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
- Riverside, CA · Member since 2017 · 8 posts · 1 vote9y
First, whose property is it? If it's your own property then you are a FSBO ( for sale by owner) which I think is legal in all states. If you're not the owner you need a realtor.
- Riverside, CA · Member since 2017 · 8 posts · 1 vote9y
I haven't actually joined this yet so excuse my ignorance but what is wholesaling real estate?
- Realtor · Homewood, IL · Member since 2015 · 16 posts · 10 votes9y
I started out trying to 'wholesale' properties. The main problem for me was finding a buyer in time to close. Now, I close on them, then market them. From what I have just read in these posts, I am NOT a wholesaler.
What is a 'wholesaler'? - Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes9y
Originally posted by @Jay Hinrichs:
@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.
Jay - I've seen you make a lot of comments over the years. I tend to agree with most. Your first comment in this thread is no excretion. But this one takes the absolute cake:
"however BP in of itself creates a lot of the empty pockets folks that try to get into wholesaling"
And this:
"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"
Amen - I don't know how many articles I can write on the blog...
- Real Estate Agent · McKinney, TX · Member since 2016 · 10 posts · 4 votes9y
It is interesting to see the discussion about wholesaling. I am in Dallas, Texas and come across wholesalers all the time, especially ones out of state. In Texas, the shortest answer is that it could be illegal depending on how the transaction is closed. Anyone can put a property under contract and assign the contract to another buyer. It becomes tricky if the original buyer doesn't actually purchase the property...meaning money exchanging hands. For example, buyer A puts a property under contract and then on the closing day assigns it to buyer B but buyer A never actually brings any money to the closing table. This then becomes a straw transaction which is illegal. Buyer A doesn't actually own the property therefor they do not have an interest in selling it. Some title companies will do these transactions but that doesn't mean that it is legal. You cannot collect a sales commission without a real estate license. I have seen very creative ways that people try to get around this. It is best to be careful about the details of a transaction like this.
- Riverside, CA · Member since 2017 · 8 posts · 1 vote9y
Ok. So what if I have an R.E. license? Will that make wholesaling more legal?
- Real Estate Broker · Wilmington, NC · Member since 2016 · 236 posts · 126 votes9y
The ethics and legality of wholesaling are so blurred that I don't even know where to start.
I will say this though: From just a societal stand point, wholesaling does WAY more harm then good IMO. I understand that there are many ethical wholesalers, but the barrier to entry is so low and it's so unregulated that it creates a breeding ground for scammers.
- Real Estate Investor · Boca Raton, FL · Member since 2013 · 42 posts · 23 votes9y
@Christopher Brainard has the equitable interest right if we're talking about the state of Florida. The above statue even states that the buyer must have "substantial consideration" to be a valid agreement. You also must have the resources to purchase the property if your end buyer fails to materialize. So if you have a substantial earnest money deposit (suggesting it's more thank $10), and you have access to funds to purchase the property, then you do qualify as having equitable interest.
I'll start by saying I'm not a wholesaler, I've closed on everything I've contracted and plan to continue to do so moving forward. However, I would not hesitate to assign a contract if circumstances arise and it's the best option. I'm a licensed Realtor, everything is disclosed in my contract including a phrase similar to @Jay Hinrichs saying Im licensed and buying to resell for a profit.
You can list a property for sale on the MLS before closing on it, Michael Quarles does it this way and has had the issue ruled on. You better put "subject to seller attaining title" in the listing.
If you read the MLS rules, which I have done, it's the "SELLER" that has the right to list the property, not the owner. Once a property is under contract the owner can no longer sell it, only the contracted buyer.
The poster above that used the defense of the website provider allowing it so it must be legal, WOW!
I guess everything on Craigslist is legal too!
If you look at a website provider like investor carrot or lead propeller, they don't ask for your credentials or if youre assigning contracts or closing on the properties. Read your own website, I'm guessing you don't tell everyone your playing middle man no? It says "will pay cash in 10 days", website provider is simply taking you for your word.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes9y
Question: Is Wholesaling Illegal?
Answer: Yes.
In almost all 50 states "wholesaling" is what many in the "Real Estate Industry" refer to as "Illegal Unlicensed Brokerage Activity" I am the owner of a Real Estate Brokerage in Cleveland, Ohio so I will focus the majority of my facts on Ohio law. But one should note that almost all 50 states have very similar laws on the books.
In a nutshell "wholesaling" is the act of finding a motivated seller and placing their property under contract. After that the "wholesaler" finds a buyer and gets the buyer to agree to purchase the property for higher than what the selling is willing to sell it for and pocketing the difference as a "wholesaling fee" or "commission". This act is more easily described as a person who is in the business of earning a fee or commission for getting a seller to sell and a buyer to buy. This is something that according to the Ohio Revised Code only a Real Estate Broker is legally allowed to do.
ORC 4735.01 Real Estate Broker definitions.
(A) "Real estate broker" includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:
(1) Sells, exchanges, purchases, rents, or leases, or negotiates the sale, exchange, purchase, rental, or leasing of any real estate;
(2) Offers, attempts, or agrees to negotiate the sale, exchange, purchase, rental, or leasing of any real estate;
(3) Lists, or offers, attempts, or agrees to list, or auctions, or offers, attempts, or agrees to auction, any real estate;
(4) Buys or offers to buy, sells or offers to sell, or otherwise deals in options on real estate;
(5) Operates, manages, or rents, or offers or attempts to operate, manage, or rent, other than as custodian, caretaker, or janitor, any building or portions of buildings to the public as tenants;
(6) Advertises or holds self out as engaged in the business of selling, exchanging, purchasing, renting, or leasing real estate;
(7) Directs or assists in the procuring of prospects or the negotiation of any transaction, other than mortgage financing, which does or is calculated to result in the sale, exchange, leasing, or renting of any real estate;
(8) Is engaged in the business of charging an advance fee or contracting for collection of a fee in connection with any contract whereby the broker undertakes primarily to promote the sale, exchange, purchase, rental, or leasing of real estate through its listing in a publication issued primarily for such purpose, or for referral of information concerning such real estate to brokers, or both, except that this division does not apply to a publisher of listings or compilations of sales of real estate by their owners;
(9) Collects rental information for purposes of referring prospective tenants to rental units or locations of such units and charges the prospective tenants a fee.
As you can see from the above law that act of "wholesaling" would fall under 7 of the 9 legal definitions of acting as a Real Estate Broker. The Ohio Division of Real Estate does not take kindly to those that break the law or teach others how to brake the law. Below is a letter that the Ohio Division of Real Estate put out in 2014.
If one is caught acting as an unlicensed Real Estate Broker the penalties can be severe. Below are actual case records of individuals who were fined huge sums of money for unlicensed brokerage activity.
- Chad Fields, Delaware, Ohio, a person not licensed under Ohio Revised Code 4735, was ordered to pay a civil penalty of $930,000.00 for committing between the dates of about November 14, 2010 through on or about May 31, 2013, 930 violations of 4735.02 by renting, leasing or negotiating the rental or lease of the subject property; offering, attempting or agreeing to negotiate the rental or leasing of the subject property; managing or offering, or attempting to operate or manage the subject property; and/or holding himself out as engaging in the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee, commission, or other valuable compensation or the expectation of a fee, commission, or other compensation. The above conduct constituted 930 violations of R.C. 4735.02, which provides that no person, partnership, association, limited liability company, limited liability partnership, or corporation shall advertise, act or assume to act as a real estate broker or real estate salesperson, without first being licensed under R.C. Chapter 4735.
- GOA Realty, LLC, Cleveland, Ohio, a company not licensed under Ohio Revised 4735 was ordered to pay a civil penalty of $1,499,000.00 for committing between the period of August 23, 2010 until on or about March 17, 2011, 149 violations of 4735.02 by renting, or leasing or negotiating the rental or lease of the subject property; offering, attempting, or agreeing to negotiate the rental or leasing of the subject property; managing or offering, or attempting to operate or manage the subject property; and/or holding himself out as engaged in the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee, commission, or other valuable compensation or the expectation of a fee, commission, or other compensation. The conduct constituted 149 violations of R.C. 4735.02, which provides that no person, partnership, association, limited liability company, limited liability partnership, or corporation shall advertise, act or assume to act as a real estate broker or real estate salesperson, without first being licensed under R.C. Chapter 4735.
- Our Wives Are In Charge, LLC, Akron, Ohio, a company not licensed under Ohio Revised Code Chapter 4735 was ordered to pay $82,000.00 for committing 82 violations of RC 4735.02 by renting, or leasing or negotiating the rental or lease of the subject property; offering, attempting, or agreeing to negotiate the rental or leasing of the subject property; managing or offering, or attempting to operate or manage the subject property; and/or holding himself out as engaged in the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee, commission, or other valuable compensation or the expectation of a fee, commission, or other compensation. The conduct constituted 82 violations of R.C. 4735.02, which provides that no person, partnership, association, limited liability company, limited liability partnership, or corporation shall advertise, act or assume to act as a real estate broker or real estate salesperson, without first being licensed under R.C. Chapter 4735.
- Paul Marcel-Rene, Akron, Ohio a person not licensed under Ohio Revised Code 4735, was ordered to pay a civil penalty of $82,000.00 for committing 82 violations of RC 4735.02 by renting, or leasing or negotiating the rental or lease of the subject property; offering, attempting, or agreeing to negotiate the rental or leasing of the subject property; managing or offering, or attempting to operate or manage the subject property; and/or holding himself out as engaged in the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee, commission, or other valuable compensation or the expectation of a fee, commission, or other compensation. The conduct constituted 82 violations of R.C. 4735.02, which provides that no person, partnership, association, limited liability company, limited liability partnership, or corporation shall advertise, act or assume to act as a real estate broker or real estate salesperson, without first being licensed under R.C. Chapter 4735.
- Delitha Gail Sparks, Cleveland, Ohio, a person not licensed under Ohio Revised Code 4735, was ordered to pay a civil penalty of $1,499,000.00 for committing between the period of August 23, 2010 until on or about March 17, 2011, 149 violations of 4735.02 by renting, or leasing or negotiating the rental or lease of the subject property; offering, attempting, or agreeing to negotiate the rental or leasing of the subject property; managing or offering, or attempting to operate or manage the subject property; and/or holding herself out as engaged in the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee, commission, or other valuable compensation or the expectation of a fee, commission, or other compensation. The conduct constituted 149 violations of R.C. 4735.02, which provides that no person, partnership, association, limited liability company, limited liability partnership, or corporation shall advertise, act or assume to act as a real estate broker or real estate salesperson, without first being licensed under R.C. Chapter 4735.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes9y
@Mindy Jensen I hope you don't mind but I went ahead and stole a graphic from one of @Brandon Turner's articles. It just fit the answer so well, I could not resist.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Lee S. one important thing in Quarles model is the SELLER or legal owner signs the listing.
most wholesalers are trying to hide the amount they are going to make.. lest seller get miffed and not want to do the deal.
@Jay Hinrichs Michael Quarles doesn't wholesale though, he wholetales which is what I would do. Listing a house on the MLS once you have a contract AND plan to close gives you extra marketing time and reduces carrying costs. Contract states property may be listed on MLS for resale immediately.
If I was going to assign a contract as a licensed Realtor, which I am, I would just send an email to all licensee's to drum up an investor/cash buyer. Simply tell them to add their comission on top or price it accordingly.
Just be honest with the owner, that is the issue people have with shady wholesalers IMO.
- Investor · Dallas, TX · Member since 2016 · 67 posts · 22 votes9y
Originally posted by @Ted Lanzaro:
Show me the statute where it says that. I would be happy to learn something new. I have been an investor for close to 20 years, represent over 500 real estate investors, know 100+ real estate attorneys and have personally both purchased and sold wholesale properties. In all those years, I have never heard of anyone being prosecuted or fined for marketing a property they had under contract. But, perhaps it is because I only deal with quality clients.
The most successful wholesalers (the ones I deal with) and the only ones who have any business doing it are the ones with huge buyers lists, primarily from opt-ins so they are not generally marketing the property to the general public, they are marketing it to their list which probably cost them thousands of dollars or more to build. they are typically guys like you, Will Bernard, who do a lot of deals but can't do them all so they sell them to people on their buyers list.
I am not an advocate of wholesaling to get into investing and I personally don't take them as clients because for the most part, I feel they are wasting their time unless they have tens of thousands of dollars to spend on marketing. If they do, I point them to rehabbing or landlording.
Have a great night,
Ted
Would love to be placed on the buyer's list of the wholesalers you work with. How do we make that happen?
- Investor · Dallas, TX · Member since 2016 · 67 posts · 22 votes9y
@James Wise Above you say Is Wholesaling Legal? Answer Yes
And then go on to list all the reasons why it would be construed as Not legal. I am assuming you are missing the "IL" ??
- Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes9y
Hi Y'all, I am a real estate attorney in California. I find the arm-chair lawyering conversation interesting and correct on several fronts. If there was an easy and obvious answer then there wouldn't be this debate.
First, "wholesaling" or "wholesale business" is not a legal term in regards to real estate transactions. different people have different ways they do deals and all call it wholesaling. So the question of whether wholesaling is illegal is not a logical legal question because youre asking about a term that is not defined.
There are certainly ways to buy and sell real estate on a "wholesale" market that are legal. And, as people have pointed out above, there are ways to do deals that are fraudulent or misleading that would likely lead to civil remedies and possibly criminal punishments.
One of the biggest ways to make sure that your deals are not fraudulent is to have clear contract language that describes what you are doing. Then the other party cannot ever claim that they were misled. I work with many wholesalers and their contracts, which I write, are clear. And their actions follow the steps outlined in the contracts.
Another very difficult problem is if a party involved in the transaction is a real estate agent. This leads to a lot of potential liability and conflicts of interest. First, real estate agents have fiduciary duties to buyers and sellers which can be violated if their own interest conflicts with their client's interest. Second, agents incur potential liability for their brokers in all their transactions. There is a lot more to explain about this. but if you are an active agent who works under a broker, you should have a long talk with your broker and make sure he/she is informed before you do any sort of wholesale deal, because her/his license is on the hook.
If you are a wholesaler in California and you want help with your contracts, PM me. I cant practice law in other states so I cant answer specific questions for people in other states.
- Investor · Athens, GA · Member since 2011 · 306 posts · 156 votes9yWith regards to Georgia, I am only a licensed agent and not an attorney, but I did reach out to an attorney who teaches continuing ed classes all the time. There is language in the Official Code of Georgia(OCGA) Law that defines the roles of a licensed person and what is allowed and not allowed although I don't have he exact code right. Somewhere in 43-40. Then there is also code that must be used with regards to advertising a contract or interest in a property when you don't own the property, in effect making assignment completely legal. Basically it states that if you have the verbiage in the contract that you may advertise and market the property to a different buyer and all parties agree then it is legal. I wish all the coaches and teachers would start using the correct terminology. Wholesaling should mean you own property and are selling it for cheaper than retail just like it does in every other industry. Assignment is usually what they all mean, or even Arbitrage. Arbitrage is finding anything for one price and making a profit by selling it for higher but does not include actually ownership of that thing. Let's all start using the right words. Assignments are completely legal for licensed brokers and agents as unlicensed persons with An "interest" in real estate.
- Brooklyn, NY · Member since 2016 · 152 posts · 44 votes9y
With wholesaling, you are opening yourself up to fines and other legal problems if you don't have a clear idea of what you are doing. You are essentially acting as a broker matching buyer with seller. And in New York, its illegal to benefit from the sale of a real estate transaction without a license. With that being said, the concept of placing a contract and flipping the contract to an end buyer is very prevalent in my market. But its often to the detriment of the seller because the wholesaler makes the property undesirable by inflating the price to make a profit.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Ethan Atkinson along with verbiage its not a one size fits all every state has a different take on this subject.. so what works in GA won't work in other states.. thats a key point
but the wholesaling how to guru's do not make any distinction they just all hide behind equitable interest theory call it a day take 10 to 40k from dreamers and off they go to their beach house and or drive around town in their lambo LOL
@Darrin Carey, sorry to go back a few pages here but I do want to give some clarity on your description of assigning a contract. What you've actually described (replacing your name with the new buyer's name) is actually Novation and not Assignment. A novation actually would require the current owner of the house to sign off on the new buyer, whereas an assignment is actually just assigning <some> of your rights/responsibilities to the new buyer.
I'm not a lawyer, so I'm sure that someone will correct me where I might have misstated the difference, so I've put my flamesuit on!- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes9y
Go down to the local community college and sign yourself up for a Business Law course. Being a community college, it won't take much brains to understand the intellectual level at which the material is presented. They'll get to contract law eventually. All your questions will be answered.
That is what I did. ;)
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