Dangerous to wholesale in an LLC

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Dangerous to wholesale in an LLC

Will Stahl
Rochester, NY · Member since 2017 · 58 posts · 10 votes

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.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
8y

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.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    8y
    Originally posted by @Will Stahl:

    @Tom Gimer and @Steve Vaughan

    Thanks for quick responses and great information. I'm definitely going to amend my articles of organization if applicable in my area and I was actually just advised by a tax accountant about setting up my tax structure as an S-corp. I will be doing more research on both.

    @Will Barnard Hey Will thanks for the responses earlier. I think that's a GREAT tip you provided about giving them a cash offer and a full price offer to list on the MLS. Now I'm thinking that I want to model my business off of that idea. My website and mailers can convey that we provide both offer amounts, so now I have a wider audiance for the services I offer - both cash sellers And people looking to list on the MLS. Is this how you go about conducting your wholesaling business advertising or do you focus on the cash offer and just tie in your full price offer at the end as sort of a side thought?

     I don’t have any wholesaling campaigns as wholesaling is not my area of focus. That said, if I did, I would test both. Send sone with one or the other, then try sending with both options in one mailer and test the results. I would also check with my broker as well to make sure my marketing pieces were within the allowed peramiters. 

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  • Will Stahl
    OP
    Rochester, NY · Member since 2017 · 58 posts · 10 votes
    8y

    Thanks everyone for all of the great feed back!

    I got a hot lead by driving for dollars and am meeting with her this Tuesday. The property looked like it was in rough shape from the outside. She sounded like she was thinking about listing the property but I'm hoping to convince her otherwise. 

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  • GARY LEONARD JR
    Real Estate Agent · Boston Ma · Member since 2019 · 31 posts · 31 votes
    5y
    My Proof above.  

    Originally posted by @Jason D.:
    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.

     Well, I hear what your saying which is the act of brokering without a license.  However, in the US, when a individual signs a purchase and sales agreement with a potential buyer, they have whats called equitable interest.  

    Brokers essentially represent for another for commission to market and sell their house. When an agents goes into the deal he is hired by buyer or seller to represent the property. The wholesaler, however, has equitable interest in the property and does not represent for another person but rather themselves as investors. Using a loophole within the national Association of realtors called "an assignment transfer". This is essentially you're right as a buyer to sign your rights within reason to buy the priceWithin reason to buy the property for a fee. People are all for thinking about us here. It is not dangerous to open an LLC it made Damn near save your buy! Because nothing you're doing is dangerous it's all legal if you do it right. What I think Jason is referring above is somebody doing it wrong! I have been a real estate agent for over 12 years and I could tell you this I do a lot of business with Wholesaler‘s and there's a lot of good ones out there! In any event a wholesaler does not market or advertise the property itself to Cash Buyer‘s. If he were to do that it would be programmed without a license with which is illegal. Instead the wholesaler advertises in markets the paperwork that the good deal is under. The wholesaler is not marketing the home even though he should have the home and all the other the civics included in his advertisement but he should present his marketing as "I have a deal under contract, "contract for purchase". Wholesaler is merely advertising the paperwork that's for sale. The value to hop in my position as the buyer will be a $5-10,000 fee.

    If a foreclosed property, like REO (and for the critics saying that this cannot be done I've done it over 100 times and I never been arrested thrown in jail or thrown to the wolves or at the FBI follow me at night). Now, as I was saying, here's a work around assigning a foreclosure contract that is unassignable. You heard it here first!

    1. You Find A Foreclosed Property
      You negotiate with lender agent
    2. You get property very cheap
    3. You create a random LLC
    4. You receive articles of organization 
    5. Present the articles of organization to banks agent
    6. Also send the banks agent either simultaneously, or immediate after a quick proof of funding letter (simply get one off double close.com because it’s actual transactional funding So get your free proof of funds letter and submit to lenders agent.  
    7. You then submit an offer using your newly created LLC name as buyer
    8. The lender accepts your offer you signed not using your own name but the new LLC you created.

      The LLC is the buyer on the P&S NOT YOU!
    9. Instead of transferring your right to purchase real estate via equitable interest (which is forbade during REO transactions) you are instead assigning 100% of your membership of the LLC to a cash buyer for a $10-$15,000 fee contingent upon closing.
    10. This allows (1) close without double closing and spending an outrageous amount of money out of profit.  
    11. So the cash buyer shows up and signs and closes the deal signing the LLC you originally breasted and was 100-% member of. However, you assign over your ownership for a fee contingent upon closing of deal.
    12. And that is how you wholesale an REO
    13. Disclaimer: Use an attorney even in closing team states. You want an attorney to draft out a correct LLC transfer paperwork etc.
    14. proof attached 
    15. Gary Leonard Jr 


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