Is wholesaling unethical?

[Felipe Regueira]

I have been grappling with a question in the back of my mind that I'd like to open for discussion here. The question is wether wholesaling is unethical or not?  I know that it is legal, but my question lies in wether it's ethical.

I would imagine that in some situations it is ethical.  A case example might be where a person inherits a pre-foreclosed property from an abusive family member and the person does not have it in them to to right the situation and keep the property.  In that case the person may want to just get rid of the property ASAP because it is traumatically triggering for them to to have it on their mind.  This case is a win-win.

In other cases there may be someone whose home is in pre-foreclosure and they aren't educated or savvy enough to figure out how to fix the situation so they can keep the home and their equity. In these cases where there is a viable solution for the homeowner I feel that it may be unethical for a wholesaler to step in and offer to purchase the home at a significant discount when all the homebuyer may need is some coaching on how to get themselves out of pre-foreclosure.  I feel that purchasing a home in this situation is unethical because it is preying on the poor and uneducated.

To be honest it is this moral dilemma that has held me back from moving forward with trying out wholesaling myself. I'd love to hear your thoughts that may argue wether it is unethical or ethical. 

[Jay Hinrichs]

Quote from @Guy Gimenez:

As a practice, it is perfectly ethical. In reality, many involved in the practice are unethical. But this is in any and every industry. I've seen assignors needlessly take homeowners into foreclosure merely because the assignors didn't want to let the homeowner out of the contract so an investor could purchase the home. Only you can decide on which side of the line you choose to walk.

out here in the left coast there are laws pertaining to folks in foreclosure.. In Oregon you must be a Licensed foreclosure consultant .. your limited to comp etc etc. penalties are quite stiff if you violate the consumers rights.

[David Ramirez]

Hey @Felipe Regueira, 

Wholesaling is just like any sales business, and its ethics depend on the standards and values of those involved. As a wholesaler, it's important to ensure that the seller genuinely needs your service and that your offer is their best option. In my company, we assess each situation and, if we believe the seller would be better off listing with a realtor, we honestly communicate that. About half the time, sellers prefer to avoid the realtor process due to various reasons like urgency, property condition, privacy concerns, or avoiding commissions. The other half appreciates our honesty, and we refer them to a realtor who can better meet their needs.

Having previously flipped houses, I can confirm that wholesaling plays a crucial role in real estate. Flippers and investors often lack the time or resources to market directly to sellers and negotiate deals. They are willing to pay a slightly higher price for discounted properties because wholesaling saves them time and effort.

Set standards and values, go by them! 

[Guy Gimenez]

As a practice, it is perfectly ethical. In reality, many involved in the practice are unethical. But this is in any and every industry. I've seen assignors needlessly take homeowners into foreclosure merely because the assignors didn't want to let the homeowner out of the contract so an investor could purchase the home. Only you can decide on which side of the line you choose to walk.

[Mason Liu]

I like to think of it as the seller being willing to pay a certain cost for the ease of transaction / solving of their issues. Now, it certainly can still be unethical if the wholesaler spreads false information in the hopes of coercing a seller to sell the property, regardless of price. However, if the seller understands why the wholesaler is offering the price he/she is offering and accepts the discount in exchange for the ease of transaction, I think a case can be made where it is indeed a ethical practice.

I think it is also relevant to know that most sales channels that are not Direct to Consumer/Business will have a wholesale component to it, where the middleman and the dealer negotiate a price to transact on where the middleman will make a premium by selling to the end consumer.

[Ben Firstenberg]

This is a really interesting question. I think it depends a lot on the situation and your mindset/attitude about it. 

For example, in the situation you described where the person isn't savvy enough... maybe you're taking advantage, but banks and other institutions will take even more advantage. They'll trash the person's credit, charge them fees to infinity and bleed them dry if they have to. If you can make them a somewhat respectable offer that lets them get out of the deal without losing their savings or worse... maybe that's not such a bad thing?

Maybe you could also develop some materials that you could provide to wholesale clients along the way about best practices for buying/owning a home? Something like "Never end up in this situation again!" You could be the coach you're describing. 

[Jay Hinrichs]

Quote from @Guy Gimenez:

As a practice, it is perfectly ethical. In reality, many involved in the practice are unethical. But this is in any and every industry. I've seen assignors needlessly take homeowners into foreclosure merely because the assignors didn't want to let the homeowner out of the contract so an investor could purchase the home. Only you can decide on which side of the line you choose to walk.

out here in the left coast there are laws pertaining to folks in foreclosure.. In Oregon you must be a Licensed foreclosure consultant .. your limited to comp etc etc. penalties are quite stiff if you violate the consumers rights.

[John Slater]

Depends what you and your contract are saying...  For me wholesaling generally then wholesaling people in foreclosure has the additional risks.  

When you're speaking with a seller, you contract is promising to purchase their property, which is a lie... as a wholesaler you have zero intention to purchase it.  You have an assignment clause in the contract giving you the right to assign, not that the seller really understands that bit, but... what if you can't find a buyer?  Will you close yourself?  NO!.... now imagine working with a homeowner in pre-foreclosure which in my state is a non-judicial foreclosure system, 111 days start to finish, and as a wholesaler you put the property under contract, work hard to find a buyer but can't, and somewhere down the line you decide to back out, "sorry mr homeowner, I changed my mind....", but now they're 30,45, 60 days further into the pre-foreclosure period because a wholesaler "couldn't find a buyer".... If you're going to wholesale, be 1000% certain you covered your *** and be careful promising on pre-foreclosures..  It's all good until someone gets hurt, then it's a problem.  

But Yes, I've wholesaled as well, and wholesaled a pre-foreclosure, but as a last minute decision when I had had the intention to close and flip myself.  Something came up and it made sense to wholesale out.

[Eliott Elias]

It is not illegal in all states. It is unethical if the wholesaler is unethical. Wholesalers solve complicated issues, and take a lot of irresponsible people out of bad situations. Investors want a deal on a silver platter without having to deal with the BS wholesalers do. 

[Alex Ficco]

Quote from @Eliott Elias:

It is not illegal in all states. It is unethical if the wholesaler is unethical. Wholesalers solve complicated issues, and take a lot of irresponsible people out of bad situations. Investors want a deal on a silver platter without having to deal with the BS wholesalers do. 

Love that. 100% true. If you run a direct to seller model for any amount of time, you think you've heard it all... until tomorrow. Always something to problem solve or get creative with. The 'easy button' is a massive benefit for the right seller and it actually feels really good when you're able to help out a seller like that in a way where no other option would have got the job done. People forget that 9/10 seller's main goal in the sale is highest net proceeds. Those are listings. We are able to transact with the 1/10 where highest net proceeds may be towards the bottom of their list of goals. I've seen people come and go with less-than-great ethics, but it's a very important component to do deals in the long term. 

[Sheri Fluellen]

My husband and I are Realtors, but for me that is secondary to my identity and work as a Investor.  Some Brokerages don't allow wholesaling with their agents b/c of the increase liability and possible conflict of interest.  For what it's worth, we are constantly looking for distressed properties ourselves.  And when we meet with a potential listing client OR an off-market lead, we share both sides of the coin.  And sometimes, people choose to sell to us off market because they just don't want the headache of listing.  As another said, it boils down to the ethics of the one doing it.  I am also a Psychologist and Certified High Performance Coach.  And I am VERY conditioned to always think of the ethics.  Others before myself. So I think about it like "informed consent" when you go to the Drs office.  What are the options, and what are the pros and cons.  That way I am genuinely collaborating with the seller not trying to pull a fast one.

[Don Konipol]

Quote from @Felipe Regueira:

I have been grappling with a question in the back of my mind that I'd like to open for discussion here. The question is wether wholesaling is unethical or not?  I know that it is legal, but my question lies in wether it's ethical.

I would imagine that in some situations it is ethical.  A case example might be where a person inherits a pre-foreclosed property from an abusive family member and the person does not have it in them to to right the situation and keep the property.  In that case the person may want to just get rid of the property ASAP because it is traumatically triggering for them to to have it on their mind.  This case is a win-win.

In other cases there may be someone whose home is in pre-foreclosure and they aren't educated or savvy enough to figure out how to fix the situation so they can keep the home and their equity. In these cases where there is a viable solution for the homeowner I feel that it may be unethical for a wholesaler to step in and offer to purchase the home at a significant discount when all the homebuyer may need is some coaching on how to get themselves out of pre-foreclosure.  I feel that purchasing a home in this situation is unethical because it is preying on the poor and uneducated.

To be honest it is this moral dilemma that has held me back from moving forward with trying out wholesaling myself. I'd love to hear your thoughts that may argue wether it is unethical or ethical. 

If you lie it’s unethical. If you tell the truth it’s ethical.  

[Lydia R.]

Quote from @Felipe Regueira:

I have been grappling with a question in the back of my mind that I'd like to open for discussion here. The question is wether wholesaling is unethical or not?  I know that it is legal, but my question lies in wether it's ethical.

I would imagine that in some situations it is ethical.  A case example might be where a person inherits a pre-foreclosed property from an abusive family member and the person does not have it in them to to right the situation and keep the property.  In that case the person may want to just get rid of the property ASAP because it is traumatically triggering for them to to have it on their mind.  This case is a win-win.

In other cases there may be someone whose home is in pre-foreclosure and they aren't educated or savvy enough to figure out how to fix the situation so they can keep the home and their equity. In these cases where there is a viable solution for the homeowner I feel that it may be unethical for a wholesaler to step in and offer to purchase the home at a significant discount when all the homebuyer may need is some coaching on how to get themselves out of pre-foreclosure.  I feel that purchasing a home in this situation is unethical because it is preying on the poor and uneducated.

To be honest it is this moral dilemma that has held me back from moving forward with trying out wholesaling myself. I'd love to hear your thoughts that may argue wether it is unethical or ethical. 

 Speaking as a wholesaler and as an investor, I dont think your ethical dilemma is limited to wholesaling. The basic principle of investing is to buy at a discount. There is no difference between a wholesaler contracting a house and assigning it and an investor going to that same house and making the seller an offer. The investors objective is exactly the same as the wholesaler. Buy the property as cheaply as possible. 

You are making the assumption that every sellers objective is to get the most money from the sale of their house. I can tell you from personal experience (Ive been wholesaling full time for nearly 8 years) that there are situations where the seller is more concerned about something else other than how much money they are getting for the house. Ive had sellers call me 2 days before the foreclosure auction, desperate for a last minute solution. At that point they are out of options other than someone who can write a big check at a moments notice. And If I am the one writing that check, you better believe I want to be getting a great deal. I had a seller basically trade me their house for an RV because what he really wanted was to pack up his dog and a few pairs of underwear and drive across the country in an RV. He did not care about the money from the sale as much as he cared about cutting all his strings and feeling free. 

So when it comes to investing as a profession you have to ask yourself if you have what it takes to buy houses at a discount. You dont have to lie, you dont have to misrepresent or obfuscate but you do have to have the objective of making money, otherwise you just started a very expensive hobby. You also need to keep in mind that we dont make the messes that sellers find themselves in. We are simply the clean up crew. We come in and solve a problem that was not of our own making and we expect to get something out of it in return. 

You are going to have to make your peace with this if you are going to jump into the world of investing. You have complete autonomy over your own actions. You can choose to pass on a potential deal because you feel the seller could make more by listing the property or if there is a way to get them out of their financial difficulty and help them keep their home you are free to help them with that course of action. No one is forcing you to buy every deal. You can consult your conscience and your own moral compass and let that guide your decision making. 

[Tim Bee]

You explain to the prospective seller what the real market rate is.  Then when they sell for 20% less they have at least been made aware.  Not sure how good that would be for your business model.  But at least you're being honest.

[Rachel H.]

@Felipe Regueira Regarding your question, I don't think there's an issue as long as you're open with the seller and they know what you're doing. Issues come up with investors when they are not transparent with the seller and hide the fact their intentions of wholesaling the deal to other investors. If you tell the seller what you're doing and they get what they want out of the deal, usually it's not a problem for me if I make money off the deal. If it's an issue with a seller, it's best to work with another seller who's more open to working with you. 

Lately, I've been wholesaling mobile homes and it's worked out great! I just closed a deal in 3 days from beginning to end helping a seller find a buyer for a mobile home on his land. Hope that helps!