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.
I sign contracts with a auto dealer to purchase 100 cars at $25,000 a piece, which would otherwise retail for $30,000. I can do this because I am a supposedly cash buyer purchasing in bulk.
I then sell those contracts to individual buyers for $27,000. Maybe I even set up a legal entity to facilitate that. Rent an office, have a website, etc., etc. I sell my contract to buy at $25k for $27k before I am actually required to put up the money and take possession of the car.
You are claiming that the fact that I am a principal to the initial contract, and to the second, is going to insulate me from having to be licensed as an automobile dealer?
Excuse me for a moment while I laugh myself silly.
OK, I'm back. I'll tell you what, if I were actually going to buy trying to make that argument to my state's licensing board, I would for good, g-ddam sure want to be able to prove that I had a quarter million in liquid assets at the time I signed the initial contracts. And I would want to be able to prove that I had made preparations to take delivery. Just to demonstrate that I was a bona fide buyer of those cars. And even then, I'd be hitting the rosary beads pretty hard, and promising God I would never do it again if He had pity on me this time, like an 18-year-old Alpha Chi pledge experiencing his first real hangover.
Now, do you suppose most "wholesalers" have the means and intent to purchase the properties they place under contract? Let's say I have my doubts. And without the means and intent, you're not a bona fide buyer, and so not a "principal" to anything real. You're an unlicensed broker who believes that he has outsmarted people with decades of experience and a duty to protect the public from the unscrupulous.
Wholesalers get away with what they do because they are largely operating under the radar, not because their sham transactions actually exempt them from the law.
And I say this as a guy who thinks the the Realtors are fighting a desperate, probably futile rear-guard action against technological and social changes that are quickly rendering them obsolete, not as a broker or agent protecting my sinecure.
And I say this as a guy ...not as a broker or agent protecting my sinecure.
Real estate agents walk a fine line here in Dallas and don't bad-mouth wholesalers because they can be entered into the BBB and get a complaint file against them.
Joe Gore
Ummm...ok?
Can't wait to see the BBB complaint against a broker for "badmouthing" someone. Someone with whom the broker has no business relationship.
"BBB Action: Complaint investigated and resolved in favor of the business."
Some real estate agents and brokers like to tell everyone about a wholesaler that is doing deals that is not licensed, but the broker or agent doesn't like to put their real name on the line as the one that finger the wholesaler because they could get sued, and that would be bad for business.
Joe Gore
I really have no idea what you are saying.
Anyone can be sued, sure.
But tell me, because I am curious, what would the cause of action be, exactly?
Not any sort of defamation, certainly, not for telling people an unlicensed person is unlicensed. Truth being an absolute defense and all.
Really, what are you saying? Is this some sort of veiled threat that real estate agents should keep their mouths shut, or sleep with the fishes? Or if not sleep with the fishes, face bogus BBB complaints and frivolous lawsuits?
Interesting thread! I have heard agents called retarded, stupid, clueless and much more.
It is true agents do not have much knowledge about wholesaling. Why should they? It is not a recognized practice by real estate boards or commissions and agents do not need to know about wholesaling unless they get an offer from a wholesaler that looks suspect.
Why do agents that know what wholesaling from upon it? Not because they feel threatened that they may lose money, but because they have probably dealt with wholesalers that tried to screw people over or had no idea what they are doing.
There are many great wholesalers who know what they are doing and do it right, but there are also many that have no idea what they are doing and do act as agents. A real estate agent is licensed and has gone through a lot of education, background checks and even finger printing. A wholesaler has no requirements to be educated or have any idea what they are doing.
Don't be mad at agents who don't like wholesalers, be mad at other wholesalers who gave wholesalers a bad name in general. I would estimate the fall through rate on a wholesale deal is much higher than a regular buyer, a wholesaler has a much better chance of not closing because they don't have a buyer, don't have the money, can't figure out how to double close or valued a property poorly. The agents job is to get the most money for their seller, not to make sure the wholesaler gets a great deal on a house that he can imiedataly sell for more money.
Most agents have never heard of wholesaling, so right of the top their opion is that it is illegal activity. Their not morons or dodos, I am a wholesaler, but lets just be honest here, when you talk about wholesaling and describe it, right off the top it sounds illegal. Its easy to get the lines crossed. When your a good wholesaler you dont even need the agent to know what your doing, you dont want the agent to even understand it. I tell the realtor i work with, just bring the deal and ill buy it. Plain and simple..
And real estate agents are not angels as well, they make it hard for the market. I talk to so many sellers that have had an agent come by and tell them their property is 100k-300k over value just to get them excited so they can get that listing. And now this homeowner with no sense of the market believes they own a million dollar home in a 500k neighborhood...
What I am saying is if an agent or broker makes a complaint make sure they have the facts and can prove a wholesaler is in violation of the law because a wholesaler has a right to confront the accuser.
Joe Gore
"That person is not a licensed real estate agent. He appears to be facilitating real estate transactions. Please investigate."
There is not even an accusation there. There is certainly no legal burden of proof. And no right to "confront the accuser."
This is silliness.
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.
This is, with all due respect, nonsense.
I can (and in fact do) own six automobiles. They are "unrestricted" assets.
And if I sell more than 4 of them in a year, I need a dealers' license in this state.
Would I be investigated and fined for selling 5 personally owned vehicles in a year? Not likely. But that is because I was under the radar, and the licensing bureau would never even know. And even if someone complained (say, a licensed and bonded car dealer who is following all of the rules and thinks I should to, so I cannot undercut his prices by not paying the costs of complyng with the law) it is unlikely that the state would do more than send a C&D.
The first year. If I do it again, they'll get interested.
And even if the Constitution is not somehow revoked, they will win, and I will lose, and I will pay a fine.
And real estate agents are not angels as well, they make it hard for the market. I talk to so many sellers that have had an agent come by and tell them their property is 100k-300k over value just to get them excited so they can get that listing. And now this homeowner with no sense of the market believes they own a million dollar home in a 500k neighborhood...
Not angels. Few of us are. But most of them are, to a large degree, rational actors.
Why would a agent want a listing at $300k over actual market value. So he can spend money advertising it, and time showing it, when it will never sell at the asking price?
To be honest, it is more likely an agent will press a seller to price too low. Even though a higher price yields a higher commission, a below-market price means collecting that slightly smaller commission in exchange for much, much less work.
@Richard C. your car analogy is apples to oranges. There is no law (at least not in a state I am aware of) that to sell real estate you have to be a licensed agent. There are laws that state that the sale of a certain number of cars requires being a "dealership". I can sell 200 houses this year and never get a license - I cannot sell 200 cars this year without a dealer's license.
There are states that require licensing based simply on sales volume, such that companies like Toll Brothers need to get licensed to sell homes they build. I think Wisconsin is one.
There are a number of other states where real estate business entities need to be licensed or registered.
In any case, I wasn't arguing that wholesaling was necessarily illegal. I was arguing that people were not insane or blindly self-interested for thinking so. And that state regulatory bodies may feel that they can write rules covering wholesaling under their existing enabling legislation. And that no realtor complaining to their state commission about a wholesaler was committing a tort by doing so.
Why do agents that know what wholesaling from upon it? Not because they feel threatened that they may lose money, but because they have probably dealt with wholesalers that tried to screw people over or had no idea what they are doing.
There are many great wholesalers who know what they are doing and do it right, but there are also many that have no idea what they are doing and do act as agents. A real estate agent is licensed and has gone through a lot of education, background checks and even finger printing. A wholesaler has no requirements to be educated or have any idea what they are doing.
Don't be mad at agents who don't like wholesalers, be mad at other wholesalers who gave wholesalers a bad name in general. I would estimate the fall through rate on a wholesale deal is much higher than a regular buyer, a wholesaler has a much better chance of not closing because they don't have a buyer, don't have the money, can't figure out how to double close or valued a property poorly. The agents job is to get the most money for their seller, not to make sure the wholesaler gets a great deal on a house that he can imiedataly sell for more money.
I only said that some have some form of mental retardation. I can say that because I'm an agent that works with those that should not be allowed to consult with people on a purchase that would affect them for a major portion of their life. That being said, I think there are some great agents out there. My buddy here in Nashville made $400K as an agent in 2013 and he works 4 days a week and sometimes only 4-5 hours on those days. He's extremely bright when it comes to investing.
Also @Richard C., I'm not sure of the laws when it pertains to auto wholesaling, but I know you can do that when it comes to real estate. I had a client do a wholesale deal when I was an agent. He started a new construction build here in TN. 2 months into it, his company relocated him and he needed to get out of the contract. He sold the contract to another buyer for $100K more.
Regardless, I think you should be a little less condescending and rude to people on here. We're all in this together. Also, it's ironic that you mention being a believer right after dropping a "GD". You pretty much lost all credibility from my point-of-view at that point.
Never claimed to be a believer.
Of course you can sell a contract like your Tennessee friend. You can probably sell several. You are doing volume, doing it as a business, and maybe not.
That's really the point. There is a lot of chest-thumping on here about how you can do what you want with your own "property." ( Whenever I see that I always think of a character from a show my kids watched when they were little. Look up "Fuzzy Lumpkins" on YouTube.)
The fact is that when you are not conducting personal transactions, but are in business, different rules can and frequently do apply. That is not a Constitutional violation, not a violation of property rights, and not unreasonable.
Most wholesalers would be better off just keeping their heads down.
And yeah, I have a serious problem with the ethics of entering into contracts with no intention or ability to perform. You can say "caveat emptor" and "my contract allows assignment!" and things like that all you like, and legally you are probably covered. But willfully taking advantage of those less sophisticated is unethical in my book.
As to my credibility in your eyes: Don't care.
@Richard C., how are you taking advantage of the less sophisticated? In most cases, people need to sell quick and listing with a Realtor is not a quick way to sell. You have the listing process, showings, inspections, financing and a number of issues that can cause the process to take 2-3 months. With a wholesale deal, you can normally wrap it up in 30 days with a cash buyer. They are paying a premium for quick cash and for the connections that a wholesaler has. Regardless, my wholesale "premium" is close to what an agent would charge to sell it. Also, when I make an offer on a house I: #1, make them aware that I have other partners; #2, show them the process that I use for coming to my evaluation. The seller understands how and why I came to my evaluation and they accept the situation as it is.
I'm not going to screw anyone, but then again, I'm not in this business to make struggling homeowners wealthy. They have a problem and I'm offering a solution.
As for the believer part, well, I'd prefer that you not make any remarks like that and try to respect those of us on here that do believe in God.
What percentage of your contracts close? If you cannot find a cash buyer, do you close yourself?
If so, great. You are an investor. If not, you are not offering a solution, you are trying to take advantage of the unsophisticated and/or distressed.
Seller needs to get out from under fast. Can list with realtor and be out in 60-90 days. You find them, offer a quick cash close. Lock up an option for 30 days. Fail to find a buyer, and bail. Now that seller who couldn't afford to wait 60-90 days is looking at 90-120 days.
If you are going an offer with a "partner" (I assume you are using this word to refer to your hoped-for eventual cash buyer), then you are acting as a broker, finding that "partner" a property. Which is OK if you have the requisite license and follow the rules.
If there is no "partner", but just a buyers list or the hope of marketing to a cash buyer, then you are lying. Sugar-coat it however you want, but you either have a partner or you don't. And you are offering hurting people an out that you HOPE you will be able to deliver, and making a fine profit doing so.
You are not providing a "solution" unless you close.
A great many wholesalers make offers they have no intention of closing on. The WHOLE POINT of doing that is to gain an advantage for himself (the ability to market the property for a profit) at the expense of the seller (who loses the ability to market it themselves.)
The OP asked why some consider wholesaling illegal or unethical. The answer is because many common wholesaling practices are illegal, and many more unethical.
As to respect: I imagine that there are many on Biggerpockets with children or other loved ones who are developmentally delayed. You might want to think about that before taking umbrage at a trivially minor profanity and an irreverent joke.
From 1961-2010 the term "Mental Retardation" was a medical term. In 2010 it was replaced with "Intellectual Disability" which will be replaced by something else due to some complaints from liberals. To your point, "Intellectual Disability" is the correct term and it probably better describes the level of incompetence that I deal with when working with other Realtors.
I have done one wholesale deal and it closed 15 days after signing the contract. In 1 year of wholesaling, I made close to 50 offers and only one was accepted, you can figure out if that one closed or not. I only make offers that will close. That being said, the situation that you described does not happen when the wholesaler can negotiate the RIGHT price. Everything can be sold quickly if you can control two things; marketing and price.
So respect is a one-way street. Got it.
I notice you didn't actually answer the questions. Did you have the ability and intention to close? Did you "explain" to people about your non-existent partner?
Never mind. I think I know.
So OP, why do many people, not just realtors, consider wholesaling unethical? This is why.
@Richard C., it's obvious that you do not want to have or you are incapable of having a constructive debate on this topic. Which ever the case may be, I'm done responding to your sarcasm and blatant ignorance on the topic, I have wholesale deals to work on. ;)
Absolutely, brother. I hear there is an elderly widow who still owns a house.