Wholesaling laws exist for one reason, and one reason only: to ensure ethical and transparent practices are utilized when wholesaling real estate. Wholesaling real estate rules have been put in place to protect those wholesaling houses, and we are lucky they exist. Unfortunately, the lines have been blurred by convoluted legal language and a disregard for compliance. As a result, many entrepreneurs have been left questioning, “is wholesaling real estate legal?”
As a result, there’s a gross misconception that wholesaling houses is illegal. It is worth noting, however, that wholesaling is not illegal. In fact, wholesaling can prove highly lucrative for those willing to follow the laws put in place by the state they intend to deal in. That said, it’s important to familiarize yourself with the wholesaling laws that govern your area and to abide by them when carrying out your own deal.
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What Is Real Estate Wholesaling?
Real estate wholesaling is the process of securing a property under market value, and assigning the contract to an interested buyer. Wholesalers earn money as a percentage or wholesaling fee attached to the contract assignment. Without ever owning the property, a wholesaler effectively acts as the middleman in a transaction. The key to being successful is having a wide network, with reliable sellers and highly interested buyers.
Is Real Estate Wholesaling Legal?
Wholesaling is not illegal when done correctly. Countless investors have made a good living by wholesaling houses while simultaneously abiding by local laws. However, as is the case with every other real estate exit strategy, investors must familiarize themselves with these laws. To make matters even more confusing, each state has its own rules in place. Case in point: it is legal to wholesale real estate as long as you follow the rules of your particular state.
When all is said and done, there is nothing illegal about selling a contract (which I’ll get into later). What’s more, you aren’t acting as an unlicensed agent (something else that has proven rather divisive). Instead, you are entering into a bilateral contract with the seller, which discloses (clear as day) your intentions to buy an equitable interest in the home and not the home itself. Additionally, wholesalers will need to provide a proof of “funds letter,” which proves intent to buy. All that said, some things make wholesaling illegal. In particular, investors can’t bring the buyer to the deal first, continue without a transparent contract, or fail to prove intent.
As a wholesaler, you are the principal buyer in the transaction, and you are selling your contract to another buyer; it’s as simple as that. According to Deidre Woollard at Millionacres, due diligence will take you far in the world of real estate wholesaling. As long as you abide by the laws outlined in your particular state and mind due diligence, “transparency, disclosures, and well-structured contracts are your friend if you are planning to be a wholesaler,” says Woollard.
Do You Need A License To Wholesale Real Estate?
Wholesaling real estate can get confusing, which begs the question: Do you need a license to wholesale real estate? The answer is simple: no. It is not necessary to be a licensed real estate agent to wholesale real estate; you need to be the principal buyer or seller in the respective transaction. However, if you are a licensed real estate agent, you need to disclose as much as possible. Most states require licensed agents to disclose their position as a licensed real estate professional when they enter into a contract with a buyer or seller.
If you are selling a contract, you must disclose that you are not the property’s current owner but rather that you hold the right to purchase the property. In other words, you will need to let buyers know that you aren’t selling the property. Instead, you are selling the rights to purchase the property.
If you are purchasing the property to resell it, you must disclose that you are not the owner on record. Instead, you must disclose that you have signed a valid purchase agreement and will close escrow sometime in the immediate future.
Do You Need A Buyers List To Wholesale Real Estate?
It is incorrect to assume you can only wholesale real estate with the help of a buyers list. It is by no means necessary to have a buyers list to wholesale real estate. However, it is worth noting that a buyers list is another tool developed to make the life of a wholesaler easier. If for nothing else, there are plenty of ways to find end-buyers that don’t involve using a buyers list. On the other hand, a buyers list will not hurt your prospects of wholesaling houses.
As their names suggest, buyers lists are exactly what you’d expect: lists of prospective buyers. Provided an investor has a dependable buyers list on hand, it’s safe to assume they already have their first idea of who they will sell their wholesale property to at a later date. That said, the importance of a truly great buyers list lies in how it was built and not the mere ownership of it. You see, a good buyers list will consist of investors who have proven they will buy a property from you if you can bring them what they need. In theory, investors should already know what the buyers on their list want. Therefore, they will already know if the subject property they are looking at will meet the investors’ needs on their buyers list. Therein lies the true benefit of a good buyers list: It will give wholesalers access to buyers before they even begin the wholesale process. After all, it’s a lot easier to wholesale a home if you already have a buyer lined up.
Despite the advantages offered by well-vetted buyers lists, however, they are not necessary. It is entirely possible to wholesale real estate without a buyers list. Instead of referring to a buyers list, wholesalers will need to find buyers another way.
Legally Wholesaling Real Estate: Compliance & Best Practices
Disclaimer:The following compliance and best practices information are just that: for information purposes only. Do not rely upon the following for your own wholesale deal, as laws change, laws vary by state, and each situation is unique. Assume the following information is not tailored to your specific situation, and be sure to seek the counsel of a competent real estate attorney before moving forward with a wholesale deal of your own:
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Position Yourself As The Principal Buyer: To abide by today’s wholesaling laws, investors must be a principal participant. In other words, investors intent on wholesaling real estate must act as the principal buyer when striking a deal with the original seller. Additionally, the investor must act as the principal seller when it comes time to part ways with the property. To be clear, the investor must always act as the principal in each part of the transaction.
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Ensure All Agreements Are Valid: It is important to note that wholesale deals are legitimate real estate deals, despite the differences that separate them from their rehabbing counterparts. As viable exit strategies, wholesale deals should be treated as such. Therefore, investors need to use valid and binding written purchase and sales agreements that conform to the requirements of their local market.
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Include The Required Agreement Language: Wholesale deals can be confusing for those that have never done them, which is why the language exercised in a respective deal is so important. To make a deal as transparent as possible, therefore abiding by all the rules outlined in your area, be sure to always include relevant agreement language that’s permissible and/or required in your specific market area.
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Include A Deposit: I highly recommend including a deposit of at least $500 when attempting to acquire a wholesale deal. Otherwise known as earnest money, the deposit will give your impending transaction validity. The money, therefore, simultaneously proves you are a serious buyer and gives you something more important: contractual interest and an equitable ownership interest in the property.
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Have A Backup Plan: While you may be interested in wholesaling houses, I recommend having a backup plan. More importantly, purchase a wholesale deal with the intent to rehab it in the event the buyer doesn’t come through. To be clear: intent includes both the mental willingness and the financial capacity to close.
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Market & Sell Interest You Own: The aforementioned purchase agreement does not give you title to the property. Instead, a wholesale deal gives you the right to buy the property at the previously agreed-upon terms. As a result, you need to be careful what you market and sell moving forward. You can only market and sell the purchase agreement itself and not the subject property. More importantly, you will need to disclose that you are a contract holder (not the owner on title) on all marketing material. The disclosure shouldn’t leave any questions about who you are in the transaction: someone selling a contract or purchasing the property and reselling it.
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Disclose Agent Licensing: Most states require licensed agents to disclose their position as a licensed real estate professional when they enter into a contract with a buyer or seller. You must, therefore, disclose your status as a licensed real estate agent. You must also clearly communicate that you are acting as a principal/direct buyer to purchase the home in the transaction.
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Exercise Transparency: As always, be fully transparent. Disclosures must be sufficient, proper, and timely. There should be no questions on behalf of either party as to what is taking place.
These points may be applied to both types of wholesaling strategies: assignment of contract and the double-close. However, they are strictly for informational purposes only. Always seek counsel from experienced, licensed, and insured professionals in your specific market area before moving forward with a wholesale deal. It is highly recommended you secure legal representation on every transaction.
Summary
Wholesaling laws were specifically designed to prevent malicious individuals from taking advantage of the system or even other buyers and sellers. For all intents and purposes, they are a safety net put in place for our own good. However, far too many investors are unfamiliar with today’s wholesaling real estate rules and still question is wholesaling real estate legal?”
As a result, wholesaling has gotten a “bad wrap” and has been grossly misrepresented. It is true: there are ways to wholesale illegally, but I digress. When carried out under wholesaling laws, wholesaling real estate can prove to be a great exit strategy.
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Familiarize yourself with today’s wholesaling laws and be sure to consult a real estate attorney before you attempt a wholesale deal of your own.
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Is wholesaling real estate illegal? Absolutely not, as long as you abide by the laws set forth in your state.
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Wholesaling with a real estate license is legal, but you need to disclose your position as a real estate professional.
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