Wholesaling - Legal or Not? An Attorney's Perspective
Wholesaler · Charleston, SC · Member since 2015 · 21 posts · 23 votes
Wholesaling - Legal or Not? An Attorney's Perspective
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Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
11yOriginally posted by @Heather Angelo:
First, I'm a newbie and lately I've been stalled due to the ongoing conversation/discussion on whether or not wholesaling is legal. There have been a plethora of opinions and heated discussions surrounding this topic, which unfortunately leaves newbies like me at a standstill.
Odd, when I do a search for this case, I come up with this article...
https://casetext.com/case/xarin-real-estate-v-gamb...
Unless I'm reading this incorrectly, in Appeals Court, Xarin Real Estate lost the case and was required to pay out $257,000.00. Additionally, using a case in Texas by a lawyer in Colorado in an attempt to justify wholesaling in Ohio is not a good legal opinion. Additionally, when I do a search for this attorney, he apparently fancies himself a real estate guru.
I really wish people would quit posting stuff like this - it is really misleading and clearly no research is done what so ever on the original article prior to posting.
-Christopher
87 Replies
- Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes11y
Not a lawyer and definitely not a wholesaler, but I would be concerned about using a P&S in a wholesaling transaction. Personally, I would want to use an option. I know that at least some states have a promissory fraud statute. Promissory fraud is when a promise is made when the promisor has no intent to perform on the promise.
- Denver, CO · Member since 2015 · 251 posts · 123 votes11y
Originally posted by @Richard Dunlop:
Originally posted by @Bill Hamilton:
I guess I get the argument that wholesaling is legal but it seems very gray to me. It seems it would open you up to lawsuits by your buyers and prosecution by the local authorities. Not to be critical buy why wouldn't you get your RE license instead? It would remove the doubt from your position and I fail to see a downside. Not that I am not willing to be enlightened on why you wouldn't get licensed.
Neither side is clear cut but the downside you don't see is that as a licensed agent the seller legitimately has an expectation of a fiduciary relationship.
I see what you are saying @Richard Dunlop but I was thinking that if I were to wholesale and go this route, I would not be acting as the listing agent (where I would have a fiduciary responsibility to the seller) but rather act as a buyers agent for my LLC and then selling it to whatever buyer I find. Although maybe this creates other problems I am not thinking about or aware of yet.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Originally posted by @Christopher Brainard:
Originally posted by @Heather Angelo:
First, I'm a newbie and lately I've been stalled due to the ongoing conversation/discussion on whether or not wholesaling is legal. There have been a plethora of opinions and heated discussions surrounding this topic, which unfortunately leaves newbies like me at a standstill.
Odd, when I do a search for this case, I come up with this article...
https://casetext.com/case/xarin-real-estate-v-gamb...
Unless I'm reading this incorrectly, in Appeals Court, Xarin Real Estate lost the case and was required to pay out $257,000.00. Additionally, using a case in Texas by a lawyer in Colorado in an attempt to justify wholesaling in Ohio is not a good legal opinion. Additionally, when I do a search for this attorney, he apparently fancies himself a real estate guru.
I really wish people would quit posting stuff like this - it is really misleading and clearly no research is done what so ever on the original article prior to posting.
-Christopher
And further....who could possibly think Bronchik's opinion on wholesaling is unbiased? The man sells wholesaling books and courses and has for 20+ years. Bronchik's probably made more money writing about wholesaling than doing it. What's happened to the culture of thinking and debating if we are quoting someone whose "legal" opinion is tied to income derived from such opinion.
Can we at least agree to question the source of this opinion and advice?
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Originally posted by @Richard C.:
From the thread title, I was expecting a post from an attorney. But that is not.what we got.
I know. Bummer, huh? Quoting Bronchik as legal opinion is the ultimate bait and switch
- Wholesaler · Charleston, SC · Member since 2015 · 21 posts · 23 votes11y
So, help me out as I'm a self-identified noob, is he not an attorney?
- Investor · Santa Barbara, CA · Member since 2014 · 32 posts · 7 votes11y
Wholesaling is not illegal. However, just like driving your car is not illegal, you can do illegal stuff while wholesaling or driving your car. Again like driving your car, laws can be state specific, and it good to check with a local title company (that is investor friendly) and possibly a real estate attorney (to make sure you fulfill any disclosure requirements). I've wholesaled in 5 different states and I remember wondering the same thing many years ago.
The bigger question is how to wholesale, and I'll leave that to other threads. Best of luck to you, hopefully this is an encouragement that you CAN wholesale and it is LEGAL!
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes11y
@Heather Angelo yes William Bronchick is an active Colorado attorney specializing in real estate. As others pointed out, he has made a boat load of money selling courses etc on how to wholesale.
- Accountant · Hopwood, PA · Member since 2015 · 125 posts · 92 votes11y
Simple question, and I'm not meaning to be offensive, but I will probably inadvertently offend somebody:
If a forum of real estate investors has spent years debating whether or not wholesaling is a legal venture, why would you want to get involved in wholesaling?
I realize the allure of getting into real estate with little of your own money, I really do. And I certainly believe in most cases we should not let our fears dictate our actions, as this most often leads to inaction. When the consequences are financial ruin and a potential criminal record, I think that's where I draw the line.
- Virtual Real Estate Investor · Santa Rosa Beach , FL · Member since 2008 · 76 posts · 77 votes11y
@Heather Angelo,
I'm going to try to help you here because this is a huge pet peeve of mine.
First, it's important to understand language, legal definitions, and semantics.
Wholesaling, as it relates to real estate investing, is the purchase of a property that you close on and then re-sell to another investor.
If you don't have cash or credit, can't close on it, and/or don't sell it to another investor, you are not wholesaling.
Unfortunately, the info shills who don't know what they're doing coined the term wholesaling and aggregated contract assignments into it because they don't know any better.
A contract assignment is where you contract on a property (could be a purchase and sale agreement, could be an option, could be a contract for deed) and then you assign that to another party who can be an investor or the end user.
Contact assignments and wholesaling have NOTHING in common except the lead generation methods typically used (yellow letters, probate lists, postcards, bandit signs).
That's where the similarities end.
The contracts are different. The processes are different. The income is taxed different.
They aren't the same thing.
The one point Bill didn't point out was that simply having a contract on a home isn't sufficient to obtain equitable interest, which you must have to legally market the property.
The contract must be a valid contract with good and valuable consideration changing hands and without fraudulent intent to lock up a property under the pretense that you're a buyer so you can then market it to other investors.
I actually just released a series of posts on these issues that will help clarify reality versus what the shills are selling.
Now, having said that, given your stated financial situation, your fastest path to cash is contract assignments which can be done anywhere in the U.S. with no money or credit or clearing titles or going to closings while using nothing but a computer or iPad. I do them virtually all over the U.S.
The beauty is, you can start a day with nothing and close a deal and have money wired to your account that day which you can't do with wholesaling. - Wholesaler · Charleston, SC · Member since 2015 · 21 posts · 23 votes11y
Great explanation @Vincent Polisi! Thank you and thank you for the links. I'll check them out
- 11yDev HornPro MemberFlipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
Originally posted by @Phil G.:
Not a lawyer and definitely not a wholesaler, but I would be concerned about using a P&S in a wholesaling transaction. Personally, I would want to use an option. I know that at least some states have a promissory fraud statute. Promissory fraud is when a promise is made when the promisor has no intent to perform on the promise.
An option is a legitimate and I think cleaner way to do what people call "wholesaling". I approve! It is a bit more "complicated" to explain to a seller why your option agreement is as good or better than the next guy's P&S contract (which he intends to assign).
When I use a P&S and intend to assign it, #1 the document say that and #2 I fully explain it to the sellers. Full disclosure and ethics go a long way.
- Virtual Real Estate Investor · Santa Rosa Beach , FL · Member since 2008 · 76 posts · 77 votes11y
@Dev Horn, I agree. Options are excellent vehicles to use in contract assignments. I've done a ton of them.
Full disclosure, total transparency, and ethics will keep you out of all kinds of trouble.
- 11yDev HornPro MemberFlipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
@Vincent Polisi is right - what most people call "wholesaling" is really just contract assignments, which are perfectly legal. So when people start crying about how "wholesaling is illegal" and I've heard "just like being a meth dealer", I often ask - where is your reference that proves that contract assignments are not lawful? No one has ever shown me that. Lots and lots of commentary & opinion, but no evidence, and of course contract assignments are commonplace.
Seems like many people that complain about wholesaling are struggling RE agents, or they're in some other aspect of the RE industry, and they're just upset that other people (unlicensed people!) are making $$$ while they struggle along....
- Virtual Real Estate Investor · Santa Rosa Beach , FL · Member since 2008 · 76 posts · 77 votes11y
@Dev HornYou hit the nail on the head, brother.
I can't emphasize this enough. As a mortgage banker years ago, I always required my borrowers to "proof up". In other words, show me the money.
As a real estate investor, anytime I hear someone say something, whether attorney or not, I always ask them to proof up.
If it's the law, it won't be that difficult to show it to me in writing.
You'll find that most of the Internet armchair attorneys quietly go away when asked for verification in writing. The sad thing is, they promulgate their falsehoods as facts and newbies who think they're doing due diligence don't do any due diligence on their due diligence.
And so the stupidity breeds from one generation to another.
It's painful to watch. - Investor · Henderson, NV · Member since 2015 · 42 posts · 13 votes11y
Originally posted by @Vincent Polisi:
@Heather Angelo,
The one point Bill didn't point out was that simply having a contract on a home isn't sufficient to obtain equitable interest, which you must have to legally market the property.
The contract must be a valid contract with good and valuable consideration changing hands and without fraudulent intent to lock up a property under the pretense that you're a buyer so you can then market it to other investors.
I actually just released a series of posts on these issues that will help clarify reality versus what the shills are selling.Can you provide a link to your posts regarding this topic?
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Heather Angelo well Charleston is one of those very tough markets for someone like yourself. IE trying to wholesale or assign contracts.. uber hot markets are like that.
when you have tight inventory.. REAL cash buyers by the hundreds ... and the sellers kind of know it...
If this is truly the market you want to work in I suspect you would do far better getting on a top producers team... and learn the business as an agent ... very few who think they can wholesale because its easy and cheap ever do anything with it...and that's a fact. One because to do it right its neither easy or CHEAP. you could get lucky.. but that's what it will be if you make any money without spending a bunch of money far more than you would getting a RE license.
Real estate sales or leasing or commercial or some other avenue is a career you can have for your lifetime...
I found Charleston almost 20 months ago and have done 8 fix and flips and 10 new constructions in that time... Not one were bought from a wholesaler.. And when we buy we have to proof up funds IE Liquid funds not a funny letter from some HML you find on line.
You may find some uneducated to the market condition sellers they are around but most sellers in Charleston understand whats happening..
So anyway you may want to think this through a little and one of the bigger wholesalers I know in Charleston is now working other markets because of the current market dynamics.
for me a Great RE broker is far more valuable in getting me deals than a wholesaler.
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Alan Siebenaler:
Wholesaling is not illegal. However, just like driving your car is not illegal, you can do illegal stuff while wholesaling or driving your car. Again like driving your car, laws can be state specific, and it good to check with a local title company (that is investor friendly) and possibly a real estate attorney (to make sure you fulfill any disclosure requirements). I've wholesaled in 5 different states and I remember wondering the same thing many years ago.
The bigger question is how to wholesale, and I'll leave that to other threads. Best of luck to you, hopefully this is an encouragement that you CAN wholesale and it is LEGAL!
Alan, I love your car-driving analogy.
By the way, you beat me by one state.
I've wholesaled in 4 states - IL, FL, OH, IN.
We may get a deal in GA soon too so by that time we should equal. :-)
And to those who say wholesaling is illegal, why would I be allowed to wholesale using the BIGGEST TITLE COMPANY in the whole Chicagoland (Fidelity National Title) through a law-firm that has the most HUD closing (700 closings a year) in the whole state of Illinois?
So, wholesaling is LEGAL but you have to do it RIGHT!
- Investor · Henderson, NV · Member since 2015 · 42 posts · 13 votes11y
Originally posted by @Dev Horn:
Originally posted by @Phil G.:
Not a lawyer and definitely not a wholesaler, but I would be concerned about using a P&S in a wholesaling transaction. Personally, I would want to use an option. I know that at least some states have a promissory fraud statute. Promissory fraud is when a promise is made when the promisor has no intent to perform on the promise.
An option is a legitimate and I think cleaner way to do what people call "wholesaling". I approve! It is a bit more "complicated" to explain to a seller why your option agreement is as good or better than the next guy's P&S contract (which he intends to assign).
There is a 2012 court decision in California that calls into question the notion that an option contract can convey an equitable interest. It appears that in California (and perhaps other states) a purchase contract with the appropriate contingencies is the way to go for wholesaling. I would definitely check with a lawyer.
- Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes11y
Out of 1,000 people, you might find six (6) at most who have actually read to understand the documents, forms and contracts which are part of real estate fundamentals.
Ask them the different between a grant deed and a quit claim deed, and you'll get blank stares. Ask why some states have a three party security document (I.e., Deed of Trust) and most will still have no clue. Same for filling in the blanks of pre-printed forms.
The simple fact is, most people who call themselves 'investors' including many on these forums, are lead generators without the capacity to create a cogent document and close with on-hand capital. That's fine, but an investor's it does not make them, just like attending lots of PTA meeting does not make you a parent.
At the root of the wholesalers debate is capacity and intent. If you have the ability to close but intend to assign your contract, you are an intermediary and should have no equitable rights. Even with an option, with meaningful consideration, it's pretty easy to blast through an optionee's claim absent adequate compensation and voluntary liens signed by counterparties (or at least optionor).
I know a few investors who wholesale unwanted Dealflow. Not the same as a person ego flip contracts with nit intention or ability to perform.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Wendell De Guzman title companies don't care if your wholesaling or assigning they just close and insure title... they don't regulate.
now some states you can't do double closes you must bring your own funds in to close the title companies will not let you pass the end buyers funds through.. ergo the need for transactional funding in those states.
so to equate what a title co.. does as a whole industry practice is legal they are not the law.. they just facilitate the transactions they don't render legal opinons.. just legal opinions as it relates to title issues. your a tad off base there with those comments.
- Virtual Real Estate Investor · Santa Rosa Beach , FL · Member since 2008 · 76 posts · 77 votes11y
@Ken Graham, I did provide the links and the forum mod deleted them. Apparently you can only post links as sources that you don't own which doesn't make a lot of sense for an education forum. For spam and sales soliciting, I get it, but this is purely informational with nothing sold.
Anyway, you can find them at my first name lastname dot wordpress dot com
Also, you're correct. Options don't convey equitable interest which is why you have to identify in the option agreement the intent to convey equitable interest.
This is how I have my options setup along with a clause indicating that if any legal body deemed the language insufficient to convey equitable interest the Optionor agrees in advance to perfect the documents so that equitable interest is conveyed. - Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Originally posted by @Dev Horn:
Originally posted by @Phil G.:
Not a lawyer and definitely not a wholesaler, but I would be concerned about using a P&S in a wholesaling transaction. Personally, I would want to use an option. I know that at least some states have a promissory fraud statute. Promissory fraud is when a promise is made when the promisor has no intent to perform on the promise.
An option is a legitimate and I think cleaner way to do what people call "wholesaling". I approve! It is a bit more "complicated" to explain to a seller why your option agreement is as good or better than the next guy's P&S contract (which he intends to assign).
When I use a P&S and intend to assign it, #1 the document say that and #2 I fully explain it to the sellers. Full disclosure and ethics go a long way.
I remember the first time I explained an option to a seller. I told her I'd give her $200 for a 30 day option. I explained the option would be accompanied by a purchase agreement with our agreed price and terms. If I chose to buy or I assign at the contract to another investor, the contract goes to escrow with the EM. If I don't execute my option in 30 days, then the deal is dead. The $200 is non refundable and not against the purchase price. She said "It's like getting paid to list and wait to see if there is a buyer". Of course I had to go into how I was not listing the property. But in the end, she understood the option to be what it was: my option to buy or not buy for a consideration sum. Way better than a "weasel clause".
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Jay Hinrichs:
@Wendell De Guzman title companies don't care if your wholesaling or assigning they just close and insure title... they don't regulate.
now some states you can't do double closes you must bring your own funds in to close the title companies will not let you pass the end buyers funds through.. ergo the need for transactional funding in those states.
so to equate what a title co.. does as a whole industry practice is legal they are not the law.. they just facilitate the transactions they don't render legal opinons.. just legal opinions as it relates to title issues. your a tad off base there with those comments.
Sure - title companies don't regulate the business of real estate (that's the government's job) - but the biggest title company in Chicagoland has tens of millions of dollars to lose if they facilitated the closing of an illegal transaction. You and I know that.
Also, I did not stop there. I also mentioned about using a LAW FIRM.
"And to those who say wholesaling is illegal, why would I be allowed to wholesale using the BIGGEST TITLE COMPANY in the whole Chicagoland (Fidelity National Title) through a law-firm that has the most HUD closing (700 closings a year) in the whole state of Illinois?"
My real estate attorney knows the laws in the state of IL about real estate wholesaling and how to do it right. He even knows how to wholesale HUD deals legally (which are not assignable) without needing transactional funding for the A to B transaction.
The whole point of my reply is that there are ways to do wholesaling in the right way that complies with the rules and regulations of that state. BP members need to know how to do it right using credible third party allies like a good title company and an experienced real estate attorney.
- Virtual Real Estate Investor · Santa Rosa Beach , FL · Member since 2008 · 76 posts · 77 votes11y
Originally posted by @Account Closed:
Kudos to you.
I hate "weasel clauses" because they constitute fraud in the inducement.
Unfortunately, they're sold to REI students every single day. - 11yDev HornPro MemberFlipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
WHY R.E. INVESTING - AND WHOLESALING - EXISTS...
In general, RE brokers/agents are not good sources of cash deals because they do not do the kind of marketing we do. All they can do is email you junk deals off the MLS (usually trashed out, vacant, over-priced REOs). And the "investors" (cash buyers) represented by RE agents are the worst to deal with because they are almost always clueless. I think the off-MLS world is a world in which licensed people are a bit lost. Many of my friends and associates are licensed brokers/agents, but I do NOT want to deal with a listed property or a represented buyer. Another big issue is it adds additional COSTS (commissions) that we do not need or want in these deals.
I could write a book on why the world NEEDS real estate investors, including wholesalers. The people that actually do this know exactly what I'm talking about.
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