Are wholesalers dishonest? Illegal?

Wholesaling
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Are wholesalers dishonest? Illegal?

Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

I'm looking at wholesaler contracts and they appear to be dishonest, possibly even illegal. Am I missing something?

I'm talking to someone that is interested in wholesaling. I'm reading up on it and trying to refresh my memory because the whole thing appears shady, manipulative, in many cases dishonest, and possibly even illegal. I think many people get away with it simply because the crime is private and nobody bothers to complain.

I've looked at a couple contracts from people claiming to be big-time wholesalers with 10+ years in the business and training programs on YouTube and private websites. The contracts they use are fairly standard purchase contracts, probably lifted from the internet and dumbed down to 1-2 pages. Although they do mention "assigning" the contract, it's literally only 1-2 words conveniently hidden in the contract. Unless they explain what is happening in detail, the contract gives the impression the wholesaler is actually buying the property. But the wholesaler has no intention of buying the property and - in the vast majority of cases - they don't even have the ability to purchase the property. Then the wholesaler is marketing the property to potential buyers, which is illegal because they can't sell something they don't own.

It seems the proper, honest, legal way to do it is this:

  1. Have an honest contract with the Seller stating what price and terms the Seller is willing to accept, and that you are not buying the home but you will work to find buyers willing to purchase the property under those terms
  2. Market the terms (not the property) to potential buyers
  3. When you find an interested buyer, sign a separate contract says they will pay your fee upon the successful purchase of the property
  4. Introduce the Buyer and Seller and monitor

Am I wrong? 

Question #2: I have someone that is wanting to find the deals and bring them to me and my potential buyers. More of a bird dog than a wholesaler. I can't legally compensate someone that is unlicensed. How can I incentivize him without violating the law? Can I tell potential buyers that the property is available for $100,000 and include the bird dog fee in the purchase price, to be paid directly to the bird dog?

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Jerryll Noorden
Flipper/Rehabber · Wilton, CT · Member since 2015 · 4k+ posts · 4k+ votes
6y

Are guns evil?

I see so many people killed by guns.

A wholesaler: Someone that puts a property under contract and then sells their equitable rights/ or contract to a back-end buyer at a profit.

There is nothing honest or dishonest about that. 

A lot of wholesalers go about it wrong, yes. But don't generalize asking if wholesalers are dishonest. That is not fair.

I blame the gurus that COMPLETELY butcher what and how wholesaling is supposed to be done!

But yes, I do feel your pain. Try not to blame people that do wholesaling in general though. Some do it right, some are pricks and most just don't know any better because that is what their mentor has taught them.

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  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    6y

    @Jonathan Hasan by being completely transparent they tell the seller what their plans are. A good wholesaler will actually close on the property and then sell it to the investor. The seller should know everything, there should be zero ambiguity. In some cases it has nothing to do with money They have a problem they need solved

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  • Jonathan Hasan
    Member since 2019 · 57 posts · 25 votes
    6y
    Originally posted by @Christi Hawkins:

    @Jonathan Hasan by being completely transparent they tell the seller what their plans are. A good wholesaler will actually close on the property and then sell it to the investor. The seller should know everything, there should be zero ambiguity. In some cases it has nothing to do with money They have a problem they need solved

    What about the ones who work with MLS deals? I have heard from other wholesalers that sometimes they find good deals on the MLS. How can they be transparent with listing agents so that everyone is in the know?

    Sincerely,

    Jonathan Hasan 

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  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    6y

    @Jonathan Hasan now that I don't know know I'm not sure why you would try to wholesale a property listed on the MLS with a Realtor

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    6y

    To me it falls in the "Intent" realm. I've got items under contract for myself. Then a situation changed and I've assigned it. I've been on the other side where someone else planned on doing XYZ with the property, got it under contract. Saw a different deal, spouse went nuts, kid needed surgery etc. So they assign their contract over. Granted in most of my personal cases the "assignment fee" was a case of beer, lunch, throwing a referral at each other etc. If I couldn't find a buyer I would have bought it anyway, same with the ones I've bought. 

    Now if I couldn't afford to buy it without finding a buyer, that is where it feels dirty. 

    Just my thoughts.

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  • Jonathan Hasan
    Member since 2019 · 57 posts · 25 votes
    6y
    Originally posted by @Christi Hawkins:

    @Jonathan Hasan now that I don't know know I'm not sure why you would try to wholesale a property listed on the MLS with a Realtor

    Sure. That is just what I was told. They try and find fixer uppers in the area to see if the seller is a "motivated seller". Maybe a house has severe internal repairs that other homebuyers don't want to deal with. Maybe the wholesaler is the first to the punch. Things like that.

    I perhaps should have explained in my post that the wholesalers I talked to only bother with distressed houses on the MLS that they think are good enough to put offers on. Even then, the listing agent could get them more money 9 times out of 10 but sometimes the homeowner is open to deals if they feel justified. At least from what I understand.

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  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    6y

    @Jonathan Hasan that’s an interesting approach The wholesalers I know go directly to the seller, and yes it’s always some kind of distress situation They either but lists or identify a neighborhood and market directly to the homeowner The other way I know they find deals is to drive around and look for properties that are clearly in a sign of disrepair I do hope your wholesalers are trying to purchase the property with the Listing Agent involved You never want to cross a Listing sign (or the Listing Realtor)

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  • Jonathan Hasan
    Member since 2019 · 57 posts · 25 votes
    6y
    Originally posted by @Christi Hawkins:

    @Jonathan Hasan that’s an interesting approach The wholesalers I know go directly to the seller, and yes it’s always some kind of distress situation They either but lists or identify a neighborhood and market directly to the homeowner The other way I know they find deals is to drive around and look for properties that are clearly in a sign of disrepair I do hope your wholesalers are trying to purchase the property with the Listing Agent involved You never want to cross a Listing sign (or the Listing Realtor)

    Yes, they always ask if the listing agent wants to represent them as the buyer. That way they get dual commission. However there are rules about dual agency in some states so they ask for referrals for any colleague who would be willing to represent them. 

    The wholesalers I talked to seem to try and get all people to benefit. 

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  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    6y

    @Jonathan Hasan I like everyone is happy in the end

    0Reply
  • Bob Floss II
    Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes
    6y

    @Nathan Gesner

    My main issue with wholesalers starts with item 1 on your list. They write beautiful prose online on their best business practice and disclosure. In practice, I rarely see any disclosure given to seller and the wholesaler plays a shell game to the closing table in hopes they don't get caught. The seller has no idea the property is being assigned.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Bob Floss II:

    @Nathan Gesner

    My main issue with wholesalers starts with item 1 on your list. They write beautiful prose online on their best business practice and disclosure. In practice, I rarely see any disclosure given to seller and the wholesaler plays a shell game to the closing table in hopes they don't get caught. The seller has no idea the property is being assigned.

    I thought Ill was the first state to pass clear cut law that one needed a real estate license for ANY type of wholesale deal other than closing on it yourself and selling it yourself..   IE assignment fee needs license  double close needs license etc etc. ?   be interested to hear your view point as an attorney on understanding the IL law as written.

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  • Jon Catterson
    Flipper/Rehabber · Sacramento, CA · Member since 2020 · 72 posts · 49 votes
    6y

     Hi Nathan,

    I have a question. How would wholesalers do that exactly? I mean what are the processes, actions, and results? Also, how is that different from what most wholesalers typically do? Thank you in advance. 

    0Reply
  • Bob Floss II
    Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes
    6y

    @Jay Hinrichs Everyone in Illinois hopefully has their broker's license at this point. I imagine there are some that will keep doing it until they get caught. Sitting through the course and passing the test doesn't seem to be making a huge improvement on disclosure. They typically hang their license with a brokerage that charges minimal transaction fees and no commission splits with no training. Most of the large real estate brokerages with training have said no wholesaling is allowed in their office. One bright spot is we don't have to look at those ugly bandit signs anymore. They don't conform to advertising rules for brokers so they can't use them.

    I honestly don't think the State is "going after" wholesalers. Now that they are licensed, they will wait for sellers to file complaints like any other licensee. They simply don't have the staff and rely on public complaints.

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