Legal ramifications of Wholesaling

7 Replies

Dear members of Bigger Pockets in Washington state-

Before jumping into wholesaling, I wanted to make sure all of my ducks were lined up in a row. I spoke to a lawyer about my contracts and the legality of this enterprise known as "wholesaling". He was concerned with the practice and thought I was "equity" skimming and essentially planning to defraud consumers out of their money.

I came across the Washington State Attorney General's page http://atg.wa.gov/hb2791prjune08.aspx#.UyfgGfldWJE

and it does seem that wholesaling could be questionable.


Is there ANY legal information/experience someone could provide me with that could help me calm my nerves and get started? I am really excited to start, but do not want to face any legal issues... such as end up in jail or pay damages up to 100k.


Thanks,


Sol

This similar to the federal law requiring certification of those assisting homeowners in distress. I advise that new folks simply stay away from distressed foreclosure matters after notice of foreclosure has been made unless you are actually the buyer, in other words, wholesalers stay away, in short.

You need to follow your attorney's advice!!!!

Actually, wholesaling is not the easy place to start in RE. Those who promote the strategy are either unknowing or they are lying saying it's the place to start out. To do this and be good at it, you need to know your market, must be able to value a property, need rehab knowledge and obtain an ARV, you need to know market rents, need to be aware of local customs and RE laws, contracting issues, closing procedures at least in setting things to close as needed, you need to know title requirements and how to solve issues.....in general, you really need a good basic understanding of RE. If you have all this, you don't need to restrict yourself to this strategy!

Think about it. Wholesaling is nothing more than selling a property to someone who plans to profit from the property, not live in it. I can tell you it's much harder to sell a good deal to another investor than it is to someone who falls in love with a home to move in. Can you imagine trying to "sell" a house to me? I might buy a house, but it won't be sold to me, I'll buy it. Meaning I have my own requirements that will be met, if they are I buy, if not I don't. Every potential buyer you get will be in this same frame of mind.

All you're doing is taking some contract steps beyond a birddog.

No money? Partner. You can partner with the owner, with a rehab type, with a landlord or even with someone that will move into the home. If you knew the basics about types of deeds and how property rights were shared and conveyed you'd be much further ahead.

Ever noticed that many of the "better known" wholesalers have some program or mentor or coach? Why is that? It's because making money off you supplements what they do, (if they really do anything) meaning they probably need to branch out and do something to put more money in their pocket because just wholesaling doesn't make them the living they want you to believe it does. Those that can't do, teach!

As a lender I was in a unique position to learn of distressed owners, people moving, failed properties, contracts falling through, people needing to sell, etc. I didn't have to look for properties, deals came to me, however there were times I'd seek out certain properties. Putting a deal together was pretty simple if it was a good deal that I could not buy as a lender or for other reasons, I'd call my friends, buyers I knew. What I did would be hard to duplicate, but saying it's not rocket science but you must have knowledge, know people and have the skills to carry it off.

Wise up people. No such thing as easy money with limited knowledge that's legal. :)

Hey Bill-

So would you say that wholesaling is a fraudulent activity?

Seeing as how a person would be skimming equity from someone?

Thanks,

Solomon Oh

@Solomon Oh , Bill did not say that wholesaling is a fraudulent activity. Bill said it's NOT that easy. And @Bill Gulley is right. Wholesaling is not that easy. I made 50 offers before I was able to wholesale my first deal. It took me about 3 months to actually visit all those houses and make all those offers (and I was a full time employee then).

Wholesaling is LEGAL if you do it right.

1. You have to put the property under a legally binding purchase contract valid in your state.

2. You have to DISCLOSE to your buyer you are wholesaling the house. You cannot pretend to be the owner since you are not.

3. I suggest you also disclose to your seller (specially individual owner) that you are wholesaling the house.

4. I suggest you only work with CASH BUYERS so you won't have problem with needing to disclose to your buyer's bank or financing institution that you are wholesaling the deal. In a shortsale transaction for instance, most banks will not allow the transaction if you are not the buyer and you are just wholesaling the house. They sometimes even put a seasoning requirement of 6 months (that is, you cannot re-sell the house until 6 months of owning it).

Originally posted by @Wendell De Guzman :
@Solomon Oh , Bill did not say that wholesaling is a fraudulent activity. Bill said it's NOT that easy. And @Bill Gulley is right. Wholesaling is not that easy. I made 50 offers before I was able to wholesale my first deal. It took me about 3 months to actually visit all those houses and make all those offers (and I was a full time employee then).

Wholesaling is LEGAL if you do it right.

1. You have to put the property under a legally binding purchase contract valid in your state.

2. You have to DISCLOSE to your buyer you are wholesaling the house. You cannot pretend to be the owner since you are not.

3. I suggest you also disclose to your seller (specially individual owner) that you are wholesaling the house.

4. I suggest you only work with CASH BUYERS so you won't have problem with needing to disclose to your buyer's bank or financing institution that you are wholesaling the deal. In a shortsale transaction for instance, most banks will not allow the transaction if you are not the buyer and you are just wholesaling the house. They sometimes even put a seasoning requirement of 6 months (that is, you cannot re-sell the house until 6 months of owning it).

Agree on everything. In WA state we must stay away from working with any distress seller in a pre-foreclosure or foreclosure situation. REIA WA has much documentation on this ruling (available to members). I suggest going to a REIA meeting and discussing with leadership.

Be transparent to all parties in the transaction and you should be okay.

Hey Wendell/Brittany-

I appreciate your feedback about this topic. I spoke to a lawyer about the issue, but all he was talking about was gloom and doom. Similarly the few real estate brokers I spoke to were not receptive to this idea and have told me to look to other ventures.

Brittany is it possible for you to send me a copy of the legally binding contract that you have used in past transactions (WA ST). I can furnish you copies of the contracts I have drafted to make a comparison.

All the best,

Solomon Oh

Originally posted by @Solomon Oh :
Hey Wendell/Brittany-

I appreciate your feedback about this topic. I spoke to a lawyer about the issue, but all he was talking about was gloom and doom. Similarly the few real estate brokers I spoke to were not receptive to this idea and have told me to look to other ventures.

Brittany is it possible for you to send me a copy of the legally binding contract that you have used in past transactions (WA ST). I can furnish you copies of the contracts I have drafted to make a comparison.

All the best,

Solomon Oh

Solomon,

I use MLS contracts drafted by a RE agent. I feel most comfortable with this contract as well as most sellers.

I'm not going to tell you the wholesaling is illegal, but the easiest way to avoid any questions it to actually buy the house. With money. Either cash, borrowed, or partnered (or maybe even with seller-financing). Get the deed. And then sell it to someone else.

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