FAQ Forum Question: Is Wholesaling Legal?
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votesFAQ Forum Question: Is Wholesaling Legal?
Most Popular Reply
Rick SteinPro Member
Investor · Austin, TX · Member since 2014 · 248 posts · 181 votesPutting the arguable legality aside for a moment, let's talk ethics. I have been a real estate broker for 31 years and been an REO agent for about 25 of those years. I have been an investor for about the same length of time. I am on the board of directors of my local REIA and we hold numerous education sessions for wholesalers or wannabees.These sessions are always packed!! Yes, it is true that the vast majority of people entering the real estate investment industry do so because they do not have the cash to purchase a property.
Many of these people, although perhaps well intentioned, are dangerous because they do not know what they are doing. They do not do proper due diligence. They knowingly or unwittingly inflate the retail value, understate the rehab costs, have no ability to close on the deal if they do not find an assignee, who often times are as ignorant as they are, and, in short, give a very bad name to the industry as a whole.
On the other hand, there are many very successful wholesalers, licensed or not, who enter into a contract, make an earnest money deposit with their title company so they have an equitable interest, do their homework property, disclose to the seller exactly what they are doing, find a knowledgeable assignee who closes the deal and every one is happy. In my humble opinion, the latter example is perfectly ethical and does a service to investors such as myself. I recently was the assignee on a property that I closed on. I was happy to pay the assignment fee as I was getting value greater than the fee I paid. I did a nominal rehab and have rented the property to a lovely family generating a nice cash flow.
85 Replies
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Mindy it really depends on the definition of the acitivity one is embarking on .
if the definition of wholesaling is:
put a property under contract and you have NO money to close and you have sent out marketing that your an all cash buyer and will close in 10 days.
Then you get into contract and put said property on crag's list with a full description of bed bath sq foot age etc.. along with pictures and advertise it for sale at a certain price. Or on BP market place.
And then you go with a potential buyer and show them the house like you own it.
then NO, that activity is clearly selling Real estate without a license and anyone who does that and gets turned into the state will probably get a fine and a cease and desist.
Every state has rules that define what activity requires licensure.. and the description above requires licensure.
State of Oregon just described Equitable interest as needing a license I had that in my CE class last week.. they are tightening up.
- Fairfield CT · Member since 2017 · 63 posts · 77 votes9yHi Follow my logic here. It is not illegal to put a property under contract. It is not illegal to assign a purchase contract if it has an assignability clause. It is not illegal to market a property you have under contract for sale. So, how is wholesaling illegal? Now, with that being said, laws differ in each state. But, I have personally bought and sold wholesale properties and represent a lot of successful wholesalers. Hope that helps! Ted
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ted Lanzaro Definetly state specific.. but your right your marketing a contract not selling real estate like a broker.. that's the fine line. here..
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
REGARDING THE STATE OF FLORIDA:
In Florida it appears the state is taking measures to stop unlicensed brokering. Here are a couple statutes to consider:
475.43 Presumptions.—In all criminal cases, contempt cases, and other cases filed pursuant to this chapter, if a party has sold, leased, or let real estate, the title to which was not in the party when it was offered for sale, lease, or letting, or such party has maintained an office bearing signs that real estate is for sale, lease, or rental thereat, or has advertised real estate for sale, lease, or rental, generally, or describing property, the title to which was not in such party at the time, it shall be a presumption that such party was acting or attempting to act as a real estate broker, and the burden of proof shall be upon him or her to show that he or she was not acting or attempting to act as a broker or sales associate. All contracts, options, or other devices not based upon a substantial consideration, or that are otherwise employed to permit an unlicensed person to sell, lease, or let real estate, the beneficial title to which has not, in good faith, passed to such party for a substantial consideration, are hereby declared void and ineffective in all cases, suits, or proceedings had or taken under this chapter; however, this section shall not apply to irrevocable gifts, to unconditional contracts to purchase, or to options based upon a substantial consideration actually paid and not subject to any agreements to return or right of return reserved.Note it states that contracts or options "employed to permit an unlicensed person to sell, lease, etc" appears to close the loophole. Any complainant could file on someone advertising themselves to be a "wholesaler" stating that person is using contracts to subvert licensing laws (regardless of the amount of consideration). It appears this statute is aimed directly at those that want to broker real estate hiding behind a contract and stating they are "not selling a house they are selling a contract". Notice it states the burden of proof is on the person to PROVE they are not attempting to broker RE without a license. Sounds like a problem for many of these operators!
Next consider this statute:
475.42 Violations and penalties.—(1) VIOLATIONS.—
(a) A person may not operate as a broker or sales associate without being the holder of a valid and current active license therefor. Any person who violates this paragraph commits a felony of the third degree, punishable as provided in s. 775.082 or s. 775.083, or, if a corporation, as provided in s. 775.083.
That part of the statute states brokering without a license is a 3rd degree felony.
If you want to work in the business get an education and get licensed. That solves any question of legality. If you just want to flip houses by taking title and then reselling, no license is needed. If you want to own rentals, no license is needed to own them or manage properties you own.
- Fairfield CT · Member since 2017 · 63 posts · 77 votes9y
I am going to caveat something here. Wholesaling is not a great business. The clients I have who are successful and make a lot doing it are very successful investors with large buyers lists and they spend up to 10k a month on marketing. Typically, these people wholesale because they have more deals than they can buy. Wholesaling in my opinion is NOT for newbies and most who try end up wasting a lot of time and money.
- Fairfield CT · Member since 2017 · 63 posts · 77 votes9y
And based on the other posts it appears that both Florida and Oregon are making it more difficult to do.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
They are amending laws for good reason. I have met the victims of some of these operators. BP has lots of threads from uneducated people posting "help, i have a property under contract and no buyers" and similar posts. Most have no intention of closing when they sign the contract and many have no money. This gives a very valid reason for the state to put an end to these people. They all see it as being able to broker real estate without a license. The state never intended that.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
@Ted Lanzaro I think the problem is not in your logic. Each of your claims by itself may be legal. The problem is that most yellow letters make misleading claims. The seller doesn't know they are signing away rights to sell their property to someone else. They think (in most cases) that the person they are dealing with has cash to close on their property.
Now a wholesaler may argue, "not my problem they don't understand or read the fine print". That argument increasingly doesn't hold water. Deceptive advertising has come under fire in most industries in recent years.
In wholesaling it is compounded by the fact that desperate sellers are usually emotionally vulnerable. Wholesalers are preying on people who recently lost a family member, old people and people in financial trouble. Very often wholesalers claim to be "solving a problem" when in reality they are taking advantage of a seller. In extreme cases they are tricking and deceiving.
I am all about buyer beware, but I have also seen elderly relatives taken advantage of and I don't have much respect for the slime balls that do that kind of stuff.
There are many honest wholesalers, but unfortunately the industry as a whole lacks oversight from a legal or ethical standpoint. Realtors are trained and bound to a code of ethics. Wholesalers have no such training and require no schooling. As a result, the profession attracts dishonest people who give the good ones a bad name.
The industry needs some help, but to make a blanket claim it is illegal in all cases is going too far.
- Fairfield CT · Member since 2017 · 63 posts · 77 votes9yI would agree that not everyone in the wholesale business is doing the right thing. But, you can say the same thing about realtors. I know a lot of REO realtors who are as crooked as they come. The wholesale thing is compounded by the fact that the guru's started selling wholesale training because it was a way to get people to buy courses who otherwise had no money to get involved in investing. To some extent, this is their fault.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ted Lanzaro I see your new to BP ... however BP in of itself creates a lot of the empty pockets folks that try to get into wholesaling.. some where out there in this great land of ours.
Folks have had it beaten into their head the way to get into real estate if your cash strapped is to wholesale then make enough cash to buy and hold
We see it everyday with new members introducing ourselves.. they say the above statement verbatim.
then there are those on BP that will assist those with no money and regale them with weasel clause language and other deceptive practices.. so this topic is quite polarized on BP.
My day job is to fund real estate investors.. I don't advertise I have no website I actually use the turn key review site as my website on BP.. but that is a give back site.. but my point is the folks I fund will occasionally buy from a wholesaler .. and I really don't care as I am not the wholesale police.. but its far and few between that I see the same names on the huds.. its just leads me to believe like you said this is simply NOT the way to get started for most folks. But there will always be those stars that can succeed .. but I believe they would succeed in whatever they put their mind too..
Real Estate simply is not for everyone .. wholesaling is marketing and sales and we all know how hard that is to be good at..
So end of the day we have the least experience people ( generally speaking) trying to do a transaction with folks NUMBER 1 possession their home. Or their investment property. And as such there needs to be some oversight lest the public gets abused.
And lastly for sure there are terrible realtors I have had to fire many that worked for me over the years.. Liars and cheats just like any industry.
- Property Manager · Philadelphia, PA · Member since 2015 · 515 posts · 196 votes9y
What if you are a licensed real estate agent or a broker? Is wholesaling legal? Often clients will attempt to sell properties for deep discounts to an agent to avoid commissions and the hassles of selling. An agent can easily put properties under contract, and sell that contract to a buyer.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
FAQs my behind ... you are just trying to start a fight for entertainment value, Mindy ... not enough drama since @Bob Bowling left the building?!? JK ;)
- Boca Raton, FL · Member since 2015 · 249 posts · 52 votes9y
This is a really vague question...
A wholesaler in general is a necessity to markets. I grocery shop every week. I pay retail for my groceries at the grocery store. A wholesaler supplies the grocery store with groceries at a price less than what I buy them for. I accept this, because I enjoy the convenience of going to one location to purchase all my grocery needs, rather than contracting with each supplier. The same concept for RE wholesaler-a buyer does not need to do all the legwork in finding that deal, contacting multiple sellers before finding the one- they let the wholesaler negotiate, so they have a one stop and done experience.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
You do have the ability to file complaints against an agent for misdeeds. They can be fined, have their license suspended, or have it revoked. Unlicensed brokers are not accountable to anyone, have no insurance, generally no training, etc.
- 9yRick SteinPro MemberInvestor · Austin, TX · Member since 2014 · 248 posts · 181 votes
Putting the arguable legality aside for a moment, let's talk ethics. I have been a real estate broker for 31 years and been an REO agent for about 25 of those years. I have been an investor for about the same length of time. I am on the board of directors of my local REIA and we hold numerous education sessions for wholesalers or wannabees.These sessions are always packed!! Yes, it is true that the vast majority of people entering the real estate investment industry do so because they do not have the cash to purchase a property.
Many of these people, although perhaps well intentioned, are dangerous because they do not know what they are doing. They do not do proper due diligence. They knowingly or unwittingly inflate the retail value, understate the rehab costs, have no ability to close on the deal if they do not find an assignee, who often times are as ignorant as they are, and, in short, give a very bad name to the industry as a whole.
On the other hand, there are many very successful wholesalers, licensed or not, who enter into a contract, make an earnest money deposit with their title company so they have an equitable interest, do their homework property, disclose to the seller exactly what they are doing, find a knowledgeable assignee who closes the deal and every one is happy. In my humble opinion, the latter example is perfectly ethical and does a service to investors such as myself. I recently was the assignee on a property that I closed on. I was happy to pay the assignment fee as I was getting value greater than the fee I paid. I did a nominal rehab and have rented the property to a lovely family generating a nice cash flow.
- Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes9y
Mindy,
I'm not sure having this topic on the FAQ will be a great idea, as it is a very complex subject and I'm not sure if any legal liability will fall on BP or the posters when someone breaks the state law somewhere and claim that BP told them to do it. With that said....
Regarding Nevada, I had a discussion with a lawyer some months back on the situation and the answer he gave me was a firm maybe. There are a couple points to consider:
1) Do you have equitable interest in the property? If so, you have the right to market the property as any other owner would and you are very unlikely to meet any resistance by the Real Estate Board. Now, the problem is that in order to have equitable interest in the property, you need to have the house under contract, you need to have the ability to close on the contract (without a 3rd party buyer), and all contingencies on the contract need to be cleared. Needless to say, most people who wholesale properties do not fall into this category, but if you do, you're pretty safe.
2) How are you marketing the property? If you do not have equitable interest in the property, you can't market the property and you can't show the property. You can, however, market the contract you hold on the property. If you do market the property, provide pictures, or show the house, you're clearly in violation of brokering without a license.
3) What do the contingencies in your contract look like? If you're relying on an inspection clause (or a similar clause) to exit a contract when the real reason is that you didn't find a 3rd party buyer, this would likely be interpreted as fraud by the courts and they would likely award damages. This basically changes your 'purchase agreement' to an 'option agreement' without consideration, unless your EMD is not refundable.
4) Are you being honest with the seller? Setting the legality of the situation aside, if you choose to wholesale properties it's very important that you are up front with the seller about your intentions. If you aren't, the likelihood of getting sued or turned into the real estate board are dramatically higher. Once you're caught, your intention will likely play a big part in the outcome of your case. If you're blatantly thumbing your nose at the law, the outcome will likely be far worse than if you entered into the contract in good faith and decided to assign it (legally or not) due to unforeseen circumstances.
There are probably a bunch of other nuances that I'm not recalling, but I'm sure we can get many other community members to chime in.
-Christopher
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Rick Stein I think you will find it interesting to note that the state of Oregon has included Equitable interest along with other descriptions of needing a RE license in Oregon.. So at least as it relates to this state the equitable interest safe haven others run to .. does not exist.. It will be interesting to see how it shakes out.. you can have all the rules and laws you want but if no one enforces them then its just something to talk about.
And of course I agree you put the least qualified people who have little to no experience into a financial transaction that for many sellers is their only asset and many buyers it could be all their money.. this leads to potential ruin for both.
Like you I have been licensed since 1975.. and have been buying and selling the whole time.
the only wholesaling or flipping I have done has been more corporate.. IE tie up a big property get it entitled for lots.. ( usually 100 to 150k of risk money on my part) then flip to Lennar or Horton. Sometimes I take them down but on 2 occasions I did a double close.. but I made sure I had the powder dry to close... lest they just let my contract die and swoop in and grab it..
So we close everything we aim at and we simply put...(We are a RE broker buying for profit or loss and we are a principal in the transaction) this has served me well all these years.. never once had a complaint.. but then again we cash out ( as stated ) everything we aim at.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes9y
Is wholesaling legal or illegal?
Let me answer that with another simple question, is it legal or illegal to drive a car? - If you have a current drivers license and obey the laws of the road, then no, itbis not illegal. However, if you drive without a license, speed, drive recklessly, drive while intoxicated, etc, then itbis illegal and a punishment will likely ensue.
One must define the word "wholesaling" and exactly which format the wholesale takes place and in what state to determine if it is legal or not. So there is not one simple yes or no answer. There are several ways to perform a wholesale transaction with some of them being legal and others not, therefore one should consult with their RE attorney in the state in which they plan to wholesale (where the property is located, not the wholesaler or buyer address) and explain in full detail the exact format in which you plan to wholesale, i.e. get property under contract, have an assignment ability in the contract, how you will market that property (public ads may be illegal in your state even with equitable interest), and how you will close the transaction. Furthermore, how you will perform in the event you do not locate a buyer should also be part of your topic with your attorney.
Will Barnard - a non attorney, nonlegal advice real estate investor.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes9y
Originally posted by @Ted Lanzaro:
Hi
Follow my logic here.
It is not illegal to market a property you have under contract for sale.
This is not 100% true by the way.
- Ogden, UT · Member since 2016 · 17 posts · 16 votes9y
@Jay Hinrichs Jay I have a question for you on the other side of the argument. I am currently working on getting my real estate license, so I have been curious about this subject.
Is there a conflict of interest in being an real estate agent and buying an investment property? What sort of disclosures or agreements does an real estate agent have to give a seller if you are looking at buying a property that you know is under market value? Do you notify the seller that you are an licensed agent and have them sign an agreement stating that you are not acting as an agent of the seller?
I know this is a heated discussion on here, but it seems to me in states where people can legally wholesale, unlicensed wholesales could be necessary. They can get properties much lower than ARV and sell without having to worry about fiduciary duties as a licensed agent.
- Fairfield CT · Member since 2017 · 63 posts · 77 votes9y
I did caveat my answer to state that different states are cracking down on wholesaling activities but to my knowledge, marketing a property you have under contract is legal.
With that being said, the world of real estate investing is constantly evolving and I would be happy to be better informed on what law it is you are speaking about.
The better to help my clients understand.
Thanks!
Ted
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
I would like to put in my .02 although you addressed Jay.
IMO there is nothing stopping an agent from buying under market. How they accomplish this is the difference. It is my believe and practice to tell a seller what I will market their property for and also tell them what I will purchase it for. Those numbers are distinctly different. If the seller wants a fast cash deal with no agency fees, etc and is willing to sell under market I put this in the contract:
"Buyer is a licensed agent, purchasing under market value, with a profit motive. Consult your attorney". My last two purchases were under market. One was actually from a licensed sales agent. Sometimes sellers need a quick deal, and others want a higher dollar amount. This is where having a license is a benefit. I can list it at FMV and make a commission. - Ogden, UT · Member since 2016 · 17 posts · 16 votes9y
Thanks @John Thedford with this being an open discussion, any and all opinions are welcome, and I appreciate the detailed answer.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kyle W. its really simple you disclose in contract your a licesne agent and a principal in the transaction and are buying for profit or loss... my dads attorney came up with that one in the 60's I have used it successfully ever since
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