Why/how do wholesalers not actually own the house?

Wholesaling
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Why/how do wholesalers not actually own the house?

Macintyre Gallagher
Phoenixville, PA · Member since 2017 · 8 posts · 1 vote

How does someone wholesaling not actually ever own the house or have to pay expenses? What is the difference between them buying it and me buying it?

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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
9y

@Macintyre Gallagher,

It's called contract assignment - they're selling YOU the right to take their position in a P&S contract. It's a common business practice, though often done wrong by wholesalers.

They've entered into a P&S contract with a seller. This gives them "equitable interest". They then can exercise an option to assign their position in that contract to someone else, preferably with the seller's knowledge and permission. As long as everyone agrees, there's usually no problem.

The wholesaler assigns their position in the contract to an end buyer. The end buyer closes with the seller and pays the assignment fee out of their (the buyer's) funds at closing.

In some states which are wholesale averse, it's often necessary to do what's called a "back-to-back" closing. The wholesaler completes the purchase from the seller using transactional funding, then sells to you when that closing is complete. The wholesaler takes profit from a small markup agreed to with the end-buyer in course of negotiations.

Hope this helps.

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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    9y
    Because they're selling you the right to the agreement of sale to purchase the property, by assignment transfer, not actually selling you the house, Anyway, hope this helps, Best, Dave
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  • Macintyre Gallagher
    OP
    Phoenixville, PA · Member since 2017 · 8 posts · 1 vote
    9y

    Thank you, but how do the wholesalers actually obtain the "right" that they then sell?

    Thanks,

    Mac

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Macintyre Gallagher,

    It's called contract assignment - they're selling YOU the right to take their position in a P&S contract. It's a common business practice, though often done wrong by wholesalers.

    They've entered into a P&S contract with a seller. This gives them "equitable interest". They then can exercise an option to assign their position in that contract to someone else, preferably with the seller's knowledge and permission. As long as everyone agrees, there's usually no problem.

    The wholesaler assigns their position in the contract to an end buyer. The end buyer closes with the seller and pays the assignment fee out of their (the buyer's) funds at closing.

    In some states which are wholesale averse, it's often necessary to do what's called a "back-to-back" closing. The wholesaler completes the purchase from the seller using transactional funding, then sells to you when that closing is complete. The wholesaler takes profit from a small markup agreed to with the end-buyer in course of negotiations.

    Hope this helps.

    4Reply
  • Stanley Parsley
    Investor · Chandler, AZ · Member since 2015 · 409 posts · 214 votes
    9y

    in most states the transaction of wholesaling is illegal

    the wholesaler-person who has the contract does not have the funds to purchase the property making it a illegal transaction

    when it is assigned-sold to the buyer for profits with no intention of being a backup purchaser this is also illegal

    at closing- when the two contracts are closed the wholesaler is responsible for the gain on both transactions of the property- if not doing this, the transaction is considered evasion by the wholesaler

    the wholesaler is responsible for the selling cost and the purchasing cost-6%- three to buying agent and three to listing agent

    legally you cannot commit fraud to make a real estate deal

    most are selling contracts for gain

    it is not wholesaling

    enjoy

    2Reply
  • Macintyre Gallagher
    OP
    Phoenixville, PA · Member since 2017 · 8 posts · 1 vote
    9y

    Thank you all so much for the help.

    - Mac

    0Reply
  • Joshua Howaniec
    Contractor · Indianapolis, IN · Member since 2016 · 267 posts · 144 votes
    9y

    This topic has consistently frustrated me because I've never actually seen an attorney weigh in and I always hear it both ways. 

    I'ld like to pit @Stanley Parsley and @David Dachtera in a discussion to see why the differences of opinion but I won't do that for sake of keeping the peace. 

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Joshua Howaniec,

    It's not between me and anyone else. 

    Wholesalers tend to "sell the property" rather than their position in the contract: "I have a xBR / xBa house ... great deal" instead of "I have a contract accepted on (property), it's a great deal, I'll sell you my position in the contract" or "... I'll assign the contract to you".

    By doing it wrong, they're raising the hackles of everyone from the NAR to the local and state government officials. By doing wrong they are, literally, "acting as an unlicensed agent / broker".

    They're also doing something arguably illegal: they have the right to sell their position in the contract. They do NOT have the right to sell the property itself.

    "It's not what you say, it's how you say it".

    THAT is what prompts legislation to prevent contract assignments in real estate, an otherwise perfectly normal, legal and common business practice.

    What Stan is talking about sounds like a hybrid between contract assignment and "back-to-back" closings. What he's describing is not wholesaling. I'm not sure what it is.

    3Reply
  • Joshua Howaniec
    Contractor · Indianapolis, IN · Member since 2016 · 267 posts · 144 votes
    9y

    @David Dachtera I apolagize if what I said sounded aggresive and agitated. Not my intentions. 

    Thank you for clarifying. As I am wholesaling and still new to it I am very aware of the language other wholesalers use like "we will buy your house cash" when nearly all of them never do so and could never do so, they just find another buyer. That subtle deciet bothers me. 

    I will take your counsel and make sure my business falls under legality and honesty. 

    Thanks again 

    0Reply
  • Matthew Perry
    Developer · Boston, MA · Member since 2017 · 125 posts · 137 votes
    9y

    I agree with everything @David Dachtera just said. I have done a ton wholesale deals over the last couple years and it is exactly a case of I have created a contract and I am selling the contract more often than not for a small premium. Never once have I led with I got a deal at 123 45th St- its a three bedroom three bath unit anyone interested. Instead I go my network of investors who I have worked with an said I have an option or signed agreement to buy a property I got it at x% off any interest? Or if there are delicate laws I will take the property on myself and then sell an lease to sell option to an investor over the next year. Every problem has a solution just a question of how creative you are looking to be with it.

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    I think there needs to be a distinction between "wholesaling" and flipping. When you see the term "wholesale" there are some that are referring to flipping and other to contract assignment. There are not many legal ways to assign contracts in FL with the exception of being licensed. I am aware of a local case where a "wholesaler" put a property under contract with no intention to close. They took through several "inspectors" who were actually people the unlicensed broker was attempting to sell the house to. It is now going to court. The owner signed a contract and then failed to close. The unlicensed broker just filed a suit. The defendants attorney is filing a counter suit for FRAUD, FDUPTA, and brokering without a license in violation of 475.43. That is the problem with most of these people--they don't have funds and have no intention of purchasing. Many owners are victimized by these scammers.

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @John Thedford,

    Yet another case of "doing it wrong".

    There is probably one ONE way to LEGALLY assign a contract in ANY jurisdiction, and it's spelled out in the law. I'm sure it's NOT limited to real estate, but encompasses any and all areas of business, whether that be assigning a contract to purchase a business, a piece of real property, a piece of industrial equipment, items of personal property, etc.

    I hate to have to say it, but education is ALWAYS key. See my profile.

    2Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Matthew Perry,

    Ideally, when you're putting a property under contact it will be something you sought out specifically for a specific buyer from your buyers list because its what they said they want to buy. In essence, you're just an "order taker", and you're going forth into the market place to fill the buyer's order.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @David Dachtera  state of Oregon just included the dealing or selling of equitable interests as an activity that is governed by real estate commission IE needs a license.. won't stop anyone.. but if they get turned in.. they will lose..

    you need to CLOSE then resell.. simple as that.. the bigger wholesaler players in our market they close. or they are licensed or both

    plus you need to be a licensed Developer to work on and flip homes if your doing more than a few a year.. again most don't know it most break the rules until they get cited and fined..

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Jay Hinrichs,

    Right - hence, "back-to-back" closings. More fees to the government, more profits to the title companies.

    Most of the folks I know only do three or less fix-and-flips a year, fewer if they're serious rehabs due to time frames and resource constraints.

    I think a lot of states are finding legislative ways to "get on the REI gravy train", driven by cries of "foul" and "fraud". They jumped ship in deregulation; now, they're scrambling to get back into the mix.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @David Dachtera in Orygun developers license has been around for decades.

    selling RE without a license is front and center .. because of complaints of various kinds.

    Sub too rental skimming being a big one.

    foreclosure bail out frauds

    And wholesalers tying up properties not closing and seller relies on the fact that they have a closing coming up they box up all their stuff  they put NOn refunable EM on the new place only to have it all unravel as the wholesaler can't close and walks..

    I know its buyer beware.. but when your talking the general public this stuff gets to regulators and in this state they protect the citizens.. we only have 4 mil in the whole state so they are pretty keen on jumping on this stuff

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Jay Hinrichs,

    Again, that points up the need to educate would-be REIs that there's a right way to do it, and there are penalties for doing it wrong. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @David Dachtera  does not matter folks that go down the wholesaling path will 95% of them will just listen to those that talk the best game and tell them that everyone else is nuts its perfectly legal blah blah blah and by the way pay me 30k for my super secret method to success.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    @David Dachtera  state of Oregon just included the dealing or selling of equitable interests as an activity that is governed by real estate commission IE needs a license.. won't stop anyone.. but if they get turned in.. they will lose..

    plus you need to be a licensed Developer to work on and flip homes if your doing more than a few a year.. again most don't know it most break the rules until they get cited and fined..

     Jay, can you point me to the law that states that an owner of properties can not develop or renovate and resale those properties without a "developers license" if they do more than 3 a year? I have never heard of that and I have flipped many homes, in all cases being the owner/builder.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Will Barnard It's orygun law.  Not ca. You can see it on the Oregon Ccb website

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y

    Ah, I see. Well that sucks for you Oregoners! I don't see why you should need to be licensed just because you own 4 homes you want to fix up and sell this year so long as you hire licensed contractors and subs to do the work!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Will Barnard  has to do with owners stiffing the subs..

    you don't need to take a test but you do NEED insurance and a Bond..

    and its a 5k fine if you get caught

    I would say only 10 to 20% of flippers in this area even know this.. when they start if that many.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y

    In CA, try stuffing a sub for a valid bill and you will get a mechanics l En slappedvon your property preventing you from selling it Neil they are paid. That's all the protection a contractor or sub needs here. On top of that, you could get sued and be liable for court costs and attorneys fees. Dies Oregon allOw for mechanics liens?

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  • Amanda Coleman
    Portland, OR · Member since 2016 · 18 posts · 14 votes
    9y

    @Jay Hinrichs Do you know if the law actually says that you need a license to do flips if you're doing more than 3 per year or is just that you're not likely to get caught if you are doing less than 3? 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Amanda Coleman  simply call down to salem to the CCB  they will  tell you.

    if you are rehabbing homes to sell to others and its your business you need a developers license

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  • John Ching
    Investor · Gilbert, AZ · Member since 2015 · 145 posts · 48 votes
    9y

    Mac, I've attended seminars from numerous well-versed, well-educated sources on the subject of wholesaling and spoken/worked with RE attorneys who write my wholesale contracts.

    The easiest way I would describe wholesaling is this: You are not "selling" the property. You are simply assigning the rights (or contract)  to purchase said property (* footnote: David D, DVH, et al!). 

    As I learned during my state licensing exam course, all real-estate contracts are assignable, unless otherwise-specified (either in writing or by local/state law). (I have not seen a NAR Sales Contract without wording to this effect)

    Now, as previously pointed out, wholesaling boils down to not just what you say, but also how you say it.

    For example, at no time should you ever tell the seller you are closing on the property without the means to actually do so (that is fraud). However, there is nothing wrong with backing out of a deal as long as you have your contingencies in place (loan provision, property/termite inspections, etc.)

    Honesty is always the best policy. If you plan on assigning the contract, let them know upfront. A simple, "...after closer inspection, this property isn't necessarily my cup of tea. But I may have a colleague or two who would be interested, is it OK if I show it to them?"

    As for "equitable interest", my contract usually spells out that I will be depositing $100 with a title company to open escrow. The contract also outlines who will be paying which expenses.

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