Dangerous to wholesale in an LLC

52 Replies

Hey everyone,

I'm starting a wholesaling business In New York and just formed an LLC. I've been doing some research regarding the legality of it and I'm a bit concerned. A lot of the forums I read seem to deal with this topic on an individual level, not from the perspective of doing it in an LLC with the sole purpose of making it a business.

Here is a quote from Billy Gulley's website:

"Where the clouds of the storm move in, acting as an individual in one transaction is much different from a legal standpoint than building a business model that does nothing but assign contracts. Being “in the business” of doing something will require licensing to be legal conducting any business, your local jurisdiction most likely requires a business license as well.

This also goes to the intent of someone entering into a contract where contract law requires a “meeting of the minds” for a valid and enforceable contract. Agreeing to purchase without the intent to purchase is simply fraudulent." - Quote from 'general real estate academy dot com'.

To me, it almost seems like by forming an LLC where the main purpose is to assign contracts, I'm requiring myself to have a business license and am opening myself to a greater possibility of being fined. I also don't have a real estate license but now plan on getting one after educating myself about the legality of wholesaling a bit more. Again, since I'm operating in an LLC i'm not sure if my 'business' is licensed in real estate or only me as an individual. The reason I formed an LLC is for extra legal protection and so I can write off the thousands of dollars of marketing costs I'm going to be spending on sending out mailers. Again, the mailers are being sent out on the behalf of my LLC - I am marketing to buy properties. 

When I created the LLC I specifically made my area of business 'Wholesaling Real estate'. Now, i'm wondering if forming an LLC at all was the right idea or if I'm opening myself up to trouble since I'm acting as a business. I'm just trying to start my first legitimate business the proper way and the last thing I want to do is get in trouble. I have a consultation with a lawyer in 2 weeks and will be touching on the same topic along with more focused questions about what I'm allowed to say in my mailers and phone calls to the homeowners I'm targeting.


Any thoughts BP community? I could really use the feedback. Everything was progressing well but now I feel that my goal might be in jeopardy.

Every business, that sells products, buys them from a source with no intention of personally using them.  They sell them.

Every "drop shipper", sells a product from a source, and never sees that product (or touches that product).  The "seller" buys from the source, sells it to the end buyer.

The stock market has its "option trading", where you can sell a stock, and not have bought it yet.

I have never, in my 25+ years of using this method, ever had anyone attempt to legally call me on this...and that includes HUD, Banks, Fannie, etc...who knew what was going on as it happened.

The LLC makes the offer, gets the offer accepted, and the Wholesaler sells the LLC to the buyer. The contract is between the LLC and the Seller...from beginning to the end. This is simply a sale of a business, with the asset of that business being the purchase agreement for the property. Businesses are sold all the time, with existing contracts included in the sale.

The difference with real estate @Joe Villeneuve , is that there are specific laws regarding the sale and marketing of real property that you don't own. I think his plan is to buy and sell real estate contracts within the LLC, not selling the business with its assets. I would read your state laws and know that you are working in a very gray area of the law, and it could end badly.
Originally posted by @Jason DiClemente :
The difference with real estate @Joe Villeneuve, is that there are specific laws regarding the sale and marketing of real property that you don't own. I think his plan is to buy and sell real estate contracts within the LLC, not selling the business with its assets. I would read your state laws and know that you are working in a very gray area of the law, and it could end badly.

 Read what I said.  He gets the same end result he wants.  There is no issue with selling a business.

Good quote. Too bad Bill Gulley hasn't posted recently. I've lurked in the forum for a while and I really enjoy his insights.

@Joe Villeneuve I see what you're saying and that was my original train of thought when I began putting together this business. However, the fact that the business is essentially selling real estate contracts leads me to think more from the perspective of @Jason DiClemente .

When you operate as an individual, not as an LLC, its easy for the individual to basically come up with an excuse as to why the contract was sold. Whereas in an LLC the intention of getting the contract from the beginning was to sell it to someone else.

The big reason I wanted the LLC is because I want to create a known brand in the community as the company that can help you when you need to sell fast for cash. However, now I'm a bit worried. I'm not sure how the "We but ugly houses" franchises do it but they don't seem to have a problem.

Originally posted by @Will Stahl :

@Joe Villeneuve I see what you're saying and that was my original train of thought when I began putting together this business. However, the fact that the business is essentially selling real estate contracts leads me to think more from the perspective of @Jason DiClemente .

When you operate an an individual, not as an LLC, its easy for the individual to basically come up with an excuse as to why the contract was sold. Whereas in an LLC the intention of getting the contract from the beginning was to sell it to someone else.

The big reason I wanted the LLC is because I want to create a known brand in the community as the company that can help you when you need to sell fast for cash. However, now I'm a bit worried. I'm not sure how the "We but ugly houses" franchises do it but they don't seem to have a problem.

I'm not selling RE Contracts...I'm selling the business (LLC). The business isn't selling RE Contracts. The business retains the contract through the entire process. The buyer and seller never change. The buyer is ALWAYS the LLC. You're over thinking this.

@Will Stahl I don't know much about We buy ugly houses, but they could be actually purchasing the properties and not assigning contracts, or they could have real estate agents on their teams. Marketing real estate without a license is illegal in most states. There are loopholes that people use to get around it but that's the gray area that your working in.

@Joe Villeneuve

Maybe I need to change how I plan on structuring things. 

Let's say...

My business is called 123 real estate

My website is called 123 real estate

All my marketing says 123 real estate

I planned on buying the property using the 123 real estate LLC so I wouldn't want to sell it because I still need it for the rest of my business. I believe what you're saying you would do is to create another LLC soley for the purpose of using it to get the contract and then you sell the llc which is the current holder of the contract. Correct?

@Jason DiClemente thanks for the advice. I know you're not a lawyer but if I had my real estate license would you still consider this a grey area?

That's a good thing if you have form your LLC. You want to mitigate the risk. We operate in residential investment and commercial lending so you don't need a real estate license unless you are in the states of Arizona, California, Idaho, & Oregon.

Originally posted by @Will Stahl :

@Joe Villeneuve

Maybe I need to change how I plan on structuring things. 

Let's say...

My business is called 123 real estate

My website is called 123 real estate

All my marketing says 123 real estate

I planned on buying the property using the 123 real estate LLC so I wouldn't want to sell it because I still need it for the rest of my business. I believe what you're saying you would do is to create another LLC soley for the purpose of using it to get the contract and then you sell the llc which is the current holder of the contract. Correct?

@Jason DiClemente thanks for the advice. I know you're not a lawyer but if I had my real estate license would you still consider this a grey area?

 Correct

@Joe Villeneuve

Thanks for the information and response. It'll cost me an extra few hundred bucks to form the LLC but it'd still be cheaper than a double closing in my area. I suppose I can create an additional llc solely for getting the property under contract. Whereas my website/marketing/brand will live under a different LLC (my main llc which I will never sell)

As a real estate agent, you are licenced to represent buyers and sellers in a real estate transaction so there is no issue with marketing properties as an agent

im 4 weeks away from getting my LLC for a wholesale company I am starting, I would love some more insight on this. thank you for posting on this subject!

Joe is stating/suggesting that you form your LLC, have that LLC lock up a contract and then sell that entity to your buyer. This way, you are not selling a contract, you are not "operating without a real estate license, etc. The issue is that you will be forming one LLC for every deal you intend to lock up. Perhaps that's cheaper than double closing but my question back to all of you s this: if you intend to form a wholesaling business, why not just get licensed instead of trying to work around it? Everybody in the wholesaling business seems to pursue a short cut or work around of the laws. I suggest you simply get licensed as it opens up many more doors for you - Period

You're overthinking this.  Work on getting a deal done.  These areas you are concerned with don't become relevant until you have a full scale business moving.  

@Will Barnard I 100% agree. I just started taking the required courses which is very informative and opens more doors for me just like you said. Even with the license I still get concerned about the legality of the situation. For instance, I interpret the below state as saying if you have a RE license and aren't sponsored by a broker you are limited in the capacity that you can act. 

"All Salespersons must be sponsored and supervised by a licensed Broker. In the words of DOS, "A real estate salesperson is associated with a real estate broker to list and negotiate the sale, lease, or rental of real property for others for compensation, under the direction and guidance of a responsible broker. A salesperson cannot operate independently."

However, I suppose if you have a RE licences, sponsored or not, that still shows that you've been deemed 'Qualified' from a real estate sales perspective.

@Ian Walsh I do think I just spooked myself when I started in doing some due diligence into the legality of the practice. I'm continuing to move forward with my plans still, it's not slowing me down. I agree, my number one focus needs to be getting a property. However, if there's one thing i'm okay with over thinking its whether or not the business I'm conducting is illegal.

Originally posted by @Will Stahl :

@Will Barnard I 100% agree. I just started taking the required courses which is very informative and opens more doors for me just like you said. Even with the license I still get concerned about the legality of the situation. For instance, I interpret the below state as saying if you have a RE license and aren't sponsored by a broker you are limited in the capacity that you can act. 

"All Salespersons must be sponsored and supervised by a licensed Broker. In the words of DOS, "A real estate salesperson is associated with a real estate broker to list and negotiate the sale, lease, or rental of real property for others for compensation, under the direction and guidance of a responsible broker. A salesperson cannot operate independently."

However, I suppose if you have a RE licences, sponsored or not, that still shows that you've been deemed 'Qualified' from a real estate sales perspective.

@Ian Walsh I do think I just spooked myself when I started in doing some due diligence into the legality of the practice. I'm continuing to move forward with my plans still, it's not slowing me down. I agree, my number one focus needs to be getting a property. However, if there's one thing i'm okay with over thinking its whether or not the business I'm conducting is illegal.

 I am not 100% positive, but I assume that all other state laws and regs. are the same as CA whereas licensed agents must hang their license with a broker (or get their own broker license). That said, that portion really has nothing to do with the strategy, it is simply a step you must do once you get licensed (pick a broker).

Again, as others stated, there is way too much over thinking here and also keep in mind that with a real estate license comes responsibilities too. It is not a license to steal and as such, most reputable licensed agents who wholesale or buy direct to flip themselves make their offers with full disclosures to every seller which includes something along the lines of "Mr Seller, I plan to offer you this all cash offer which may be below current market value, etc etc." They will also include all necessary additional disclosures and often times, will also include a suggested retail list price that they suggest they would list on the open market for. In other words, they give the seller two options. 1. an all cash offer today at what is likely a below market value price or 2. A price they are willing to represent and list on the MLS on behalf of the seller. Doing this provides the full disclosure and options needed to stay within the legal limits of the laws and not "take advantage" of a less savvy seller.

@Joe Villeneuve said it perfectly.  With so many things in business, in this country especially, there are increasingly more middle men (if you will) who get paid to do what they do.  

As far as my LLC, it doesn't just do any one RE thing. So, according to your argument of the LLC being in business for one sole purpose (say, wholesaling for instance) that doesn't apply. This could be one consideration for you.

Originally posted by @Joe Villeneuve :

Every business, that sells products, buys them from a source with no intention of personally using them.  They sell them.

Every "drop shipper", sells a product from a source, and never sees that product (or touches that product).  The "seller" buys from the source, sells it to the end buyer.

The stock market has its "option trading", where you can sell a stock, and not have bought it yet.

I have never, in my 25+ years of using this method, ever had anyone attempt to legally call me on this...and that includes HUD, Banks, Fannie, etc...who knew what was going on as it happened.

The LLC makes the offer, gets the offer accepted, and the Wholesaler sells the LLC to the buyer. The contract is between the LLC and the Seller...from beginning to the end. This is simply a sale of a business, with the asset of that business being the purchase agreement for the property. Businesses are sold all the time, with existing contracts included in the sale.

That's not the way most of the wholesalers on this site do business. 

I would also suggest taking a good look at local bulk sales laws. 

@Will Stahl Real estate investment and business related thereto is a much better statement of purpose for a business than Wholesaling. Businesses may only do what they are expressly permitted to do in their founding docs.

Aside from the limitations (and public record) that places on your own business, if you take Joe's advice and sell that LLC ... among other things the buyer would have to amend the articles to do anything else.

Originally posted by @Tom Gimer :

@Will Stahl Real estate investment and business related thereto is a much better statement of purpose for a business than Wholesaling. Businesses may only do what they are expressly permitted to do in their founding docs.

Aside from the limitations (and public record) that places on your own business, if you take Joe's advice and sell that LLC ... among other things the buyer would have to amend the articles to do anything else.

Why would the buyer want to amend the "articles"...or do anything else with the LLC for that matter. The property is in its own LLC.

Originally posted by @Joe Villeneuve :
Originally posted by @Tom Gimer:

@Will Stahl Real estate investment and business related thereto is a much better statement of purpose for a business than Wholesaling. Businesses may only do what they are expressly permitted to do in their founding docs.

Aside from the limitations (and public record) that places on your own business, if you take Joe's advice and sell that LLC ... among other things the buyer would have to amend the articles to do anything else.

Why would the buyer want to amend the "articles"...or do anything else with the LLC for that matter. The property is in its own LLC.

OK so the buyer just bought an LLC that owns a piece of property, right? That LLC is only authorized to "wholesale" real estate. If it is going to rent the property, get a loan, do anything other than wholesaling, it needs to amend its statement of purpose.

Originally posted by @Tom Gimer :
Originally posted by @Joe Villeneuve:
Originally posted by @Tom Gimer:

@Will Stahl Real estate investment and business related thereto is a much better statement of purpose for a business than Wholesaling. Businesses may only do what they are expressly permitted to do in their founding docs.

Aside from the limitations (and public record) that places on your own business, if you take Joe's advice and sell that LLC ... among other things the buyer would have to amend the articles to do anything else.

Why would the buyer want to amend the "articles"...or do anything else with the LLC for that matter. The property is in its own LLC.

OK so the buyer just bought an LLC that owns a piece of property, right? That LLC is only authorized to "wholesale" real estate. If it is going to rent the property, get a loan, do anything other than wholesaling, it needs to amend its statement of purpose.

NO. That LLC is authorized to OWN real estate. The LLC isn't wholesaling anything...it's first buying the property, then holding it. Where do you see the LLC wholesaling anything?

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