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

94 Replies

@Jay Hinrichs well.. if a wholesaler doesn’t close they don’t get paid. I don’t see how one would be labeled a fraud in this situation. Also as a wholesaler I let the seller know that I will be making a profit should we close by or before the scheduled deadline. Prior to signing a contract the seller and I would also negotiate on a fair earnest fee should I fail to meet the deadline. I fail to see how that is fraudulent.

Originally posted by @Jason D. :

@Brian Jordan I would agree, that in the scenario you used, they are a customer. They are selling YOU their property. When you put the property under contract with the intention of finding them a buyer, they are a client. You are helping them market their property in order to sell it.

"Wholesalers" claim that they are selling a contract, but no buyer will simply look at the contract and buy it. The contract has no value without the property that is attached to it. So you HAVE to market the property, along with the contract that is attached.

If you really want to wholesale, you have to purchase the property, then resell via double close or by other means of marketing. Assigning a contract with no intention to purchase, and then marketing that contract, is not leagal in any state that I can think of

I believe you're confused when you state "assigning a contract with no intention to purchase" I believe you mean executing a contract with no intention to purchase. The Assignment doesn't come until I've found a buyer for the contract. I also cringe when I see you state "If you really want to wholesale, you have to purchase the property, then resell it via double close. This is not only confusing (If I've already purchased the property, then there's no double close) but the whole statement is more based on your opinion than law. Your statement is your opinion of what wholesaling is. I've been wholesaling for 9 years full-time and have closed over 400 transactions in 2 different state, Texas and Ohio. My definition of wholesaling is very different from yours but that's just my opinion. You mentioned that when I put a house under contract with the intent of finding a buyer, I've now made the seller a client. This could not be more inaccurate. I do not have a Client until they have signed the necessary paperwork explaining agency and both parties have agreed to that relationship. I single action from a single party in no way creates an agency or fiduciary relationship. Also, you can talk about intent all day long but we seem to be focused on the legalities of it all so I'll say this. Good luck proving intent in a court of law. I can imagine it would be next to impossible. Now, all of this being said. I highly encourage wholesalers to get their real estate license. Besides the legalities, it gives you access to the MLS and incredibly powerful training to make you better at your craft. Best of luck to all you wholesalers out there!!! Don't get discouraged. Educate yourself and always do the next right thing!

I didn't realize people still thought this was illegal.

Originally posted by @Cheryl Crockett :

@Charlie MacPherson  

You and I are in agreement. I wrote about an "ethical" lawyer.

A lawyer that doesn't obey the law is not ethical.

 lawyers have opinions  regulators have their opinions  usually regulators win.. they may both be right or both be wrong.

in closing of real estate where you live. lawyers are closing agents they are not doing deep dives into real estate licensure laws. totally different things..  I have first hand experience at this.. I had one project my lawyer said I was fine to structure the way I did.

I got turned into the state. regulator does not agree with my lawyer.. and guess who won.. REGULATOR that one cost me 30k. and a cease and desist from the state. and a lot of drama and stress.

each state is different I have done quite a few fundings in your market wholesale is the norm on contracts in low value asset IE cheapy 20 to 50k homes. that need work. no doubt. 

Originally posted by @Ian Walsh :

I didn't realize people still thought this was illegal.

its state specific.. just like HML that come into Oregon thinking they are doing commercial loans on one to four units and therefore do not need NMLS or state license.. well WRONG.. you can see many a hard money lender with big fines and cease and desists.

there are 12 states that require it and actually go after HML who think they are exempt.. Or and NV for sure..

Wholesaling is under the same state by state situation?  Lending would be such a different animal from wholesaling.  I don't venture too far outside my market so it would be new to me.

Originally posted by @Jay Hinrichs :
Originally posted by @Ian Walsh:

I didn't realize people still thought this was illegal.

its state specific.. just like HML that come into Oregon thinking they are doing commercial loans on one to four units and therefore do not need NMLS or state license.. well WRONG.. you can see many a hard money lender with big fines and cease and desists.

there are 12 states that require it and actually go after HML who think they are exempt.. Or and NV for sure..

Originally posted by @Ian Walsh :
Wholesaling is under the same state by state situation?  Lending would be such a different animal from wholesaling.  I don't venture too far outside my market so it would be new to me.

Originally posted by @Jay Hinrichs:
Originally posted by @Ian Walsh:

I didn't realize people still thought this was illegal.

its state specific.. just like HML that come into Oregon thinking they are doing commercial loans on one to four units and therefore do not need NMLS or state license.. well WRONG.. you can see many a hard money lender with big fines and cease and desists.

there are 12 states that require it and actually go after HML who think they are exempt.. Or and NV for sure..

 Exactly this is all state specific.. in all my PA and MD fundings I do there are wholesalers attached to darn near every one of them. so its very state specific and what a state wants to spend their time and money regulating.

In Oregon they will go after non licensed " wholesalers"  see below my correspondence with the state of Oregon.

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,

they opened an investigation.. and no doubt will lead to a cease and desist.. Oregon is just a very tough state to do business in.. like for your clients you lend to that do fix and flip.. in Oregon you need a developers license even if you hire the GC to do the work.. most don't know it.. I have been fined twice for violating it so that cost me 6k.. and you need a developers license in each individual entity you own that does flips or builds new.. and since I build new housing communities in different LLCs I need one for everyone.. I figured One developers license would work but nope.. got wrung up on it..   So all this stuff on BP were it might be fine in one state does not make it fine nationwide.. Like in WI for instance if you sell more than I think its 7 homes a year you need a license even if you own it.. I  simply had a hard time believe that one until I investigated and sure enough.. just think how man violate that one. 

Originally posted by @Juensy Pierre :

@Jay Hinrichs well.. if a wholesaler doesn’t close they don’t get paid. I don’t see how one would be labeled a fraud in this situation. Also as a wholesaler I let the seller know that I will be making a profit should we close by or before the scheduled deadline. Prior to signing a contract the seller and I would also negotiate on a fair earnest fee should I fail to meet the deadline. I fail to see how that is fraudulent.

That's good to hear you are running an honest company. What is your average deposit when you wholesale? I have seen good wholesalers offer up thousands, most offer up $1 or less.

Originally posted by @Brian Pulaski :
Originally posted by @Juensy Pierre:

@Jay Hinrichs well.. if a wholesaler doesn’t close they don’t get paid. I don’t see how one would be labeled a fraud in this situation. Also as a wholesaler I let the seller know that I will be making a profit should we close by or before the scheduled deadline. Prior to signing a contract the seller and I would also negotiate on a fair earnest fee should I fail to meet the deadline. I fail to see how that is fraudulent.

That's good to hear you are running an honest company. What is your average deposit when you wholesale? I have seen good wholesalers offer up thousands, most offer up $1 or less.

 I had one offer me 25 dollars.. I just laughed he went on to say they do so many deals blah blah..  its too funny really.. 

"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."

This is true, as long as they understand that they are selling for less than what the property is worth.

@Brian Jordan I'll clear up my comment, since it seems to be confusing... yes, executing a contract with no intention of purchase, and if not fully disclosed to the seller, also known as "fraud by inducement"

When I say "purchase and resell via double close" I mean take title in your name before reselling", but as @Jay Hinrichs pointed out, that's still questionable because you are still marketing a property that you dont own.

My definition of Wholesaling is purchasing something, then selling business to business, to an end buyer that will retail that product to a consumer. "Wholesaling" as its taught by gurus and is generally performed by people in realestate, is simply executing a contract, then looking for someone to assign that contract to.

As far as my definition of a client. I define client as someone that you are performing a service for. Therefore, when you offer to find a buyer for their property, through an assignment of contract, you are performing a service for that person, and therefore they are your client. And as a real estate agent, you have a responsibility to a client that contradicts your goal as a "wholesaler".

I'm hoping that clears up so of the confusion on my opinions on the subject.

@Jason DiClemente, well stated explanation!  I have spoken to at least three real estate agents here in Virginia and even they do wholesaling on the side.  Of course, they identify themselves as licensed real estate agents in all deals.

Originally posted by @Juensy Pierre :

@Jay Hinrichs well.. if a wholesaler doesn’t close they don’t get paid. I don’t see how one would be labeled a fraud in this situation. Also as a wholesaler I let the seller know that I will be making a profit should we close by or before the scheduled deadline. Prior to signing a contract the seller and I would also negotiate on a fair earnest fee should I fail to meet the deadline. I fail to see how that is fraudulent.

 If---you are signing contracts with no ability to close and using BS escape clauses that IS FRAUD IN THE INDUCEMENT. 

I actually enjoy when agents are involved. I am licensed and can represent our LLC if needed. But, having the agent help move the deal along and make sure they're looking out for the seller's best interest, I find, is very helpful. I don't want to leave a trail of anger, disappointment, questions of ethics. It also helps with the "long dollar." Buying directly from a homeowner is a one and done type deal with the highest cost of marketing (typically accompanied by a higher return). But working through an agent with a pocket listing or even on the MLS can be the groundwork of a great working relationship moving into the future. I focus so hard on buying correctly and all but ensuring my performance on the deal (I don't assign contracts though). We close on the property and already have a buyer under contract subject to us closing with the seller. Creating a track record of performance, transparency, and building a positive reputation are the most valuable assets that someone who wants to wholesale can do. I missed that point when first getting into real estate. The $ signs are very attractive at first. But, you have to focus on value delivery. Actually deliver the value that you're promising.

We focus on performance %. My personal performace % is 100%. As a whole, our San Diego wholesale brokerage, hovers between 85-90% performance. There's always margin for improvement. Focus on performance. Don't fluff your numbers to get the contract. Banking on requesting repairs or reductions will only leave a trail of waste behind you. Be realistic. Be honest. 

@Jay Hinrichs wrote: "I got turned into the state. regulator does not agree with my lawyer.. and guess who won.. REGULATOR that one cost me 30k. and a cease and desist from the state. and a lot of drama and stress."

Jay,

I am so sorry that happened to you. Thank you for sharing so that others can learn.

Many opinions differ and vary among realtors, brokers, investors, lawyers and (as you have added) regulators, etc. And some are very passionate about their respective stances. Add to that, the differences between states in the laws that govern the transfer of real estate.

Your experience is one of many that proves the discussion about the legality of wholesaling can never be "squashed" or ended with a Bigger Pockets forum post. Still, there is plenty to learn in the posts. But, in a few weeks or months, someone will start a similar thread, just as someone probably did a few months or years ago.

I wish you the very best on your current or next deal.

Originally posted by @Alan Johnson :

@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.

 That is one of the best posts I have seen on the subject. 

@Brian Jordan I'm in Cleveland and really appreciate your insight about wholesaling particularly since it seems like Ohio is one of the states taking a fairly hard line stance against illegal forms of wholesaling.  

I'm fairly new in REI and have been looking into wholesaling as something additional to the fix & flips I've done in the past (I was primarily the private money lender in a handful of fix and flip deals). I've been seeing so much conflicting information regarding wholesaling that it has me a little bit gun shy. My situation is a little different than the "typical" newbie looking to start wholesaling because they have no money and this seems like an inexpensive way to get started. I have the funds to close on any deal that I would be putting under contract and the last thing I would want to do is back out of a deal and leave the seller high and dry.

You recommended wholesalers get their real estate license and this seems like a logical course of action however I have a few questions. Would you recommend then trying to find a broker to work under or just have the license for the education and training it provides as well as additional benefits like access to MLS? I really have no interest or intention of selling homes as a realtor. From my research it seems like most brokers aren't going to want to sign on for such a deal since I wouldn't really be selling homes for them in the traditional way and there are obvious risks on their end. Finally, assuming I would be acting ethically and following the proper procedures are there different fiduciary responsibilities between just having my license as opposed to working under (or eventually being) a broker?

Thanks in advance for any info you can offer since we are in the same state.  I want to do things the legal and ethical way but am running across a lot of conflicting information.

Originally posted by @Jim S. :

@Brian Jordan I'm in Cleveland and really appreciate your insight about wholesaling particularly since it seems like Ohio is one of the states taking a fairly hard line stance against illegal forms of wholesaling.  

I'm fairly new in REI and have been looking into wholesaling as something additional to the fix & flips I've done in the past (I was primarily the private money lender in a handful of fix and flip deals). I've been seeing so much conflicting information regarding wholesaling that it has me a little bit gun shy. My situation is a little different than the "typical" newbie looking to start wholesaling because they have no money and this seems like an inexpensive way to get started. I have the funds to close on any deal that I would be putting under contract and the last thing I would want to do is back out of a deal and leave the seller high and dry.

You recommended wholesalers get their real estate license and this seems like a logical course of action however I have a few questions. Would you recommend then trying to find a broker to work under or just have the license for the education and training it provides as well as additional benefits like access to MLS? I really have no interest or intention of selling homes as a realtor. From my research it seems like most brokers aren't going to want to sign on for such a deal since I wouldn't really be selling homes for them in the traditional way and there are obvious risks on their end. Finally, assuming I would be acting ethically and following the proper procedures are there different fiduciary responsibilities between just having my license as opposed to working under (or eventually being) a broker?

Thanks in advance for any info you can offer since we are in the same state.  I want to do things the legal and ethical way but am running across a lot of conflicting information.

 Getting your license is not a good idea for you if you want to wholesale. If I were you I would just buy the house. As soon as you close resell the sucker for a profit. If you are a licensed agent you have a fiduciary responsibility to the general public so buying low & selling high could be a license issue for you.

@Jim S. Looking at your comment thread I imagine that you are struggling at the moment with the potentially conflicting views that have been expressed.

I maintain that the controversy surrounding "wholesaling" largely revolves around not using the best tools to get the job done.

If the intention is not to actually purchase a piece of real estate, why enter into a purchase agreement (even if assignable)?  These agreements have been designed to record in writing the intention (and obligation) of a seller to sell and the buyer to buy.

An option agreement for real estate, on the other hand, is designed to obligate only one party (in this case, the seller) to perform. The other party (option holder or "optionee") is completely free to decide to proceed with the purchase of the property (by executing the option) or not.  The optionee has this privilege because he/she has given the property owner "consideration" (payment) in return for the property owner's agreement to sell should the optionee decide to purchase.

Additionally (if specified in the option agreement) the optionee may sell/assign the option agreement to anyone he/she chooses.  The new holder of the option can then notify the property owner of their intention to execute the option.

This second "consideration" (payment) for selling the option avoids using phrases like "assignment fee" or "assignment commission" associated with wholesaling purchase contracts that tend to make it appear that the wholesaler is brokering without a license.

It is my contention that the proper tool (option agreement) can go a long way towards helping you "to do things the legal and ethical way."  

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