Wholesaling in unethical... why or why not?

80 Replies

Hi guys I was thinking about this today and just wanted to ask this question and see what  your opinion on the matter is. Many people in and out of real estate frown upon wholesaling. There are so many negative stigma's and opinions towards it. I just want to ask why do you think people view it as wrong, unethical or shady? I personally don't think it is any of those things, because I view it as every other aspect of real estate, problem solving. You are providing value and a solution for others. I know that there are some bad wholesalers just like there are bad people in every profession. I think this kind of trickles down and stems from the negative attitude towards people in real estate in general. As I have transitioned into wholesaling I have come to realize that it isn't all peaches and cream, and is actually very hard. Definitely not as easy as guru's and people on FB, and YouTube make it seem. I see many wholesalers work hard, help others, and provide value to both the seller and the investor, yet they are called "vultures" and seen as the bad guys. What would it take to change this? What is it going to take to change the overall view on real estate investors to a positive one?

@Michael Guzik Don't waste your time trying to change the perceptions of the general public. There are only 3 groups of people who's opinions matter:

1. Sellers. If they're motivated they don't care about anything other than: "Can you solve my problem?"
2. Buyers. If they're motivated they don't care about anything other than: "Can you solve my problem?"
3. Friends and family. Just tell them you flip houses. They'll think you're a rock star.

Depends on the jurisdiction really..  in some states its simply illegal end of story.

and I don't think anyone is advocating breaking the law.. right ?

My opinion is this..   If you are wholesaling properties you are acting as a 3rd party real estate service provider (or solution provider, or consultant, or whatever..)  So, you should have a license.  Going through RE school and getting your license one of the only useful things that they really teach is ethics.  They provide examples and show you how and why something is unethical and how to avoid it.  Like for example even representing both sides of a transaction (which is what wholesalers typically do) and how that can be a sticky situation.  

Now.. here is how I approach a motivated seller or any seller. I disclose I am a broker 1st.. (and also and investor) then I ask them if they want to get top dollar and list on market, pay a commission, go through inspections, possibly make repairs etc.. OR.. do you want cash right now, quick close, no commission, no inspections etc. I run quick numbers for them and let them know how either situation would work. I tell them my price would net you X amount. Or we could list at X price on the MLS and try to predict the net to them and Days on market.

The fact that I can present options, provide comps, and give them a bit of control I think puts them at ease and makes them want to work with me. 

If I can get the deal, good.  If I can get a listing thats also good.  If I'm to busy to list it, I can kick it to another agent and take referral.   

I feel like I can close a higher percentage of the leads that come through, pushing my advertising costs down and I don't have to make the redicoulus mark up that some wholesalers have to make because they spend 10k a month on mailers and ads and ditch 80% of the leads because the spread isn't big enough.  

Also, if I do get the property under contract and the end buyers back out or fall through I make sure that I have the cash to actually buy it make sure it closes no matter what.  

To me its just good business and makes it ethical.  Give the seller all the info, treat them like a client.  Do what you say you are going to do, put your money where your mouth is etc..  

@Jay Hinrichs Every time this is mentioned I still shake my head in disbelief that there are some states which won't allow you to sell something you own.

Originally posted by @Doug Pretorius :

@Jay Hinrichs Every time this is mentioned I still shake my head in disbelief that there are some states which won't allow you to sell something you own.

Doug as it relates to the US .. you can sell what you own.. the problem becomes folks selling what THEY DONT OWN.. and its clear in many states if one took the time to read the regs that advertising and bringing two people together for a real estate transaction is something that needs a license for.

if no licenses were needed then why even have a real estate licensure  everyone just do what they want.. 

Even in Canada there are licensed agents I don't know about the advertising properties you don't own in Canada .. it could be fine it could be selling RE without a license I don't know then ..   BC may look at it differently than AB  I just know what my state Oregon does and is doing..  

@Doug Pretorius   Further Doug don't get me wrong I would LOVE to not have to be licensed as I am or have been licensed in 3 states plus a Licensed Mortgage banker.. the CE for all this stuff is just over the top etc etc.

it would just be nice if we level the playing field.

My interview yesterday with the state of Oregon regulators was based on that.. If we are going to have an industry then we need everyone to play by the same rules.   

If there are no rules then so be it and everyone can just go do there thing.

However is will say this if you read in EVERY state in the union what activity needs a license they will all say the same thing bringing two parties together for expectation of compensation. and at the end of the day that's what all of us do in some manner. 

the US folks like to hid behind equitable interest and E Interest is NOT just being in contract.. even though the gurus will tell you that.. and to whole or assign contracts I have yet to see and add anywhere that says Hey I have this contract for sale its written on an 8 1/2 X 11 contract form etc..  NO they say this house at this address is for sale.. that's the issue.

especially people starting out there I no way they can just sell a contract they have to advertise the house .. its already very difficult business for most and the reality is 95% who thinks its easy and the way to get started fail in 6 months we see this one BP every day.. people get gung ho then fade away.. its a very tough thing to do successfully so is being a real estate agent or broker.. I have owned 3 brokerages over the years and had literally hundreds of agents that worked for me its a never ending cycle of new people coming in and those that cant cut it leaving.. 

Those that do well at this would do well at anything they put their mind to.. that I am dead certain on .. smart is smart.. driven is driven.. sales ability can be god given but some have it some don't..   that kind of thing.

@Jay Hinrichs The Real Estate and Business Brokers Act reads the same way here in Ontario. Bringing together 2 parties for compensation requires a license.

But that's not what wholesalers do. Wholesalers acquire an interest in a property and then assign that interest for a fee.

Here in Canada assignments are very common in pre-construction. Let's say a new 200 unit building is going to be built in Toronto. An investor will come along and enter contract for 10 or 20 of them, usually at a substantial discount, with no intention of ever closing on any of them. As construction proceeds and end-buyers drive prices up the investor lists their units on the MLS with a broker who specializes in assignment sales.

There is some question about how ethical it is for these investors to purchase large numbers of units at a discount and profit at the expense of end-buyers who are struggling to enter the housing market. But there is never a question as to whether or not those investors have the right to assign their contracts. As long as the contract says it can be assigned, it's legal for them to do so. This has absolutely nothing to do with brokering without a license.

I just did a quick search on realtor.ca for "assignment" and here's an excellent example: https://www.realtor.ca/Residential/Single-Family/1...

Hope that link works. It's for a 4 bedroom townhouse that is under construction and being sold with builder approval as an assignment sale. The listing even mentions the assignment fee of $30,000.

Can't wholesalers do the same thing in the US?

@Doug Pretorius technically you cant list a property on MLS without the current owners signature.. but there maybe some work arounds..

I wonder if this is why BC passed that anti flipping sur charge .. to keep this stuff from happening.

At least in Oregon it boils down to do you own it or do you not.. The regulator I was talking too is also investigating a broker that has been listing wholesalers deals on MLS..

Any way..  I guess the original question was ethics.. 

@Doug Pretorius   I see what you mean on that listing,  the assignment in our state I know that wont fly.. 

but have no doubt it does  happen .. although builders in our market specifically will NOT allow assignment of the contracts.. they don't want to leave that much money on the table.. and me being one I would never allow it. 

our market is brisk but not that hot..  buyer can buy from builder no problem there is no frenzy of people lined up for days or anything like what happened back in the mid 2000s in some markets.

I wonder if the builders get those pre sales to calm down bankers  

I can only speak to Florida where wholesaling is legal despite a lot of bad information on here and elsewhere. I have never personally cared for wholesaling for reasons that are kind of irrelevant but there is nothing illegal about it.  It is NOT brokering under Florida law because by definition you are not engaged in the activity for another person but are doing it presumably for yourself.  There are practices that some wholesalers engage in that may be unlawful but the practice as it in principle should be, is not.  If yo are considering wholesaling just know that you should get legal advice from a lawyer that represents you not a website.  Free advice can be great or it can be worth exactly what you paid for it. 

@Jay Hinrichs Developers definitely get presales to satisfy lenders and (they hope) to boost sales.  They often give massive discounts or MFN or other perks to make it happen.  There are a fair amount of “bulk buyers” out there that get big discounts to tie up units which they then break off and sell piece meal below the rack rate but above what they paid making the spread....

@Jay Hinrichs From what I read the assignment law change in BC is specifically targeted at licensed agents. There was a lot of shady stuff going on where agents were listing a property way below market value and then selling it to family members or their own corporations and then flipping it to Chinese investors for millions more. Now they have to by law disclose to the seller what the market value of their property is and whether or not the contract is being assigned. The law specifies that this applies only to licensed agents and that non-licensed buyers are exempt.

Yeah my contract states that the seller grants me the right to advertise the property with a sign on the property, electronic or print, and listing on the MLS.

I don't know much about building but my understanding here in Canada is that a builder can only get their construction loan for large projects if 40% of the project is pre-sold.

There’s a lot of “interesting” stuff going on in Canada ... Toronto at least ... 

Anyone who stereotypes an entire industry as unethical is just being negative and should keep the bad vibes to themselves, this topic on BP is really getting old...there’s good and bad people in every industry and there’s ethical professional people with morals and unethical non professional people with no morals in every industry. It’s just like when people say all cops are bad or all lawyers are thief’s etc.
I run a successful wholesaling business....I’m not licensed but I have multiple agents and brokers on my team that love me and I love them. Together we help people and we make a lot of money doing so, 2 days ago I bought a house from a lady who only has months to live...she was about to loose her house also it was in default...my acquisition guy drove out to her house to get the agreement signed and asked her if she needed help with anything and he ended up going to stater brothers doing her grocery shopping for her. Then when it was time to sign docs we sent a uber to pick her up and bought her lunch at a restaurant and had the notary come out to her to make it ez for her. This lady thanked us for all we did and we were glad to help. But to go back to the original topic of discussion I’m sure there will be some people who say we took advantage of a lady who is about to die and that’s not ethical and then there’s some people who will say we went above and beyond to help this lady and also run our business and provide a true win win situation. It’s all perspective is the glass half empty?? Or is it half full??? I don’t know but while everyone argues about it I’ll be busy selling the glass lol

Originally posted by @Ryan Mullin :

My opinion is this..   If you are wholesaling properties you are acting as a 3rd party real estate service provider (or solution provider, or consultant, or whatever..)  So, you should have a license.  Going through RE school and getting your license one of the only useful things that they really teach is ethics.  They provide examples and show you how and why something is unethical and how to avoid it.  Like for example even representing both sides of a transaction (which is what wholesalers typically do) and how that can be a sticky situation.  

Now.. here is how I approach a motivated seller or any seller. I disclose I am a broker 1st.. (and also and investor) then I ask them if they want to get top dollar and list on market, pay a commission, go through inspections, possibly make repairs etc.. OR.. do you want cash right now, quick close, no commission, no inspections etc. I run quick numbers for them and let them know how either situation would work. I tell them my price would net you X amount. Or we could list at X price on the MLS and try to predict the net to them and Days on market.

The fact that I can present options, provide comps, and give them a bit of control I think puts them at ease and makes them want to work with me. 

If I can get the deal, good.  If I can get a listing thats also good.  If I'm to busy to list it, I can kick it to another agent and take referral.   

I feel like I can close a higher percentage of the leads that come through, pushing my advertising costs down and I don't have to make the redicoulus mark up that some wholesalers have to make because they spend 10k a month on mailers and ads and ditch 80% of the leads because the spread isn't big enough.  

Also, if I do get the property under contract and the end buyers back out or fall through I make sure that I have the cash to actually buy it make sure it closes no matter what.  

To me its just good business and makes it ethical.  Give the seller all the info, treat them like a client.  Do what you say you are going to do, put your money where your mouth is etc..  

 This is great. Thank you Ryan for this comment. My wife is an agent and we are struggling to find a strategy to mix wholesaling and retailing, so we may see if we can work something like this into our strategy. Thanks again.

It’s only unethical if you make it that. Assuming it’s not outright illegal in your state, people make it unethical by doing the following:

1. Lying to sellers by saying I’m a “cash buyer”. If you don’t have your own cash or are borrowing it from someone, this isn’t true. Tell them you have an end buyer.

2. Overestimating ARV and underestimating Repair’s. This is probably a combination of lack of knowledge as much as unethical. If you’re telling me there’s 5k repairs and I can buy it for 80 and sell for 120, I know you’re off somewhere.

Originally posted by @Eric Jacobs :

@Jay Hinrichs Developers definitely get presales to satisfy lenders and (they hope) to boost sales.  They often give massive discounts or MFN or other perks to make it happen.  There are a fair amount of “bulk buyers” out there that get big discounts to tie up units which they then break off and sell piece meal below the rack rate but above what they paid making the spread....

 I am aware I am a builder and my bank allows me 12 spec loans at a time but if I pre sell that does not go against my spec number this allows me to build and sell at a much quicker pace... although they also want copies of the transactions and if they thought the presales were just flippers tying up the homes I am pretty sure those would not count at least to my banker.. 

@Dylan Barnard   There is nothing precluding a Chapter 475 licensee from wholesaling but it is very, very dangerous and I have personally defended multiple brokerages who have been sued after an agent or an "affiliate" wholesaled a deal where an agent was involved.  Personally, I would keep a firewall between wholesaling activities and brokerage activities.  I'm not even sure I think they are all that compatible IMHO.  

Personally I see nothing wrong with wholesaling if you are a licensed broker. If you are just running around assigning contracts that you can't afford to close on if your end buyer falls through or you cant find one, that is immoral in my opinion and should be illegal. Operating with a license holds you to certain standards that can put everyone involved in the transaction a little more at ease knowing they are not dealing with someone that will take your down payment and run. As a whole I think wholesaling has gotten a bad rap because people are doing it immorally but wholesaling as an idea I see nothing wrong with it is some individuals that do wholesale that I would have a problem with

@Jay Hinrichs , you say that assigning sales contracts isn't allowed in some places. What about options? Could you buy and then sell an option?

I don't do wholesaling nor do I want to, but I see nothing illegal or amoral about it as long as people are honest.

Originally posted by @Kevin Sobilo :

@Jay Hinrichs, you say that assigning sales contracts isn't allowed in some places. What about options? Could you buy and then sell an option?

I don't do wholesaling nor do I want to, but I see nothing illegal or amoral about it as long as people are honest.

I don't know..  although I think from a sellers stand point they would understand what your doing better.. IE your taking an option  you may or may not buy it.

but that's not how wholesaling is taught and done..  its hey tie it up and try to flip the contract and if you cant just walk from your EM..

sellers go into contract not knowing they have been either flat out lied to  and you all know who you are that does this.. or misled..

either way sellers get damaged .. they box stuff up they put EM on homes that they lose when their house does not close and they cant close.. those are the issues. 

@Jay Hinrichs , people can always get lied to and jerked around. People have to be responsible for protecting their own interests. The seller could always involve and agent or lawyer to get advice from. I don't know about all agents, but I myself will answer questions for anyone free of charge. I do of course expect when they do need to use an agent that I will then be considered for the business.

If I was going to wholesale (which I'm not), I would probably do it through options. Its just simpler and cleaner and more understandable. Plus the seller gets the benefit of money in hand from the get-go, which I'm sure many seller's doing deals like that actually need, as opposed to earnest money held in escrow for a conventional wholesale deal.

Originally posted by @Eric Jacobs :

@Dylan Barnard  There is nothing precluding a Chapter 475 licensee from wholesaling but it is very, very dangerous and I have personally defended multiple brokerages who have been sued after an agent or an "affiliate" wholesaled a deal where an agent was involved.  Personally, I would keep a firewall between wholesaling activities and brokerage activities.  I'm not even sure I think they are all that compatible IMHO.  

 Thanks for the advice Eric. I realize that we really need to speak with an attorney very soon. 

Sorry @Dylan Barnard the referenced to Chapter 475 was Florida.  I see you are in Texas.  All I know about Texas is the BBQ is fantastic and Austin is overpriced :) 

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