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
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes11y
I love this:
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.If I can vote 10 times for your post, I would :-)
I totally agree with you Dev and I know exactly what you are talking about.
Originally posted by @Dev Horn:
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Dev Horn I will take deals any way I can get them.. But for my Charleston deals I have two very good agents.. who have brought me all my deals 18 so far and a 25 lot subdivision .. I also know one of the top wholesalers there and he has never brought me anything as good or profitable as my agents have... so I think like all things it just depends... In general though and just like there are wonky wholesalers that just try to resell MLS stuff LOL... there are agents that are not that swift as well and really don't know what a deal is or is not. then is comes down to what region your in.
I found it interesting to note that in MI if you sell more than 4 props in a year you need to be licensed.. those cheapies in Detroit I bet guys sell them by the hundreds with no thought of licensure.
- 11yJill DeWitPro MemberInvestor · Scottsdale AZ · Member since 2015 · 1k+ posts · 423 votes
Originally posted by @Dev Horn:
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.
-------------------
Thanks, Dev. Great post!
I have found that many RE agent/brokers don't want to deal with smaller transactions because the commission is so low that it is not a good use of their time. I would feel the same way!
There are many great, honest, wholesalers out there - for all types of properties and happy to be in that club!
Sometimes I want to shop for something on my own and save $. (buy wholesale) Other times I want to pay more for the extra service and guidance. (buy retail - pay a commission & higher cost)
There is definitely a great need for both brokers and wholesalers.
- Jill
- 11yJill DeWitPro MemberInvestor · Scottsdale AZ · Member since 2015 · 1k+ posts · 423 votes
Originally posted by @Dev Horn:
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.
-------------------
Thanks, Dev. Great post!
I have found that many RE agent/brokers don't want to deal with smaller transactions because the commission is so low that it is not a good use of their time. I would feel the same way!
There are many great, honest, wholesalers out there - for all types of properties and happy to be in that club!
Sometimes I want to shop for something on my own and save $. (buy wholesale) Other times I want to pay more for the extra service and guidance. (buy retail - pay a commission & higher cost)
There is definitely a great need for both brokers and wholesalers.
- Jill
- Investor · Saint Louis, MO · Member since 2014 · 113 posts · 43 votes11y
When you are wholesaling you are not selling a property. You are selling the contract to purchase that property. If you happen to actually buy the property, then you own it and can sell it.
- wholesaler/aspiring investor and flipper · Sweetwater, TN · Member since 2015 · 32 posts · 7 votes11y
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Originally posted by @Heather Angelo:
:) Certainly not trying to cause any issues. If anything, I'm trying to resolve them according to current law.
Don't you find it odd that this guru used a Texas case to argue Ohio law?
Guess what they don't teach much of in law school.....Administrative Hearings vs Courts.
Any idea of how often I argued with attorneys as a regulator? Lots, and I never lost.
A Real Estate Commission is empowered to define and interpret the laws under its jurisdiction, as well as related laws, it also is charged to identify violations as it interprets those laws and to fine violators administratively as it deems appropriate.
An administrative hearing by a federal or state agency is where you sit there while they act as the prosecutor, judge and jury. In their sole opinion, if that hearing board believes you are in violation, then you're in violation. They also look to the intent of actions of violators and with their broad discretion, they can apply opinion that they understand that address the spirit of the regulation, it's purpose.
Most attorneys do not want to go to regulatory hearings, because they lose so often.
Now, after your hearing, you can continue through due process and take the matter to court. The only one there who wins is your defense attorney, everyone else is on a salary. See how often a judge overturns an administrative hearing, look it up, it won't be very often. A fine may be reduced, knowing you just blew money over the same matter to make the infraction more equitable, but the chance of you walking out a winner is slim and none!
There are four paths to take for newbie wholesalers:
1. Blindly go where gurus lead you, weigh the benefits and the consequences, assess the risk and act accepting those risks.
2. Don't wholesale trying to out smart the powers that be, you won't win, but you're not doing business in that manner.
3. Don't wholesale as the gurus teach, take title, use transactional funding, close in your name, then sell it.
4. Be inside a business entity with several of your buyers. Understand what they will buy. Contract in the name of that entity. Then, through the accounting of each capital and asset accounts, have the "buyer" fund the transaction taking title in that entity and set the management and disposition of that property over to that "partner". You get paid by the entity. You cal also admit new partners and allow partners to withdraw from the entity. When they leave, they can take their toys and assets with them.
Look like 4 simple options to me. Choose one and good luck :)
- Flipper/Rehabber · Mount Pleasant, SC · Member since 2013 · 547 posts · 235 votes11y
As with most things in business and in life, there is a right and a wrong way to work a wholesale deal.
I am NOT an attorney. We have done wholesale closings with 4 different law firms in the past 6 months. These attorneys have guided us to the "right" way to assign a contract in SC. These attorneys assure me that our transactions are 100% legal.
My own love for people and underlying ethics are summed up in one of my favorite quotes "I will engage in no transaction that does not benefit all whom it affects" - Napoleon Hill, "The Laws of Success" 1929
A good, honest wholesaler leaves every party to the transaction smiling. Our sellers are thrilled with the easy process I offer. We pay their closing costs (in most cases), the sellers endure very few showings, no clean-up or repairs required. 90% of the sellers we work with have rejected the traditional process of working with a realtor or broker, or have been rejected BY realtors and brokers because of the condition of their property and/or their lives. We have several realtors who recommend wholesale seller candidates to us because they don't want to deal with the difficult situations. We compensate these realtors with listing referrals. We have helped active drug addicts, extreme hoarders, and tired property owners of all types by contracting to buy their property and either closing on it and reselling with title or by assigning the contract. I am very careful to explain the process to my sellers. I explain that I am not an agent or a broker and that I cannot represent a seller, I can only represent my own business interests. I explain the I will eventually assign the contract to a partner. If the seller is not comfortable with assignment, we close on the transaction and take title. When we assign a contract, I stick with the seller and the end buyer through the entire transaction and I usually attend the closing as a friend to the seller and a friend to the end buyer.
We wholesale one deal a month on average and buy/rehab/resell 6-8 homes per year here in Charleston, South Carolina. We love buying assigned contracts from wholesalers, and we love assigning to other investors. A legal, honest, and open wholesale transaction is a BIG win-win.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
That's all good, except the "we assign to a "partner"". In the number 4 above, you actually have a partner. We had discussions here about "partners" and "prospects" they aren't the same thing.
I have told sellers that I'm in touch with other investors, some friends that can purchase. I never claimed they were partners because they aren't a business partner which is the implication. A seller doesn't think someone is talking about their bowling partner or their drinking partner. A prudent person assumes a business partner, that goes deeper as to your responsibilities to your partner, having authority to deal, the ability to bind your partner. That means any weasel clause may not work, you should know your partner wouldn't accept a pink house or obvious defects. Having imaginary partners can get you into trouble!
I've said this in every wholesaling thread I think, I'm not against assigning a contact, or wholesaling when it is done properly, ethically and legally. The problem is, the 90% of the newbie wholesalers following some guru approach and not understanding what homeowners may do when they are mislead. I've also said, a seller doesn't care who buys the place, so why not spill the beans and be totally up front?
I'm done :)
- Professional · Nokomis, FL · Member since 2013 · 123 posts · 99 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, You are correct that it is NOT illegal to drive a car... AS LONG AS YOU HAVE A LICENSE.
- Wholesaler · Columbia, SC · Member since 2015 · 123 posts · 15 votes11y
@Russ Scheider, thanks for your answer! I'm an SC investor/wholesaler and it's always good to hear the perspective of investors in my market.
- Wholesaler · Charleston, SC · Member since 2015 · 21 posts · 23 votes11y
Thanks so much for this response. It's incredibly interesting to me to hear how many investors assume that because one is exploring wholesaling, they must be doing something underhanded or have the intent to screw someone over. It's also interesting to hear how many assume that because I'm a self identified noob, I must be completely uninformed and wanting to jump in with enough info to get myself and others in trouble. (Who gave the gun to the baby?)
I've spent a great deal of time reading the laws, the court cases from around the country, MANY books, etc and I've spent a great deal of time building my plan and mission that my business will be built around. In my professional life, I'm a project manager, governance analyst and process improvement specialist. I likely spend more time than most planning and setting up with keen attention to regulations and compliance. But why argue, right? I'm just looking for input from the trenches, so to speak.
That said, your business model and mission speak to me as they are very similar to mine. My brand will be built around transparency, integrity and I will NEVER complete a deal that is not a win win win, and my sellers will know that.
Since you are in Charleston, if you're open to it, I'd love to maybe meet for a cup of coffee (my treat :) ) and pick your brain, maybe run my business model by you.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Heather Angelo I see a BP Charleston Meet up in the offing ..
We are having a BP meet up in Portland next week that I am hosting and we will get a fairly decent turnout I believe.. you may want to work with Russ ... and get a number of like minded folks to the same spot.. that way y'all can network a little more ...
Also as a antidotal suggestion.. RE success definitely hinges on your sales skills, you can have all the systems and process's in place but you should spend some time reading up on how to close a deal... How to ask for an order,,, etc etc.. this is one thing I see agents that have worked for me over the years neglect and to their detriment. Especially in the uber competitive market that you live in.. there is no secret to how to find leads .. its what you do with them and how you handle them will be the difference between success and failure.
- Marietta, GA · Member since 2015 · 117 posts · 23 votes11y
I'm glad we are turning this into a long crusade. We can always use more problems. People have different interest and ox's drop it.
- 11yJill DeWitPro MemberInvestor · Scottsdale AZ · Member since 2015 · 1k+ posts · 423 votes
Originally posted by @Ryan Dossey:
There is no gray area.... If you just purchase the property. Then resell it.
Well said Ryan. It is that simple. No funny business. Buy good properties at a great price, pay cash, and roll them into your inventory and market until they sell.
Appreciate your "to the point" answer. Sometimes I think people get hung up because they can't believe the big picture concept is that simple.
-Jill
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jill DeWit this difference is these folks are buying homes that cost in many instances 100's of thousands.. they are not buying tax sale worthless land for 2k a parcel. big difference.. plus competition for said homes is keen ... not so with the millions of vacant parcels scattered throughout the West.
But yes very simple solution is to just buy what you contract for and resell..the issue is this wholesaling attracts those getting started and that have limited funds to no funds.. they are the one's who read the no money down no credit books.. And all the RE information sellers recommend that folks start with this process as the way to break into the business so that they can earn a living then become buy and hold investors which is pretty much the theme of each of these folks.. and the progression they want to do.. Along with working for themselves and getting out of the corporate grind. that's the dream RE is the answer to financial freedom. the issue at play is its not that easy and the inventory at least for housing in many markets is very tight and there are too many wholesalers and not enough deals. therefore 99 out of a 100 who attempt this with no money no credit will blow what little they have on marketing and will be still stuck at their day job this time next year.. as opposed to maybe getting in to the industry in another capacity that will give them a career...
I suspect the list of wholesalers that have made a living at this for more than 24 months is a short one.. you have the very few that dominate a certain market.. but most of those at some point are licensed as well.
- Flipper/Rehabber · Mount Pleasant, SC · Member since 2013 · 547 posts · 235 votes11y
@Jay Hinrichs @Heather Angelo I am hosting an Investors Happy Hour at the Charleston Harbor Fish House on Sept 15. Inbox me your email address and I will send you the Evite. All are welcome.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
I never meant to imply you were out to do anyone in or that your intentions were not genuine.
I haven't read all the posts in this thread. I've seen these threads, they are all over this topic and usually, the same people post the same stuff.
You mentioned or implied you feel that you're on top of this from your "studies".
I would have confidence in someone who was a CPA or perhaps a law student in reading statutes and getting that big picture in focus, I've found over the years that when a layperson reads materials with preconceived ideas or an agenda, their understandings are skewed, partly due to human nature.
Experience has taught me a lot.
RE is much different than selling shoes, what you say, how you say it, when you say something, the way you say things makes an implication to others, we deal based on written agreements, Statute of Frauds, that doesn't mean that what is said or implied getting to that contract isn't important, it is.
This is an area where newbies can find trouble.
A seller can be misled unintentionally, easily, if they think they have a done deal with a wholesaler they will act as any other seller would in doing other things while relying on your performance.
Look up tortuous conduct, in law, it applies in all states.
Can you mention just four things a prudent seller might do thinking they have a buyer for their home, within 30 days of a closing date?
This is the type of thing that isn't in RE books, guru tales, or statues, it's reality.
Misleading a seller, by what is said or implied can have consequences, a ticked off seller is not a happy camper, especially if they feel like they were jerked around taking their property off the market while some wholesaler went out to beat the bushes to make some money off them and then failed to perform.
A seller has every right to expect performance in a contract, if you fail and they acted in other matters, that can cause additional financial damages, tortuous conduct and a wholesaler will lose 90% of the time so long as that seller acted prudently.
It's not just about the agency laws, the contracts, how you claim an equitable interest, it's about reality of the consequences of your actions. :)
- Flipper/Rehabber · Mount Pleasant, SC · Member since 2013 · 547 posts · 235 votes11y
@Bill Gulley spoken like a true resident of the Show-Me state! We lived in STL for 5 years. Very skeptical, you Midwesterners.
All jokes aside, Your point is well-taken. I consider the majority of people on my buyers list friends and explain this to my sellers. I speak of "investor-friends".
Based on your advice, I will be a bit more careful with the word "partner". Although my lawyers have specifically approved that description when I have a signed assignment agreement.
I endeavor to be crystal-clear with everyone involved in my transactions. A bit of a tightrope walk at times.
Thanks for your input. I will keep it in mind.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
LOL, Yes, this Missouri mule has to be shown, problem is, I don't believe everything I see either.
I'm surprised your attorney missed the legal implications of "partner" and how partners are expected to be bound and perform. I'd stick with another terms, known associates, investors, interested parties, prospects......something that keeps that end buyer and myself from being seen as acting together to advance some business interest.
Good luck :)
- Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes11y
Originally posted by @Jay Hinrichs:
@Jill DeWit this difference is these folks are buying homes that cost in many instances 100's of thousands.. they are not buying tax sale worthless land for 2k a parcel. big difference.. plus competition for said homes is keen ... not so with the millions of vacant parcels scattered throughout the West.
But yes very simple solution is to just buy what you contract for and resell..the issue is this wholesaling attracts those getting started and that have limited funds to no funds.. they are the one's who read the no money down no credit books.. And all the RE information sellers recommend that folks start with this process as the way to break into the business so that they can earn a living then become buy and hold investors which is pretty much the theme of each of these folks.. and the progression they want to do.. Along with working for themselves and getting out of the corporate grind. that's the dream RE is the answer to financial freedom. the issue at play is its not that easy and the inventory at least for housing in many markets is very tight and there are too many wholesalers and not enough deals. therefore 99 out of a 100 who attempt this with no money no credit will blow what little they have on marketing and will be still stuck at their day job this time next year.. as opposed to maybe getting in to the industry in another capacity that will give them a career...
I suspect the list of wholesalers that have made a living at this for more than 24 months is a short one.. you have the very few that dominate a certain market.. but most of those at some point are licensed as well.
Jay
Well said about Wholesaling is area specific, where the cash buyers are buying RIGHT NOW, not 6 months ago.
If more people would get their RE license and offer home sellers
- cash
- listing
- lease option
- sub2
- installment sale
- joint venture (minor rehab)
This is called
Don't be a One Trick Pony, Be a Transaction Engineer :)
- Investor · Thousand Oaks, CA · Member since 2012 · 176 posts · 47 votes11y
It's no different that assigning a commodities contract. 1000's of people do that every day.
If you're doing it correctly, all you're doing is selling the right to purchase the property. There might be some nuances depending where you are, but essentially that's all it is.
It is not illegal. You're not acting as a fiduciary to any seller or buyer.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Originally posted by @Josh Justiniano:
It's no different that assigning a commodities contract. 1000's of people do that every day.
If you're doing it correctly, all you're doing is selling the right to purchase the property. There might be some nuances depending where you are, but essentially that's all it is.
It is not illegal. You're not acting as a fiduciary to any seller or buyer.
When will, or how can we get, people to understand that real estate is not the securities market, or selling personal property is not the same as RE, that different laws apply, how do we get that across, that flipping contracts on hog bellies isn't the same as real property. :)
- Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes11y
Originally posted by @Bill Gulley:
Originally posted by @Josh Justiniano:
It's no different that assigning a commodities contract. 1000's of people do that every day.
If you're doing it correctly, all you're doing is selling the right to purchase the property. There might be some nuances depending where you are, but essentially that's all it is.
It is not illegal. You're not acting as a fiduciary to any seller or buyer.
When will, or how can we get, people to understand that real estate is not the securities market, or selling personal property is not the same as RE, that different laws apply, how do we get that across, that flipping contracts on hog bellies isn't the same as real property. :)
I think Josh's point was that contract law is not specific to the underlying contract. In other words, contract law doesn't distinguish between a contract to have someone wash your car and a contract to sell an apartment contract -- if both contracts are assignable, then contract law looks at them equally.
I think the point Josh was ignoring was that obviously, within each industry, you'll have other rules and laws that extend above and beyond the limitations of contract law. For example, a contract to murder someone may legally be assignable within the scope of contract law, but it's safe to say that there are other laws that would make buying or selling that contract illegal.
Yes, it's legal to assign a real estate contract (assuming the contract doesn't say otherwise); the question is whether other laws are being broken or not throughout the execution of the transaction.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
I'll buy that Jason! But, the subject matter makes the difference! Need to also look at the contract having a legal purpose to be valid, might have issues with that too. :)
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