?How do you legally execute a wholesaling transaction?

21 Replies

What are the legalities behind wholesaling? If i am not a licensed Real Estate Agent, is this ok? I am curious to know the laws & rules behind this. Thanks!

You do not need to be a licensed agent to wholesale, at least not in AZ. Check your state's laws to make sure. But basically as a wholesaler - you find properties at steep discounts, put them under contract, and assign the contract for a fee to an end buyer.

Thanks for that info. I am in CT but I will look into our laws.

Also you could always double close. Meaning you close on the property yourself and then sell it immediately to your buyer. You will have to pay closing costs but it's a way to complete the deal if you cannot assign contracts in CT.

Originally posted by @Account Closed :

What are the legalities behind wholesaling? If i am not a licensed Real Estate Agent, is this ok? I am curious to know the laws & rules behind this. Thanks!

 Great question Grace!

While I am no attorney, I am a Realtor® and Licensed Broker in the State of Arizona who does wholesale, and helps people across the country with the sales skills to do the same.  

Your ability to put a property under contract and subsequently sell it is generally protected under the Contract Clause of the Constitution (Basically says that the State can't make a law that prohibits the otherwise lawful execution of certain contracts.) 

There are some states that restrict wholesale activity (Ohio comes to mind), but there is no law against flipping property on a "double close"

It's helpful to remember in wholesaling, there are two forms of transfer of title you generally deal with.  Assignment of contract (where you simply give up your right to the contract) and Double Close (where you close with either the end use buyer's funds, or your own through transactional funding.) 

So long as you remember that you are a principal in the transaction, and act accordingly, you will be fine!

Happy hunting!

Have a Powerful Sales Day! 

Originally posted by @Karl Krentzel :
Originally posted by @Grace Tripp:

What are the legalities behind wholesaling? If i am not a licensed Real Estate Agent, is this ok? I am curious to know the laws & rules behind this. Thanks!

 Great question Grace!

While I am no attorney, I am a Realtor® and Licensed Broker in the State of Arizona who does wholesale, and helps people across the country with the sales skills to do the same.  

Your ability to put a property under contract and subsequently sell it is generally protected under the Contract Clause of the Constitution (Basically says that the State can't make a law that prohibits the otherwise lawful execution of certain contracts.) 

There are some states that restrict wholesale activity (Ohio comes to mind), but there is no law against flipping property on a "double close"

It's helpful to remember in wholesaling, there are two forms of transfer of title you generally deal with.  Assignment of contract (where you simply give up your right to the contract) and Double Close (where you close with either the end use buyer's funds, or your own through transactional funding.) 

So long as you remember that you are a principal in the transaction, and act accordingly, you will be fine!

Happy hunting!

Have a Powerful Sales Day! 

 Thanks! Hope it's the same for CT :)

@Karl Krentzel  you beat me to this post haha...I was just about to send her your name in a private message.

@Account Closed  Karl has been living the life you are asking about for a long time, so you are in good hands with his advice

wish I lived in AZ! Great responses from over there. Thanks guys 

Thanks @Brandon and @Grace... 

The good news is... it DOES work in CT... You see, there are a few things you need to know...

1.  Your Broker will not have a problem buying on your own accord.  They couldn't.. otherwise no agent who works for them could sell their own home. They will most likely require you to put some form of E&O Insurance on the transaction (even though E&O will not generally cover an assignment of contract nor double close by self agent).

Pay it anyway.  It's a cheap cost of "doing business" and it gives the Broker some cheese.

2.  The overarching theme you need to remember is that you are an American Citizen first, a Realtor® second.  Therefore, you can act on your own behalf, but you have willingly agreed to be held by a separate set of standards (The National Association of Realtors® Code of Ethics).  

Nothing in those Codes of Ethics prevents you from acting on your own behalf.  In fact, if anything, the Code itself tells you how to do it (Article 4).   Therefore, there is nothing in State law, nor the Code of Ethics that prevents you from acting as a Principal to the transaction, which is what we are really talking about after all.

3.  You are a Realtor®.  Be wary of those who try to teach you how to Invest, (Whether it be rehabbing, notes, wholesaling, or other) who are not Realtors® or have never been Realtors®.  

Our standards of conduct and expected practices are required to be a certain way.  Those ways, when done properly, result in very powerful conclusion for a Seller or Buyer.  

It is my belief that as an Agent/Investor, you are in a uniquely powerful position to help the homeowner.  Whether it be by acting on your own behalf as a wholesaler, rehabber, or landlord.... 

Or on THEIR Behalf as an agent for them with all the fiduciary responsibilities that go along with it.  

Remember, you cannot be both.  An Agent, as well as a Principal in the same transaction (without their subsequent agreement in writing, which would be stupid anyway.) 

Have a Powerful Sales Day!!

What is E&O insurance? Thanks.

Well, I now see the motivation of being here Karl. Brandon L., any relationship to Karl? We disclose such things here.

You're getting a sales pitch and any licensee in the country is NOT in Tucson Az, nor are state RE commissions viewing wholesaling in the same light as AZ may.

No one can tell you what a broker won't have a problem with, most won't touch it with a new agent.

How the Realtor Code of Ethics is interpreted officially in your area is NOT something a broker in another state may be aware of, nor do they speak for the NAR!

Ethics and what may be viewed as illegal goes beyond the knowledge, realm of expertise and professional conduct of a real estate broker, that is for an attorney to ascertain and regulators that may be involved.

I have no issue at all with members drumming up business, I do have an issue with making comments that mislead newbies, speaking as to what is ethical or legal in some other state or who won't have an issue with what.

CT is a pretty liberal state, AZ is at the other end of the spectrum with all kinds of opinions, especially speaking constitutionally from ideas formed by who knows who. In conservative areas, they are generally more business oriented, liberal areas lean toward consumers, that makes a big difference as to what people get away with in courts and with legal interpretations, I, nor anyone here can tell you what is acceptable in CT unless they are an attorney in CT.  

Realtors need to inform their broker of ANY type of transaction they may want to get involved with, they hold your license are if you open your mouth about real estate, dealing privately or otherwise, they are still responsible for what you might be pulling in public. NO ONE can tell you what your broker may have issues with except that broker! :)

    

Wholesaling, when done properly, does not require the following:

1) A Real Estate Agent License

2) Broker Permission of a Licensed Real Estate Agent

Wholesaling, when done properly, does require the following:

1) An Equitable Interest be formed by you to then assign off (an open contingency contract is not an Equitable Interest)

2) If you are a licensed agent in the same state of the transaction, full disclosure of such license status along with language stating you are acting as the principal in the transaction

Read legal case studies regarding Wholesaling in your state to get more familiar with what the courts in your area consider Equitable Interest and Wholesaling to be. Don't ask a Real Estate Agent, Broker or Association for guidance as they all don't care for Wholesalers..lol

Happy Wholesaling!/

Not totally true @Fred T.   and since you aren't a broker, you may not understand the risks a broker has with agents running the streets, the broker "owns" the agents' license, an agent doesn't freaking sneeze real estate without knowledge of the broker! Basic agency law.

Next thing most investors don't have a clue about, is that state real estate commissions, cease and desist sit orders and fines are not necessarily a judicial matter to be found in court cases, regulatory agencies have administrative authority to deal with violations in administrative hearings, which may or may not be made as public information.  

Sorry @Account Closed  BP forums is not a good place to get wholesaling information from the general public, too many wholesalers who are just beginning, no experience, lack knowledge or you'll get those selling or mentoring or you'll get the gurus. Take care who you listen to. I have nothing against wholesaling, but few here can tell you how to do it properly; It also depends on the type of property, your market, acceptable practice and the type of contract you might use, there are many variables.

I don't mentor in specific deals, I don't want the liability. If you're interested in learning you can contact me, but I don't sell anything nor do I charge for advice. Considering people have paid me more than their attorneys in deals, that's a pretty good value. But, don't abuse me either, LOL, I'll make you study! Good luck :)

@Grace Tripp - Here is a link to a good article written by a real estate attorney and overall good guy, William Bronchik. 

On occasion we will get asked by a student if “wholesaling is illegal?” oftentimes it is after a Realtor or Realtor board has told a wholesaler that it is. Please see the following article for an attorney’s opinion on this question:
http://www.legalwiz.com/license-to-wholesale-properties/

Hope this helps!

Richard

@Bill Gulley Your understand of Agent/Broker relationship may be true if the Agent is performing services for another consumer. But if they are involved in the transaction itself as a principal, and the MLS is not utilized, then the Broker has no business in the transaction not would they hold any form of legal standing.

Real Estate Commission publish hearings, so I'm not sure what the message was there.

It's not uncommon to get these types of responses from Brokers, as a matter of fact I recently had to have an Attorney write an Opinion Letter to a Broker of Record in order for them to understand the law and the definition of "For Another".

Did you know that some National Brokerages allow the Agent to take their listings and clients with them if they move to another Brokerage even though technically the Brokerage "owns" the listing? 

There is no one size fits all here...but I will say that anyone doing Wholesaling (licensed or not) should consult with their Real Estate Attorney as to the required language in the contract and overall mechanics of the transaction (what actions create an Equitable Interest) so that if someone does challenge it, that same Attorney can defend his guidance (so long as you actually followed their guidance of course..lol) in court or a Commission Hearing./

Yes, I know listings and clients go with agents and they are welcome to take them if they had that attitude being shown the door. Not just national agencies, agents are independent contractors. Again, I have no issue with wholesaling, I have wholesaled myself, that's not the issue, it's agents who think they can do anything they like and not involve the broker, I wouldn't care what that attorneys' opinion would be, he wouldn't be running my agency, I'm sure other brokers would have similar responses.

I'm also not speaking from a RE broker's perspective as much as I am from a past regulatory standpoint and compliance. Not one wholesaler on BP apparently understands that perspective. If it's all well and fine, call your RE Commission and ask if you can wholesale as it is promoted in that state, ask a regulator, not an attorney, the attorney may or may not defend you, many bail after giving bad advice. 

I agree with your last paragraph there Fred, with a good attorney.

I've mentioned this many times, but all that equitable interest stuff is fine for someone who flips a contract, but when you start flipping contracts as a business that stuff doesn't always hold water, you're in the business of real estate and you're assigning contracts to circumvent license laws, which is how they nail them in Mo., being in the business of something is much different than doing something as a personal one time investment.

Newbies are grossly mislead as to wholesaling, it's not easy, requires RE knowledge and valuation skills, understanding of a Realtor's role if they are involved and the effects of what they may do with different types of owners, by the time they have all that down, they can move on to bigger transactions. But, the hype continues. :)

I avoid blogs, for good reason, I don't need any holes in my ceiling, LOL.

BTW that attorney mentioned above is a guru using his license passing off expertise that in some respects appears to suggest violations of financial law,  with a law degree hanging on the wall giving advice that has apparent violations of law. I believe he use to be on BP, left soon after I got here as I recall, could be the other guru attorney too, seems birds of a feather stick together, so where you get advice is a critical decision. Most people naturally want to flow with the information they want to hear, that is naïve and dangerous in finance and real estate. They want things to work and an attorney can be the biggest predator of all.

I noticed too the poster mentioning Bill referred to students, so you see what I mean, this place is full of newbie wannabes, mentors, coaches, partners, gurus and the rest of the wholesaling "educators".

All RE is local.

Now, I'm outta here, I have things to do, good luck to all and stay out of trouble. :)  

Originally posted by @Myra F. :

What is E&O insurance? Thanks.

Hi Myra

I'm actually more involved in helping people avoid being scammed in real estate related activities, and investing in real estate is a side business, but here's what I think will answer your question.

E&O insurance aka Errors and Omissions insurance reduces the risk of potential lawsuits from sellers or buyers claiming the sales associates and the firms they work for had prior knowledge of any discrepancies or substandard work. I have included a link from Investopedia that goes into more detail:

http://www.investopedia.com/terms/e/errors-omissio...

Hope that helps, I'm always trying to learn more and get better.

Charles Knighton II, MSRE

President- The REI Consumer

[email protected]

www.REIConsumer.org

Thank you for the link and the explanation.  M.

Originally posted by @Account Closed :
Originally posted by @Myra Francois:

What is E&O insurance? Thanks.

Hi Myra

I'm actually more involved in helping people avoid being scammed in real estate related activities, and investing in real estate is a side business, but here's what I think will answer your question.

E&O insurance aka Errors and Omissions insurance reduces the risk of potential lawsuits from sellers or buyers claiming the sales associates and the firms they work for had prior knowledge of any discrepancies or substandard work. I have included a link from Investopedia that goes into more detail:

http://www.investopedia.com/terms/e/errors-omissio...

Hope that helps, I'm always trying to learn more and get better.

Charles Knighton II, MSRE

President- The REI Consumer

[email protected]

www.REIConsumer.org

Forgot to mention that you'll get the "I can help you" bunch. This one has a plug along with the I'm a good guy approach. I'd think using Account Closed says something, it does to me, but at least he "signed off" with a name. Kind of reminds me of non-profit credit counselors.  :)

simple answer...

1. find a great deal from a motivated seller.

2 Negotiate a great price that makes financial sense to both parties

3. Sign a purchase and sell agreement with the seller. (you can find these documents at biggerpockets/documents)

4. Find a cash buyer, flipper, landlord etc.

5. Legally connect the cash buyer to the motivated seller. (this is done with a title company.)

6. Collect the difference in price between what the seller contract is for and what the cash buyer will pay

:) 

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