I was talking to a realtor who has cash buyer clients and he was telling me how wholesaling isn't an officially recognized real estate practice in the "real estate" industry.
It could be considered an illegal practice because it's doing real estate without a license.
Can someone help me understand this?
I have read a lot of stupid and uninformed anwers here but that is to be expected. First of all no one is saying everything is illegal as far as a seasoned licensed agent is concerned. Now the big but, laws for licensing were passed to protect the public and many times investors cross the line into licensed activity and as far as I'm concerned if you get nailed good.
I was an investor for ten years before I got a license so my first love is investing and being a broker was intended to aid my investing. But lines get crossed by investors. For example if you find a buyer first and tell them you will find them a property
you are acting as a agent, you are not a principle in any deal at this point, you are no different then a agent trying to locate a property for a buyer. Plus it can go even further if the buyer thinks you are acting in a agency capacity for them. It doesn't matter what you think, it only matters what the buyer thinks and it is called implied agency. The only reason you don't hear more about this is because the average person has no clue, but when that person seeks a lawyer for some reason you won't like the consequences. There are other lines we cross but I will stop here.
They don't know what they're talking about.
If you sign a contract with a seller, then you're a principal in the transaction. Same, if you sign a contract with a buyer or if you assign a contract, that you have signed yourself.
Doing real estate without a license would be, if you were brokering deals without a license. But you're not brokering - you're a principal
Hey Rob,
You're gonna find that a lot of real estate agents are idiots. Plain and simple. And this is coming from someone who has been an agent and just recently became a broker. For some reason, its just a job that attracts the dodos.
Wholesaling is not illegal. An attorney may correct me on this, but the reason its not illegal is because you're making yourself a party to the contract and then assigning your contract. Or closing your contract and then immediately selling the property to someone else, as in a double closing.
Unlicensed practice of real estate has more to do with finding a buyer for a seller for a fee. You're not actually a party to the transaction in that case.
Unethical? It can be, depending on how you go about it. I believe that as long as you disclose and don't try to hide things from the seller its completely ethical. They have a problem and you're solving it for them.
I was listening to the BiggerPockets Podcast today and one of the guests was talking about how he tells the sellers that either himself or one of his partners will be purchasing the property. That's an easy way of communicating to the seller what you're doing without having them get upset over an assignment of the contract.
Good luck man!
Why do realtors consider Wholesaling illegal or unethical?
One of two reasons: 1. They are uninformed, ignorant, or misinformed or 2. They are threatened.
Use any purchase contract that both buyer and seller will accept. It can even be on a napkin. Once you have a fully executed contract, you have equitable interest in the property and dampen assign the contract (unless the contract prohibits it) or you can close and resale. Either way, it is perfectly legal.
I totally agree with the comments above (and @Matthew B. made me truly laugh out loud with the "dodos" comment. I, too, have my license - for investing purposes - and seem to have run into an inordinate amount of dodos along the way. Dodos and some shysters.).
It sounds like this agent misunderstands the concept. I think perhaps he pictures wholesaling as a practice in which you, the investor, get paid a fee to connect a seller with a buyer. Hence, the idea that you'd be practicing real estate without a license. But as @Michaela G. points out, you are a principal in the transaction, which makes it a different animal.
At the same time, I might be able to see his point about wholesaling not being an officially recognized real estate practice - if by that he means, in the world of licensed agents and brokers. As far as I know, I can't wholesale a property in my role as an agent. There's no mechanism for it, and furthermore, it would be frowned upon - first and foremost, my "allegiance" as an agent is to the seller and in ensuring the seller gets the most they can for the property. I am ethically obligated to do this to the best of my ability.
Second, the industry and lawmakers are quite rightfully concerned about a professional potentially taking advantage of a seller. In other words, they want to make sure that I, the licensed and (presumably) educated agent, doesn't tell a seller their property is worth 'x' when I know damn well it can go for a lot more, then turn around and sell it for 'y' to an end buyer and pocket the spread - a spread that, so far as the industry sees it, should have gone to the seller (minus commission). So as an agent, I am pretty much limited to listing the property and earning a commission.
Hope that helps, and if any other agents or brokers see a flaw in my explanation, please correct me! (I'm primarily an investor and don't spend much time in the agent/broker realm.)
Dodo here reminds everyone that several states are cracking down on unlicensed wholesaling.
@Karin Crompton that's exactly what he said...wow, i totally thought you guys might have talked because both points you mentioned are almost the exact words he used...
Can you explain the "principal" aspect to me? Does a napkin contract that says the seller is selling me their house for "x" amount legally make me a principal to the home? and does that contract then give me equitable interest even if I'm not on title or have a lien?
Sorry if I sound pedestrian but my realtor friend said that I can't sell a contract to a buyer because I'm not legally and officially on title to the home...I would need something like a Quick Claim deed (or something like that lol) to legally sell the property...
as you can tell I'm a confused newbie
Being a principal means that you are a party of the sale. Buyers and sellers are principals in the transaction. If you sign a contract as a buyer, then you are a principal.
You aren't actually 'selling' the contract. There are 2 ways of handling it: There's one contract that has a seller and also a buyer (presumable you're the buyer) and then you'd sign another contract, where you are the seller and then someone else is the buyer.
At that time there are only promises to sell/buy and nothing is actually being sold/bought at that point in time.
Then there'd be a simultaneous closing with the same attorney at the same time. Your seller sits in one room at the attorney's office and your buyer sits in another room. Then you and the attorney start of signing documents in the seller's room, then you'll excuse yourself and attorney and you walk to the room where the seller sits. Then you'll sign the necessary documents for your sale. Then you'll go back to the seller and finish there and then go back to the buyer and finish there.
It runs a little different in states where title companies work it, because they have a couple of extra days for the transaction.
Or you could assign your purchasing contract to a buyer, with an assignment fee. The seller will meet directly with your buyer. But it also shows the amount that you're making with your assignment and might make the seller get antsy at closing.
Uh-oh, I'm a little concerned about using similar explanations as an alleged dodo. Might have to rethink my statement. ;-)
You probably want to contact an attorney to walk you through the ways this is done, and how to do it properly. I'm extremely limited in my ability with definitions and what constitutes a legal document and all of that, nor do I want to wade too deeply into it. I'm just not that smart. haha
However, I don't know why you couldn't sell or assign a contract - investors do it all the time. But again, state laws vary and attorneys are the ones to set it up properly.
And finally, I was talking in broad brush strokes regarding the agent/broker role. However, if you are an investor and not licensed, I don't see where you have the same concerns. I believe everyone should offer full disclosure and transparency when dealing with sellers (i.e., they know you are offering a lowball kind of price and your intentions), but the legalities of what you do are different than those an agent/broker is bound by.
Wholesalers are a huge detriment to the financial interests of Realtors, almost without exception. So you're hearing a commentary (pitch?) from a vested interest. Whatever your critique of realtors might be, most of them can make a reasonable sounding pitch when it comes to their own best interests.
Realtors are also a very powerful lobby group in D.C. I actually wrote a blog about Wholesalers and realtors.....
Either or, you should treat both as tools of the trade and triple verify everything they whisper in yer ear.
It's kind of like Card Counters in Vegas. It's not illegal to have the ability to remember what cards have been played, constantly recalculate odds, and adjust your play accordingly, but it removes most of the advantage the casino has. It's not illegal, the house just doesn't like it, so they treat you as if you are a criminal and concoct a story that it's against the law.
As Doug said, it is frowned upon, but not illegal, like card counting on an airplane. (did not want to be censored)
The best short answer is that there are a lot of dodo Realtors. A longer answer would get into group psychology, about how a group reinforces self serving ideas, Collective rationalization, Stereotyped views of out-groups, etc...
I have read a lot of stupid and uninformed anwers here but that is to be expected. First of all no one is saying everything is illegal as far as a seasoned licensed agent is concerned. Now the big but, laws for licensing were passed to protect the public and many times investors cross the line into licensed activity and as far as I'm concerned if you get nailed good.
I was an investor for ten years before I got a license so my first love is investing and being a broker was intended to aid my investing. But lines get crossed by investors. For example if you find a buyer first and tell them you will find them a property
you are acting as a agent, you are not a principle in any deal at this point, you are no different then a agent trying to locate a property for a buyer. Plus it can go even further if the buyer thinks you are acting in a agency capacity for them. It doesn't matter what you think, it only matters what the buyer thinks and it is called implied agency. The only reason you don't hear more about this is because the average person has no clue, but when that person seeks a lawyer for some reason you won't like the consequences. There are other lines we cross but I will stop here.
@Brian P. Makes some good points here. To be clear, wholesaling is not illegal, just as driving a car is not illegal, however, you can do illegal things whole wholesaling just as you can while driving. The key is to perform your wholesaling while not crossing any illegal lines.
@Brian P. is correct to some degree. I just got my license here as well so I know what Implied Agency is. Implied agency means an agency created from the conduct of the principal and agent. Keyword there is Principal, which is you as a wholesaler are. I think the key to all this is Disclosure.
To be honest a seller could sue you for anything. They could say you put mold and cockroaches in their home but the real question is would they win in court.
Wholesaling just like Rehabbing, Note buying and being a Landlord aren’t illegal. but as with any paths in Real estate I would highly recommend adding a Real Estate Lawyer to your team as their are a lot of nut jobs out there.
Wayne
Implied agency doesn't require one of the parties to be licensed, I post this so investors are not misled. As a side note it is one reason I recommend to investors that they knock of calling themselves real estate consultants, find some other title that a licensing agency won't use against you if you step into the wringer. And as one investor found out in my current location real estate advisor was a bad choice too.
The key is really to be honest and above board, and actually understand what you are doing when wholesaling.
As mentioned there are 2 basic ways to do it:
1) Assignment of the contract
2) Double close
Lets just get double closing out of the way first. Even the most ignorant and threatened RE Agent should have a hard time figuring out how a double close would be acting as an unlicensed agent. In this case YOU buy the property then resell it right away. No blurred lines as you do take title (even if only for a few minutes).
The issue is always in assignments. The problem is that a lot of wholesalers are dodos (awesome word!) too. They DO say stuff that makes it sound like they are acting in that capacity. As Brian pointed out if you say to a buyer you will find them a property for them to buy that sounds like an agent. The BUY side isn't where most of us are going to worry but that was a great example.
The more likely place they get in trouble will be if they give the fairly accurate statement of "I have a list of investor buyers that will buy your property at the price we agree on and I will just get a small fee to connect you guys."
Congratulations you just practiced RE Brokerage without a license!
In an assignment you are NOT selling a property, you are selling your contractual rights to buy the property. You are selling the contract. It is important to make that distinction, that is where you are a "Principle" in the transaction thus not brokering a deal. I think something like the "Myself or one of my partners will be purchasing the property" type statement is a much safer way to go. I would use a more generic term like "Colleague" rather than partner though since anyone you know professionally (like people on your buyers list) can be considered a colleague while a partner does imply a closer relationship that might be somewhat misleading.
First, remember that licensing, in any profession, is less about protecting the public and more about protecting the livelihood of those holding the license.
Wholesaling is NOT and could never be made illegal under our current legal structure. Unless and until the US Constitution is revoked, you can sell any unrestricted asset you own, at any time, for any price.
Anyone can buy real estate and sell that real estate, on their own, without the help of any professional. Personally, I think it is a mistake, but you can do it.
Wholesalers aren't typically doing their transactions that cleanly. The walk a thin line by trying to independently negotiate both sides of the transaction before actually taking title. In many instances, they don't sell the property to the ultimate buyer at all, they merely sell their interest in the purchase contract.
There is nothing wrong with that as long as the two sides have really been negotiated independently.
When the wholesaler crosses the line and the two transactions become one, then there can be problems. By lining up a list of buyers and asking them to tell you what they want and then going to find those properties for them, you make it much harder to keep the transactions independent and much more difficult to prove they are independent if you are caught.
I find that Realtors often are unclear on what is illegal for the public and what is illegal for the agent. I have heard agents at my office that thought something was illegal when it was actually just our brokers guideline not a law issue.
Realtors and other licensed agents say wholesaling is illegal because you are taking business away from them. There really isn't any other reason. People whine and moan about things that threaten their business/way of life.
I actually think the average residential agent is so unaware of the investment side of the business that they think it must be against some law. When I submit a somewhat outside the box offer, whether representing myself or another investor, listing agents tend to think I am completely crazy. If its not a cash or residential mortgage deal many agents have never heard of it.
I understand what you are sating that it could be self interest but in many cases I would propose it is just ignorance.
My .02
I "wholesaled" properties for years, under different circumstances, as a lender receiving a property and then simply calling investors I knew and offering it to them. During much of that time I did not have a license, my business was lending and the activity I was involved with was in disposing of collateral or properties that I acquired through various transactions.
IMO, you are not a party to a contract that has an intent of selling a property owned by one party which is to be sold to another party. All that is going on here is a guru ploy (I don't know the guru who devised this initially that started this as an investor strategy, but I'm sure it was a guru) that devises a contract to assign instead of a listing agreement, changing different types of contracts but effecting the same thing won't wash in many areas, like mine at some point.
Assigning contracts is not new nor is it illegal. I did one last year, that is I did ONE. Last year I was not in the business of facilitating the sale of real estate by assigning contracts. That is where you'll have an issue. States have different licensing laws as to what requires a license and how they define the act of contracting sales. Here, Missouri uses the phrase "facilitating any real estate transaction" it also does not depend on charging any fee per se as you can profit for compensation. If push came to shove I could show the ability to buy under my contract, that makes a big difference as to making an agreement to purchase.
However, let's consider the legal application of assigning any sale contract, i can purchase a contract to buy a car, or 10 cars at one shot maybe, and not be considered a dealer. I can attempt to buy a motel and then I might get an offer allowing me to profit, I may see the motel is not what I initially thought and decide that best thing to do is to assign my contract to others. These situations are a far cry from someone who utilizes this arrangement as a business model doing deal after deal after deal.
When you are doing any activity as business, a repetitious activity you will be viewed as a dealer or an operator, that is what you really are you are not investing as that term is used here by those seeking a better public image calling themselves "investors". There is no way that a wholesaler with little or no money will be viewed or called an "investor" in any court, it's a business operation and you are the operator.
So, the business of wholesaling as popularly put together is more than likely going to be viewed as being in a business of contracting, without the ability to perform as initially stipulated and then selling a contract as the right to sell for compensation. This is very similar to contracting without any obligation to buy in order to offer the subject property to a real buyer, such known as a listing agreement with an agent. It goes to the intent of the RE license laws.
So far, I have not heard anyone admit they got nailed wholesaling, it certainly doesn't mean they have not, and I know people here have been nailed for the unauthorized practice of real estate. I didn't go to court to hear the details nor did I dig up any case. Let's not be silly, someone was acting in the capacity as a real estate broker without a license, not much brokers do but to facilitate sales or rentals with the public.
The double closing has been pretty well shut down with the issue of the B buyer not having the ability to perform, it's not a valid contract in good faith. The same issue applies with any contract regardless of what king of contract it is in any industry unless the broker holds some license.
Assigning is the preferred way to do these, assign it, collect a fee and walk away. But get in the business of doing this you will certainly be taking on issues with regulators.
So, how do you do Birddogging/wholesaling deals legally if you can't perform? The guy finding a deal must be inside as a partner with the real end buyer. You find me a great deal, I put you in my LLC, we buy it, I pay you and I can keep yo in my LLC with a very limited position if we expect to do future business, otherwise if it's a one time deal, I can simply take you out of the company, pretty much like hiring someone who looks like they may be an asset and finding later they are not a just get rid of them. Then, you are inside the entity act as an actual principle and not a third party.
Of all the investors on here that go on about having an equitable interest in a contract or property, not one of them has ever given a legal definition of what that interest is in any particular transaction, pretty much because they are repeating guru justifications and don't have a clue, putting it bluntly. An equitable interest will be determined on a case by case basis, under the circumstances, considering the facts surrounding the transaction and the reasonableness of the claim as to any interest. $10 down and I have an equitable interest in a $200,000 property......Horsefeathers!
State law prevails, check with your attorney in detail, don'r assume what can be done in FL is good to go in MI. Sorry this is long, but it's pretty brief! :)
Wholesaling is legal, but I can see how it border lines being a 'Net Listing' by an Unlicensed person. It's more or less a loop hole.
By having a property under contract, you have acquired equitable rights to that property which includes selling your rights to another party.
Anyhow, agents don't want to deal with wholesalers (someone who may not actually have any more to close), they want the cash buyer.
I agree with Bill. You are definitely a dealer. In fact, flipping houses for profit is considered a dealer activity, but a long term hold is an investor activity. Similar to stocks, there are investors (long term hold / passive) and dealers (day traders). They are viewed by the IRS differently and may be subject to different rules.
The problem is that an RE Agent (which you can assume that most have some form of mental retardation) is going to look at wholesaling as engaging in real estate agent activities when you are not licensed as one. Also, they want to make sure that you will compensate them for their expertise in bringing you the cash buyers. We don't work for free.
Most managing brokers will not allow a RE agent to wholesale for the simple fact that you have all the benefits of being licensed and the managing broker does not get a piece of the transaction (some managing broker's get upto 50% of their agents' transactions). This is due to the fact that you are selling your interests and not someone else's interest in the property.
Although, if the seller is smart and you make considerably more that what a "reasonable" commission would be and that is not disclosed to the seller, he could have grounds to sue you or make the contract voidable. It's the fact that you are in using your position to have an unfair advantage.
In my professional opinion (I'm not an attorney, I'm just telling you what I will continue to do), as long as you're not making unreasonable spreads on your wholesale deals as an agent, you should be alright (unreasonable would be to get a $10,000 assignment fee/profit on a $30,000 wholesale deal).
I have a reciprocal relationship with a wholesaler where I will help in analyzing deals and providing comps if he will send some deals that need to be listed. It works well for us. The point us, no matter how dumb or ignorant Realtors are as a whole, we've been burned by wholesalers too many times and you need to figure out how to compensate an agent for their time, expenses and expertise.