I am attempting to begin my real estate investment business. I have been getting mixed reviews on whether the practice of wholesaling is legal or not. I've read that the benefits are that you need very little capital to do it,and that you can receive a finder's fee of sorts. I'm also told that it is not ethical or it is fraud to put a house under contact that you are not able to buy, and are not truly intending on buying. How exactly can you do this legally and ethically? I am a real estate agent, so I want to see how that factors in as well.
My understanding is Wholesaling is legal if you are an agent. I know agents that wholesale properties in my area. You need to be open and clear to leads/clients that you are an agent and wholesaler. If done correctly you do own the property that you are wholesaling on closing day till it is transferred to end buyer. Like any other real estate transaction you make sure you include contingencies that allow you to exit a deal if need be without penalties.
The understanding I have of wholesaling is, that your the middle man between buyer and sellers a partner of sorts with the local real estate investors.
Wholesaling can be done several different ways. Some are legal, some are not. Regardless of the way you choose, it doesn't matter whether you are an agent or not.
If you have no intent to perform on the contact if you do not assign it, it is absolutely unethical, and most likely illegal. In this case, being an agent and listing it is the right answer.
Wholesaling is definitely legal if you are a real estate agent or broker.
Yes Wholesaling is legal.
Could you put some spin on it that made some aspect of the deal illegal, yes; like failing to disclose that you are an agent.
Will it always be legal. I suspect not. Some bureaucrats in Ohio are already thinking it is illegal. The perception among those not familiar with the practice or real estate investing is that it is taking advantage of people. I suspect overtime liberal courts or legislatures will eventually start to make it illegal. Once it happens in one state it could start a domino affect. Like i said Ohio is already leaning that way.
Based on that theory, you are probably MORE at risk if you are an agent. An agent will be held to a higher standard.
@Ned Carey Can you give me any more info as to how it works? I just want to make sure that I am understanding it correctly. Any info you have would be greatly appreciated. Thanks!
There is a ton of info here about any real estate subject so a search would be helpful. Also the is a forum specifically for Wholesaling which you can get to by clicking the forums tab and selecting "All Forums" There are some very good "Sticky Posts" at the top of the wholesaling forum.
Basically to wholesale you get a property under contract at a great price well below what another investor would quickly buy the property for. Then you assign your contract to another buyer for an assignment fee. ( For others reading along, Assigning your contract is basically selling your contract) Sometimes a wholesaler will actually close on the property and then resell.
Another way to put it is buy a property for 1/2 what it is worth and quickly resell it for 3/4 what it is worth. Simple concept, not so easy to do.
@Ned Carey Thank you very much! That is exactly what I understood. I will do some more research.
Hold your horses!
Wholesaling one deal is most likely legal everywhere, doing so as a business model is a totally different matter, what method you use or contract shuffle you use, if you are facilitating sales between buyers and sellers it can be illegal and that will be determined at the local level, no one on the internet can tell you what is legal in your area unless they are operating in your area and have the blessings of their local attorney!
As an agent, you have another issue, you need to look up "net listing" which is where an agent enters into transactions where that agent makes money from the equity of a seller, where the seller is limited as to what they receive and the agent receives the amounts ultimately paid for a property, "netting" profits from the equity held by the owner. That IS considered unethical and is illegal in most states.
Simply assigning contracts becomes a method of operating, if you were able to obtain a sale or option contract, your broker will likely ask why you could not have secured a listing agreement. You are seen, being a licensee, as having greater knowledge than the public, the reason you disclose your agency relationship in every transaction is to put the public on notice of your expertise so they have an opportunity to deal without being at a disadvantage. Your telling a seller his property is worth $150,000 and then immediately trying to sell it for $175,000 is beyond customary charges for selling a property, you're overcharging, you're taking equity from that owner, you're also misinforming the seller, obviously and you are effectively doing the same thing as an agent. Are there scab agents doing this?.....I'm sure there are, do you want to be one?
You also need to speak to your broker, they still have liabilities existing in anything you do in real estate, including buying for your own account, you can't open your mouth to the public about real estate without your broker having a liability in what you say or do! Not only can a broker fire you, they can get your license pulled for dealing without disclosing your operations to them. Talk to your broker!
Now, if you go above and beyond what an agent is expected to do, say the owner has title issues and can't sell, you contract to buy, you cure the title issues, coordinate some repairs and then assign, you might be in the clear as you added value to that property. The value you bring in a wholesale deal is the same as what a commission would be, go past that and you're most likely dealing in a predatory manner. Factors will play into this as well, type of property, residential, commercial it's condition, marketability and highest and best use, if you can add more value outside an agency relationship then you might deal in such matters.
Talk to your broker, not investors who are not licensees ! :)
My version of wholesaling is a bit different than most, as we buy mls listed properties and sell them to other rehabbers as a significant part of our business model. We don't typicall assign the contracts as the banks don't allow it. We typically close and and then sell to a rehab buyer that we have lined up before we close.
The frustrating part is that with bank owned properties They use out of area title companies, many incredibly incompetent, two weeks before we get title recorded is not that unusual,
We are looking at using a local title co to close, pay the extra fees so we can close to our buyer right away. Exploring the simultaneous close, which two of our local title companies we work with won't do.
Do you see this model as being problematic for a realtor, from a legal aspect assuming all disclosures are done.
I am in real estate classes now, along with one of my staff to become licensed. Not to work with retail buyers or homeowners, but to better understand the principles of real estate transactions and for our business.
What is your take on a realtor buying a property on the mls, selling to a rehab buyer in double close scenario.
We would have money in escrow for our closing.
Have not decided on a broker yet, or talked to a local attorney to make sure we have the legal aspects covered, which we will do in the next week or two, but be interested in your take.
@Dell Schlabach Double closings may not get an agent past the intent and actual matter at hand, taking title for 3 minutes is rather transparent, local influences will apply. Taking title will be better than simply assigning a contract!
Better yet, buy in a LLC, bring your rehabber in the LLC, let them buy in. they do the rehab, then buyout the property from the LLC and then they can stay in or bail from membership and move on, This may set the property in title for 30 to 90 days or more, the property has been improved, there is no question as to the value added and the amounts exchanged under an operating agreement are not public sales.
Agency disclosures still apply as to agents with interests in entities or acting individually.
This sets another loop in the initial transaction, not you personally and it allows more time to cure the perception of some quick flip of a contract.
What you're doing, if you take title isn't the wholesale flip either and the longer you hold title the better.
BTW, a flipper's LLC can be a member of that holding or facilitating LLC. It's all taken care of in the Operating Agreement.
Hope that made sense..... :)
Originally posted by @Bill G.:
Your telling a seller his property is worth $150,000 and then immediately trying to sell it for $175,000 is beyond customary charges for selling a property, you're overcharging, you're taking equity from that owner, you're also misinforming the seller.
This post has been removed.
This is all great info. I had planned on talking with my board's legal counsel. Also, I would never do anything without discussing it with my broker first. I just wanted to make sure I had a clear understanding before speaking with them. if it was something that I did not understand, then I wouldn't see the point in pursuing it to begin with. @Craig Jones What you explained is more along the lines of what I was looking into. I would want to make it a win-win for everyone. I may want to speak to you about it a bit more. Thanks for all the info everybody!
Wholesaling is legal. In your purchase contract you have to make sure to put "and or assigns". This allows you to legally assign your rights to another party.
However check with your broker and make sure it is considered an ethical practices in your state. Here in Maryland, unless things have changed since I had my license in 2011-2013, net listings are not allowed here.
@Shalay Cano Wholesaling is legal. I know in Florida assigning a contract is completely legal. There is a lot of negative connotation on this site about wholesalers but, most of them are short sighted and I know everyone of them will buy a property from a wholesaler to get that good deal in a heart beat. As a wholesaler you are marketing for people who need to sell their homes fast and can't wait for the typical 60 days a real estate agent takes to sell their house. You get that house under contract keeping in mind you have to make a profit and your end buyer needs to have their profit in there. So , you get the property under contract at X and you assign that contract for X + 5-10K or even more.
But, do not take my word or anyone's word on this site for the legality of this in your area. consult an attorney in your area and see what they say.
I have to take issue with the net listing remark. Yes there were abuses but not very many but a few cases caused some states to make them illegal. All that was needed to continue on screwing those people of the type that were victims was an option.
The real reason for the non-use by agents was the fact a seller wanted a price to him of say $100k so an agent thinking well I think I can sell it for $105 or more so OK I'll take the listing as a net listing. What usually happened was a buyer would be taking his first shot and would offer $100k on the property which was on the mls at $107k and the agent was required to present it and the seller would of course accept it and the agent thus had a net amount of zero dollars due him and still had to handle the closing. Didn't take long for brokers to toss the net listing forms into the garbage.
This was the reason there wasn't really any outcry and out rage at the net listing being made illegal, it was more like great, now on those occasions when a seller demanded a net listing we could just say we would do that for you but we can't because this state made it illegal (thank god).
I'm a novice and wholesaling was a topic I skipped over in my first few months visiting BP, so I only recently got a bit of understanding about it.
I thought I'd share a story from my year of looking for a multifamily property in Worcester, MA. One property I was interested in did not stand out as fantastic or terrible, very middle of the road. I decided to make an offer about 12% less than the list price. Next day I was told there was another offer, and was this my final and best? Before I could answer, I got an email from my buyer's agent sending me pdfs of documents for me to read that she had just received from the seller's agent. The seller (a buyer of tax foreclosed properties) was now going to have an auction instead. To make an offer in this auction, I had to pay $5,000 to someone else and do other onerous things just to participate. I told my agent they must think I am crazy. I asked her to withdraw my offer and I'd find a less complicated seller, which I happily did. I will never buy a property with a layer of added control and expense that does not benefit me.
Definitely legal...but there are always caveats....
And the caveats I mentioned.
You'll always have wholesalers commenting in these threads, Google "cognitive bias" asking someone who does something and believes in what they do won't be someone who will contradict themselves.
I couldn't even follow Brian P.'s second paragraph, none the less, that is not the issue with net listings, I stated the issue, it can become a fiduciary matter.
Thinking you can flip a contract demanding more than what is seen as a fair value for what you did is predatory, such do not understand what or how "value" is determined in business transactions, the functions performed in any business have value ranges that are acceptable, it's not the wild west where you can grab whatever you think you can talk someone into anymore.
The internet is great, forums offer a platform for qualified and experienced people to give good advice, it's also a curse in that it is also a platform for anyone who is not educated or experienced to voice opinions that are far from reality or the true picture of a topic. Readers then have to use some common sense as to what they might follow, so long as you see a local attorney. I don't worry about folks, it's just that I know that most investors think they know, they seek to follow advice that aligns with their desires to justify what they want to do as opposed to what they should do. After that, few actually seek legal advice.
I can give advice, say that you need to see an attorney, if you don't take the advice or understand the points made or refuse to seek legal advice, allowing cognitive basis to take over, then you deserve any failure or problems that come your way. The only other issue is having misguided investor types on the streets dealing with the public, that's not my job, that is for prosecutors and real estate commission to deal with......I'm sure there business is good and well secured. Good luck :)
Originally posted by @Mike Flowers :
There is a lot of negative connotation on this site about wholesalers but, most of them are short sighted
Actually there are a lot of people on this site who like to warn of potential negatives that others just gloss over. The risk in wholesaling is very small. But there absolutely is a risk. I feel as an experienced investor who knows better, I have some responsibility to warn of potential risk no matter how small. I suspect that is @Bill G. 's motivation too.
But, do not take my word or anyone's word on this site for the legality of this in your area. consult an attorney in your area and see what they say.
Excellent advice, however even an attorney may not give you the best advice. Is that attorney experienced in that area of the law? Is he or she speaking from general legal knowledge, or specific knowledge of court cases and actual precedents on point? Is that attorney considering the risk of a liberal judge ruling beyond the law to correct what the judge perceives as an injustice?
Judges have liberal discretion
A judge can rule that your intent was to circumvent the law, even if you followed the law. A judge can rule that your contract was unconscionable and therefore invalid. Also you could be found to operated "Not in good faith" . Does Bill G sometimes overstate his case? I think so (But I still love ya Bill). But to pretend these risks do not exist at all, is "short sighted" as Mike says above. (not picking on you Mike but your comment helped highlight something I wanted to address)
@Shalay Cano I bet you weren't expecting all this controversy when you asked the question.
Wholesaling, like driving a vehicle, is legal as long as you don't step outside the law. And that's where the problem begins. The law is often unclear and is interpreted differently from jurisdiction to jurisdiction. Yes, a judge in Texas can (and often does) interpret a statute differently than one in MN or FL, but if you're concerned about the eliminating all risk then don't get involved in business...in fact, don't even get out of bed tomorrow morning...that is the only way to eliminate risk. Business is about understanding the risk, mitigating it as much as reasonably possible, then determining if the reward is significant enough to make the risk acceptable.
I spend little time worrying about how a judge "may" rule anymore than I worry about what "may" happen while driving the highways. I know the risk and I know the reward...that is how I make business decisions.
I do use real estate attorney's to give me advice and yes, they too can make mistakes. But I can assure you Shalay, there is considerable misinformation on this and any website dedicated to a specific industry or profession too and understanding that is important. If you ever go to court, I wish you luck saying, "but I heard it on BP." I suspect it won't carry much weight vs. "I acted on the advice of legal counsel." A jury is likely to weigh your acting upon the advice of legal counsel much differently than acting on the advice of of any other party who has no dog in the hunt.
Bottom line...if you have any doubt about the legality of an activity, including wholesaling, seek legal counsel in your state so you have someone with the background, training and specific knowledge to deliver such an opinion. Then assess the risk and rewards and act accordingly.
Yes Ned, I do hit on issues along a spectrum of RE dealings, I'm not an attorney and I'm in my area, not other markets too often. I give advise based on my experiences along that spectrum, I try to take in the norm of thinking nationally, based on reviewing matters by attorneys in other states, federal regulatory views, HUD, the NAR and ALTA along with other national associations. My views may not be applicable in all areas, I error on the side of caution because if I were to swing the other direction I could well be beyond more conservative thinking, prudence is a good position to operate from. And, you absolutely have to take risks as Guy mentioned. Business is an art and a science, before you try to be an artist you need to understand the local attitudes of your design and artistry.
I admit, I break the speed limit everyday, it's a risk and reward decision every time if I knowingly drive too fast. Knock on wood, I haven't had a speeding ticket in about 20 years! Oklahoma has a zero tolerance to speeding, I drive just under that limit and rarely take the chance there, Missouri and Kansas and Arkansas is a different matter, my gosh, if you don't drive 10 or 15 mph over the limit in Texas you can be a traffic hazard, you better step on it!
Newbies don't need to be hearing drive 15 mph over the limit, they may be in Oklahoma, there are plenty of gurus and pitches suggesting to drive 20 mph over the limit, speaking to a national audience I can't agree with that, so I will default to Oklahoma as that ensures your long term survival.
However, financing is federally calibrated, while some local liberal (or politically conservative) judge may gloss past some federal aspect (that is done in smaller jurisdictions where judges are not really exposed to certain types of cases) it is the federal regulators, HUD, federal judges that can act on a financing matter, that is well known and it can put a local state judge out of the picture. Even so, RE operators need to have a knowledgeable attorney to bless what they may do at the local level. :)
Bill, I appreciate this: "I error on the side of caution". That is prudent in handling large value transactions. Where I see problems and errors with wholesalers or another party besides the original seller and the current prospective buyers is when they come in after it begins, after there is a listing on the MLS. The property is already publicly identified as using this MLS process, and then suddenly with the same MLS number it is now an auction and another owner. I was so curious about this I made plans to see the attorney general. I was just an ordinary buyer and thought this behavior was wrong.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing