Squashing the "Wholesaling is illegal/legal" argument!!!

94 Replies

I have read through a lot of forum post about the topic of wholesaling (the latest by @Brittany Witt) and it seems like the argument of wholesaling being legal/illegal could be squashed once and for all by getting your RE license.

With your RE license, you are required to hold your clients interest above your own by law. So if your client's interest is selling their property quickly and you can satisfy that interest with a cash buyer, regardless of the price, I don't see how that could be looked at as unethical.

On the other side of the coin, if your clients interest is to get the most money from the of their property as they can (as a licensed RE agent with your clients interest before your own) most likely it would be listed on the MLS.

I am curious to here what others here have to say!! Especially you @John Thedford

Getting a license certainly solves a lot of problems. There are those that Proclaim it is still a net listing and therefore illegal in some states. That is certainly one way to get around the fact that marketing properties you do not own is illegal unless you are a licensee. Personally I do not like the practice and believe it is still bad for the public because it is a blind transaction.

@Mike Hendrickson From what I am seeing, there actually seems to be two separate issues that are  used interchangeably depending on the author's viewpoint.

  1. Is it legal?
  2. Is it moral / ethical?

The second question seems to hit the hot button of a lot of contributors on BP, probably because it comes down to differing individual core values.

To illustrate, consider this hypothetical example:

Scenario 1: You're in a shabby second hand store and notice a dusty Van Gogh that you know to be worth $1 million dollars.  You ask the shop owner how much he wants for the painting, and he says he doesn't know.  He asks you to make an offer.  What is the moral and ethical price you should offer the shop keeper to purchase the painting?

Scenario 2: Same as above, except that the painting has a price tag of $100 on it.  Do you buy it for the asking price of $100, or do you offer more?  If so, how much more? (Or do you offer less!)

There is, of course, no universal answer to either situation.  It's different for all of us and, accordingly (at least in my view) not worthy of debate in a forum that exists for the purpose of sharing knowledge and experience rather than passing judgement on perceived motivations.

This is the primary reason why I chose the tagline "I would rather be judged by the quality of my contributions rather than perceptions of my motivations" in my profile.

Trolling with my burrito and suds...

@Mike Hendrickson so if, as a RE license holder, your supposed to uphold your client's (the seller) best interest, how would you reconcile getting the most money for your client, with not listing it to get the most exposure, and therefore, the highest price? And, I dont know a single realtor that would accept an assignable contract from a buyer on a listed property, so haw are you best representing your client, by offering an assignable contract?

The problem lies in the fact that you can not be a wholesaler, and represent the seller at the same time, because those are conflicting goals.

Originally posted by @Mike Hendrickson :

I have read through a lot of forum post about the topic of wholesaling (the latest by @Brittany Witt) and it seems like the argument of wholesaling being legal/illegal could be squashed once and for all by getting your RE license.

With your RE license, you are required to hold your clients interest above your own by law. So if your client's interest is selling their property quickly and you can satisfy that interest with a cash buyer, regardless of the price, I don't see how that could be looked at as unethical.

On the other side of the coin, if your clients interest is to get the most money from the of their property as they can (as a licensed RE agent with your clients interest before your own) most likely it would be listed on the MLS.

I am curious to here what others here have to say!! Especially you @John Thedford

I have been licensed since 1975 and I buy distressed assets and have for 4 decades.. the difference is I buy them.. I don't tie them up and try to make a middle man fee.. if I am doing that I am an agent.. and do a formal listing.. ( although have not done that for 20 years now).

But commissions are negotiable.. the last big deal I brokered was 22 duplex's in Vancouver.. builder was in trouble with the bank.

needed them off the books they were brand new..  I could not buy them all.. so I told them I sell a lot of property to CA investors over the years.. and I can do a fly and buy program for them..  the retail prices were about 250k each. .I negotiate a set fee of 30k per sale. 

And promptly sold them all in one weekend in San Fran.. but I spent 50k getting 300 investors into one room where I pitched them.. That generated 660k in gross commissions for myself and since I owned the brokerage I just paid my assistants.. was a very good year..LOL

I could have sold nothing and lost 50k I paid up front for the room the food the advertising the radio adds.. the free tickets to the Rolling Stones  etc etc.  for hard to sell assets and agent can charge more for easy to sell assets they can charge less.. Commissions are negotiable.  When I started back in the later 70s I sold dirt in North CA which was pretty tough to sell my rates were 10 to 30% commissions and I got paid.. because frankly I was good at it.. and produced.. 

And I buy lots of property every year and still do.. there is a lady on here from Raleigh I think that did a pod cast and her definition of wholesaling is you buy it.. once you own it you resell it.

this has all morphed into assigning contracts.. and its no the assigning of the contract that is the issue its how they market it.  IE website direct marketing picture of the house description giving one the impression that they own them when they don't.. that's where the real estate regulators can and do step in.. 

but be that as it may with Guru's teaching that method it will never end unless the states really start to go after the gurus and those who follow them.. Just like you cant lease or represent a property for lease without a license.. you cant collect rents on house you don't own and charge a fee.. ??  it goes on and on.  

@Jason D. absolutely agree with you that you can not represent a sellers interest who's goal is to sell for the most money possible with an assignable contract (that is most likely under market value.) In this situation, a wholesale deal is not an option for the "wholesaler" who has a RE license, BUT listing it on the MLS or referring to a listing agent to get the highest price would/should be.

The situations where you would assign a contract/wholesale is when the sellers needs are NOT highest price but all of the benefits wholesaling provides (fast closing, closing on a specific day, cash, no inspection contingency, etc. etc.)

Hopefully I answered your question...

@Mike Hendrickson The statement that a wholesaler can deliver what an agent can’t (fast close, cash, no inspection, etc) is a delusion. 

The has many of the same buyers looking. One deal I did ax an agent on a distressed property:

the best offer the owner got after a month from wholesalers, homevestors, we buy houses guys, was $110k, and I have no idea if they were a real buyer or not  

I was referred to the owner by a BP member here. In 5 days on the mls, after 8 offers ( 2 were bs wholesalers), we got a real buyer for $137k, 10% EM, cash purchase, 2 day inspection, 14 day close(the buyer could close in 4 days after title search/commitment).

So the owner got both.....higher price, and ability to close quick from a Real flipper. 

Regarding "I have been licensed since 1975 and I buy distressed assets and have for 4 decades.. the difference is I buy them.. I don't tie them up and try to make a middle man fee.. " 

Ding! Ding! Ding! Ding! 

The average "wholesaler" doesn't have a penny, and that's the difference. 

It's about being "ready, willing, and ABLE" to perform on a contract. 

"Wholesalers", in general, aren't able to perform. 

Almost always when the contracts are contested, it's a civil matter, not a criminal matter. So the premise "Wholesaling is illegal/legal" is faulty since this indicates a criminal violation. And your mileage will vary based on state... here we go again.... 

Originally posted by @Mike Hendrickson :

@Jason D. absolutely agree with you that you can not represent a sellers interest who's goal is to sell for the most money possible with an assignable contract (that is most likely under market value.) In this situation, a wholesale deal is not an option for the "wholesaler" who has a RE license, BUT listing it on the MLS or referring to a listing agent to get the highest price would/should be.

The situations where you would assign a contract/wholesale is when the sellers needs are NOT highest price but all of the benefits wholesaling provides (fast closing, closing on a specific day, cash, no inspection contingency, etc. etc.)

Hopefully I answered your question...

 I don't understand.. why people think real estate agents cant do  no inspection ,, close on a specific day and quick closings.. most agents have For real buyers in the wings if they are agents that work with investors.. that argument that wholesalers can do it better and quicker and such is just BS total BS.. and most wholealsalers are beginners who cant do it quicker cant close on a certain day and butcher deals left and right.. :)

@Mike Hendrickson the goal of the seller is ALWAYS to get the highest price for their situation. Now, their situation may change what that price is, but, as a wholesaler, your goal is to get the property for the LOWEST price, so you can't possibly represent their best interest. Because if you were getting them the highest price, you would market the property to the most people possible, which is the MLS

If I understand correctly, to  wholesale properties you need a RE license, funds to actually buy the property, and a seller who is motivated to sell for any reason other than make the most amount of money possible. If not all of the above criteria is meet, it’s not a crime but it is unethical and unprofessional. Did I miss anything?

Even though I can buy a property cash, sometimes I just wholesale it if it's too small for me to handle. I specialize in 50+ unit apartments and hotels so when I encounter a single or a small multi family with lots of profit potential, I usually decide to wholesale it. 

I sometimes close on the deal first then sell it to a buyer. That's called the DOUBLE close. There is no need to have a real estate license to do that. Otherwise, no one can sell their house For Sale By Owner.

Sometimes, I put it under contract in an LLC and then assign my ownership in that LLC to a buyer. Do you need a real estate license to do that? Not really.

And if you can't close the deal yourself because you don't have the funds or the ability to raise the funds quickly, you should think twice about wholesaling.

Contrary to what the gurus say, wholesaling is not a beginner's strategy. You got to be: 

  • great at finding deals 
  • good at estimating repairs
  • good & creative in legally controlling a property
  • good in marketing and selling 
  • and can raise the funds if you need to close.

Lots of things can go wrong in all those - hence, wholesaling is not for the newbie. And if you don't have the funds to close (or can raise it quickly), you might as well have a real estate license to help you find deals and find buyers.

@Michael Ealy wholesaling is actually one of the best ways to get your foot in the door of the real estate investing business.. well at least it’s one of the best ways to acquire the funds to do so. You don’t need any money to close on a deal, even when it comes to a double close, you’re not using your own money to do so.

@Jason D. As part of real estate training, you learn the difference between client and customer. A client is someone, as a real estate agent, I have a fiduciary responsibility to. That means the seller has entered in to an agreement with me stating I will represent them in a real estate transaction. At that point, I have been sworn to hold their interests above all others. A customer would be someone who calls me from a We Buy Houses postcard and wants to sell their house to me directly. They are a customer at this point and I owe them NO fiduciary duty. I am there to provide a service and solve the problem they've presented me with. Two completely different scenarios.

@Michael Ealy   In MA, CA and MI (the three states in which I've taken the time to research the actual RE laws), selling your contract is prohibited unless you're licensed to sell real estate.

Double closing is 100% legal.  If you already own it, you are - and should be - free to do with it what you wish.

This is the pertinent text of the MA law, describing license-required activities: 

https://malegislature.gov/Laws/GeneralLaws/PartI/T...

''Real estate broker'', hereinafter referred to as broker, any person who for another person and for a fee, commission or other valuable consideration, or with the intention or in the expectation or upon the promise of receiving or collecting a fee, commission or other valuable consideration, does any of the following: sells, exchanges, purchases, rents or leases, or negotiates, or offers, attempts or agrees to negotiate the sale, exchange, purchase, rental or leasing of any real estate, or lists or offers, attempts or agrees to list any real estate, or buys or offers to buy, sells or offers to sell or otherwise deals in options on real estate, or advertises or holds himself out as engaged in the business of selling, exchanging, purchasing, renting or leasing real estate, or assists or directs in the procuring of prospects or the negotiation or completion of any agreement or transaction which results or is intended to result in the sale, exchange, purchase, leasing or renting of any real estate."

These laws are designed to protect the public because it is presumed that someone in the business of dealing in real estate will have an unfair advantage over someone who sells perhaps one or two properties in a lifetime.

I have a current, real life scenario where a young couple was about to get screwed HARD.

I received a sales lead from a buyer who wanted to go to see a home.  As we talked I asked them about their current situation.

They told me that they were selling their house as they needed more room.  One toddler and a new baby due in February - several weeks away meant that they need more room,

They told me that they had an offer from the nationally franchised wholesale company (who may or may not use a caveman in their ads) of $228,000 for their 1,471 sq ft, 3 bed, 2 bath home in West Plymouth - just 8 minutes from my own home.  They told me that the price was so low because it was a dump.  

I went to see it.  It was nothing like a dump.  The total work needed was a new backsplash in the kitchen, one room needed new carpet and the old in-ground pool needed to be filled in or repaired.  It needs about $4,000 in work.

The fast-talking flim-flam artist convinced them that their home was a disaster that wouldn't sell.  This creep convinced them to accept over $100,000 less than the actual current market value of their home.

Fortunately, they had not yet signed a contract.  Their home is now on the market with me for $350,000.  I expect it to sell within 1-2% of that number.

This is exactly the kind of thing the states contemplated when requiring licensure.  If I pulled this kind of crap, I'd face some combination of fines and license suspension and/or revocation.

@Charlie MacPherson Unfortunately, this doesn’t say that wholesale real estate investing is illegal even in your own state. You see, it becomes illegal when a wholesaler represents a seller or locks up the property and then proceeds to find a buyer. I want to help people like yourself understand that a wholesaler DOES NOT sell the property. As a wholesaler you’re simply going out and finding a buyer for the CONTRACT. You really are just selling a piece of paper. Now In the scenario where a wholesaler “screws over” someone’s grandmother and is now getting sued; The attorney representing the wholesaler would most likely argue for the dismissal of the case seeing that the contract, if written out correctly, protects the wholesaler. The end result in this scenario would only be the wholesalers legal fees are paid for by the opposing party. People need to understand that unless a contract forbids it, it’s perfectly legal to assign a contract (that includes a real estate contract). So again I ask, show me a source that says wholesale real estate is illegal?

@Juensy Pierre You should re-read the state law again.  It couldn't possibly be any more clear.

Look for the word "or".  It ties together all of the actions stated as EACH ONE being a license-required activity.

And one of the key differences between wholesalers and Realtors is that wholesalers represent themselves.  Realtors represent - and are a fiduciary of - the seller.

The "otherwise deals in options in real estate" language defeats your claim of selling a contract being legal.

Just for a little more information, I have run this question by my own broker who holds a seat on the state's Division of Professional Licensure - Board of Registration in Real Estate.  

This is the state's regulating authority.  She agrees that wholesaling in MA is a license-required activity.

If a family member hauls you to court for screwing their grandmother out of her equity, it's not going to go well for you.

@Juensy Pierre   @Charlie MacPherson   the laws for real estate licensure are universal in the US every states regs read darn near verbatim.. just like you need a lenders license to do residential owner occ mortgages in every state.

here is what my state regulator had to say when I sent them advertising copy from an e mail I got from a wholesaler that 

1. had no license I checked

2. did not own the property  I had title send me over last recorded deed

3. was marketing the property just like an agent would  on his flyer and was broadcasting it out to the public and his buyers list.

when I copy and past it comes in upside down but I think you will get the drift.  this case has gone to full investigation 

""

530 Center Street NE, Suite 100, Salem, OR 97301

State of Oregon - Real Estate Agency

Frances Hlawatsch | Financial Investigator

Best regards,

Thank you again for the information, if I have further questions for you during the investigation I will certainly reach out.

The Agency is well aware that unlicensed “wholesalers” are rampant in our jurisdiction. Addressing the problems is like trying to put out small individual fires in a forest that is burning. The Agency’s investigations are complaint driven, so we rely heavily on the public, and our licensees to bring these individuals to our attention.

Thank you for getting back to me. The advertising copy you attached to your email came out perfectly and will be very helpful. Thanks!

Hello Jay,

"""

There is no question in the State of Oregons mind that you need to actually be in title BEFORE you can advertise a property.  They don't buy the double close or the equitable interest theory that Gurus teach students and then students just repeat it like a mina bird. 

@Charlie MacPherson I re-read it (5x to be exact because I really am trying my best to see it from your point of view) and broke it down paragraph by paragraph. I’ve even googled “is wholesaling real estate illegal in any state?” then I got a little bit more specific: “is it illegal in MA?” And “is a license required in any state to wholesale real estate?” The answers I repeatedly came across is that wholesaling is not illegal and no license is required (sources: BiggerPockets.com, Wholesale Elite by Max Maxwell, Wholesale Inc by Tom Krol and Cody Hofhine. Forbes... the list is endless.) I get that you need a license to sell a property, that’s as clear as day. However, you really cannot say the same about selling a contract. Although having a license can be beneficial to a wholesaler, it is not required. Adding on, it is highly recommended to have an attorney look over or create a contract for a wholesaler. That being said, a wholesaler can be well protected in the court of law.

Originally posted by @Juensy Pierre :

@Charlie MacPherson I re-read it (5x to be exact because I really am trying my best to see it from your point of view) and broke it down paragraph by paragraph. I’ve even googled “is wholesaling real estate illegal in any state?” then I got a little bit more specific: “is it illegal in MA?” And “is a license required in any state to wholesale real estate?” The answers I repeatedly came across is that wholesaling is not illegal and no license is required (sources: BiggerPockets.com, Wholesale Elite by Max Maxwell, Wholesale Inc by Tom Krol and Cody Hofhine. Forbes... the list is endless.) I get that you need a license to sell a property, that’s as clear as day. However, you really cannot say the same about selling a contract. Although having a license can be beneficial to a wholesaler, it is not required. Adding on, it is highly recommended to have an attorney look over or create a contract for a wholesaler. That being said, a wholesaler can be well protected in the court of law.

Juensy of course all those sources say that .. they get paid to sell their programs.. if they said its not legal they would be out of business.

consider the source.. there is only one source and that is the department of real estate regulators.. just like I posted above.

assignment of contracts happens and is legal.. the issue is marketing them.. in a way that mimics like a mina Bird a real estate agent.

show me one wholesaler that does not describe the home in some form or fashion.. and look at all the websites set up just like agents.

the reason they are there is simply because like my state regulators said they don't hunt for it.. but if a specific written complaint comes in then they go into action.. I have 2 guys in town that I do deals with because the state of Oregon already gave them cease and desist as they were turned in by neighbors..  One guy just put a sign in the yard.. neighbor knew he did not own the property and wha la.. its like getting a drunk driving cost you about 10k for first offense. 

Originally posted by @Juensy Pierre :

@Charlie MacPherson I re-read it (5x to be exact because I really am trying my best to see it from your point of view) and broke it down paragraph by paragraph. I’ve even googled “is wholesaling real estate illegal in any state?” then I got a little bit more specific: “is it illegal in MA?” And “is a license required in any state to wholesale real estate?” The answers I repeatedly came across is that wholesaling is not illegal and no license is required (sources: BiggerPockets.com, Wholesale Elite by Max Maxwell, Wholesale Inc by Tom Krol and Cody Hofhine. Forbes... the list is endless.) I get that you need a license to sell a property, that’s as clear as day. However, you really cannot say the same about selling a contract. Although having a license can be beneficial to a wholesaler, it is not required. Adding on, it is highly recommended to have an attorney look over or create a contract for a wholesaler. That being said, a wholesaler can be well protected in the court of law.

I would be very careful on taking legal advice from the sources you noted...

Keep in mind, you argue that your contract protects you. That contract you have entered into was for you to buy the house, correct? If you enter into it with zero intentions or ability to buy the house, expect the opposing attorney to use that argument. A wholesaler with no money and no ability or attempt to secure a loan on a house he/she is "buying" per that contract is part of the issue.

I'm not sure how legal/illegal any of it is in NY state. I can say this, I have never been sent a wholesale deal where they show me the contract. It is always the info on the house, the address and a note to NOT discuss anything with the seller. Most wholesalers are very adamant that the buyer does not speak with the seller about the details of the deal.

@Jay Hinrichs It’s pretty clear this particular wholesaler might get into some serious trouble if he/she marketed the property instead of marketing the contract, although if he/she double closes or has a license he/she can pull through this situation. This is one of many benefits of having a license in a situation such as this one but again it’s not required when selling a contract.

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