especially if you have rehabbed the property, you’ll likely earn a significant profit, even in just a few months.
To go back to an earlier point, there is the issue of “marketing” a property that you do not currently own. Your advertising must be legal, but how can you ensure it is?
The best way is to build relationships with potential buyers, so you can use your connections when a property comes up. You can then avoid Craigslist posts or promoting on Facebook Marketplace or other marketing tactics that look shady.
Illegal advertising for wholesale properties involves ambiguous language and intentional dishonesty or omission. It can include advertising that you are selling the property rather than the purchase agreement.
The buyer is purchasing the transfer of a contract, not the real estate property, from you. That needs to be clear in your marketing.
Examples of legal marketing include:
- Posting a Craigslist ad that you are a wholesaler looking for potential buyers.
- Building your connections with people who want to sell and who want to buy real estate.
- Networking with buyers at real estate auctions.
- Advertising the selling of a contract to prospective buyers.
Also, know whether or not you need to have a real estate license in your state to advertise the property. And remember that in most states, you are not allowed to show photos or give specific information about a wholesale property.
Check with your local and state guidelines before designing your marketing strategy.
The truth about wholesaling is this: it definitely flirts with the line between legal and illegal.
If you want to see how close to that line you can get, that is your choice.
However, if you want to be sure that you are operating your wholesaling business as legally as possible, either get your license or close on the property, take the title, and sell the property itself.