If it’s done the proper way, wholesaling real estate can be a rewarding and lucrative endeavor. But to get your wholesaling business off the ground, you need to know what’s legal and what will land you in hot water.
Even if you stay on the right side of the law, you want to be as efficient as possible, saving you time, money, and most of all, frustration. Wholesaling real estate is legal in all 50 states, but there are specific laws and regulations you must follow to ensure you’re in full compliance.
Here’s what you need to know if you’re considering the launch of a wholesaling business.
In simple terms, real estate wholesalers are middlemen who facilitate deals between sellers and potential buyers.
A wholesaler will find a property, preferably at below market value, enter into a contractual purchase agreement with the seller, and then either assign the contract or buy and then sell the property to another buyer at a higher price, collecting a fee in the process.
There are several ways to structure a wholesaling deal, and any type of property can be wholesaled, including:
Often, sellers are motivated to make a quick deal for less than the full market value, perhaps due to health problems or financial setbacks. Real estate investors routinely look for these kinds of investment properties so they can get a reasonable rate of return when they eventually sell. Zillow is one of many tools you can use to help establish a value range, but you should do plenty of homework for each property to maximize your knowledge and potential for profits.
One of the great things about wholesaling is that you don’t need years and years of experience of real estate investing to begin. You will still need to work at it, but beginners can execute deals and make money almost from the outset.
People from all walks of life can become wholesalers, you do not need to be a real estate professional or be affiliated with a real estate brokerage to break into this field.
Yes, wholesaling real estate is legal. As long as you follow laws and processes put in place to protect all parties involved in a wholesaling transaction.
Keep in mind that wholesaling legalities can vary from state to state, so make sure you do your due diligence before starting.
In some states, this can be harder than it sounds because real estate laws aren’t always clearly written, creating a grey area for some wholesalers. Many states also have disclosure agreements that can land you in hot water if you’re not in compliance.
For example, as of January 1, 2020, California made changes to its 593 reporting and income withholding requirements. Every real estate transaction with a sales price over $100,000 must now be reported to the state’s Franchise Tax Board, whether or not the transaction is exempt from state income tax withholding.
When in doubt, either consult with an experienced real estate attorney to get accurate legal advice, or back off on a real estate deal until you have a clear and ethical answer to your questions.
Many inexperienced real estate wholesalers get in trouble when they blur the line between wholesaling and brokering real estate without a license. As long as you simply act as a principal buyer in a transaction and either sell your contracted real property to a new buyer or you buy and then sell a property outright, you should run into no problems.
If you intend to put together a wholesale deal and assign a contract, in the interests of full transparency, you should disclose this as part of the initial contract process. When you make your intentions clear up front that you’re only selling the rights of the contract, you run into little or no problems when you close out your portion of the deal.
Many people also assume that because relatively small amounts of upfront money can be involved in a wholesaling deal, this is a good profession for beginners. Sometimes that’s the case, but not always.
As the middleman, you have responsibilities to both the seller and the buyer. It’s not uncommon for real estate investors and sellers to push boundaries to maximize their profits. And in some cases, that can include trying to squeeze out a wholesaler and work directly with each other. It happens.
That’s why it is a good idea to have an attorney’s fees clause in your agreements. If you run into problems that require legal advice or end up dealing with unethical partners, you can pursue legal action to enforce the purchase agreement and preserve the right to seek compensation for your attorney’s fees.
Also, when you enter into a contract with a seller, you should include language that fully releases you from liability and further obligations after you assign the contract to the end buyer.
Having a transparent, clear, concise, and well-written purchase contract will not only legally protect you, but it will also cut short the argument or even the perception that you are entering into any kind of illegal transaction.
If you want to wholesale properties, there are several ways to structure a wholesale deal. The most common are:
After you get a house under contract, which may or may not include an earnest money deposit, you assign your rights in the contract to a new buyer.
Under an assignment of contract, you are a principal in the transaction, which means you don’t need a real estate license to wholesale a real property this way. However, the new investor takes on the rights and responsibilities of the contract and will close the deal instead of you.
Also, in your role as a middleman for this type of real estate deal, you’re not responsible for paying any closing costs.
For your efforts, you can charge an assignment fee, which is similar to a real estate commission that a licensed agent would earn as part of the deal. Typically, you’ll be paid when the deal closes.
There are also instances when you can collect your fee when the contract is assigned. It all depends on how you’re able to structure the deal.
The other good thing about this method is that assigning a contract can be as simple as drafting a one-page agreement to transfer your rights. To protect yourself, make sure you have a lawyer specializing in real estate contracts draft the document. If not structured properly, you could run into assignment prohibitions that will kill the deal for you.
There are a couple of conditions involving real estate law that might impact your decision to use this method.
The other thing you must be aware of is that one of the requirements of an assignment contract is full disclosure that reveals precisely how much you’re making when the contract is assigned. If any of the parties think your assignment fee is too high, you could be asked to renegotiate the amount, especially since it’s perceived that you are not taking on any of the risks in the deal.
An "Entity Assignment" is a variation on the assignment of a contract. Instead of writing up the initial contract with you as the buyer, you write up an agreement with a trust or an LLC as the purchaser (the entity).
This allows you to assign the contract to another investor because the contractual rights are under the trust or LLC, and not an individual. You sell or assign the entity to the new investor for a fee. In many cases, the entity is created solely for this one transaction.
In some cases, sellers may be reluctant to sign a purchase agreement that includes an assignment clause to an individual. Using an entity assignment of a contract is a way to ease those concerns so that you can get the deal done.
The downside is that there could be added costs to set up the entity, both in terms of legal fees or registration costs that you would have to pay to the state.
This process involves executing two transactions. First, you buy the property from the seller. Then you will sell the property to your buyer. Most of the time, these two transactions will take place the same day, or within a couple of days of each other.
The good thing about a double closing is that the amount of profit you make does not need to be revealed. You don’t need to disclose your financial position, and you can more freely negotiate a deal with a much higher price and upside.
In fact, you don’t need to reveal at all that you plan to sell the house to a new buyer immediately. This can be an attractive benefit for many wholesalers.
Many people believe a double close is the “cleanest” type of deal because you actually buy a property and then sell a property instead of assigning rights, which some individuals may balk at. You also retain more control because you own the property at some point. It gives you leeway to ask whatever price you want or to market the property however you want, as long as those activities take place after a wholesaler actually owns the property.
As you might guess, the flip side is that with two separate transactions, you’ll also need to deal with two different sets of closing costs. But if you are savvy enough to structure your deals right in a double close, you should be able to absorb added costs without any problems.
The other downside is that this process requires more upfront working capital because you have to qualify to buy the property initially and bring your financing to the seller for approval.
With a double close, the end buyer may want to rehab and make certain improvements to the property before ultimately selling to another buyer. A wholesaler will not make improvements because they will not own the property long enough, sometimes less than a day, or not more than a couple of days, at most. Each investment in the property should produce an immediate bottom-line return or be included to facilitate the overall deal.
As an alternative, some end buyers will simply buy and flip the real estate investment property “as is” to another buyer. It will be up to the end buyer to make improvements as they see fit, if at all.
This will have an impact on the deal since a buyer must be able to calculate what their costs are going to be with combined purchase and repair costs if they go that route.
As a wholesaler, you need to have this discussion with your buyer upfront to have a clear understanding of their intentions and motivation.
Yes, but again, there are laws and procedures you must follow. All real estate deals must be executed correctly and within a legal framework.
Co-wholesaling is a joint venture between two parties who both agree to play a role in getting a property under contract, and either assigning the contract or buying and selling the property to an investor who may also be one of the partners.
Co-wholesaling can be a single partnership deal or ongoing for a series of transactions.
Among other things, make sure that joint venture agreements also include a non-compete or non-circumvention clause to protect all parties.
People may enter into a co-wholesaling agreement to pool their resources, experience, access to funding, and other assets to strengthen their positions and improve their chances of being successful wholesalers. Each partner can focus on their strengths, and it’s easier to do more deals because you’re generally able to access more opportunities through your combined efforts.
Taking more of a volume approach to completing transactions means there’s less pressure to put every dollar in your pocket for every transaction. This alone makes it easier to complete more deals, bumping up your overall wholesaling income.
In some cases, a more experienced partner will partner with somebody new to wholesaling, providing an opportunity to mentor and grow professionally while also enjoying the benefits of combined resources.
In some cases, and the assignment contract. Both parties earn a fee when the contract is assigned, or the property is bought and sold. In most cases, the fee is split 50/50. But as it is with all things in life, the fee split can be in any that is negotiated between the partners.
Reverse wholesaling is the same process as wholesaling, except the steps are flip-flopped.
So, the short answer is “yes” reverse wholesaling is legal, as long as you follow the laws governing these kinds of transactions. There is no difference in the amount of research, and due diligence you should perform. The more knowledge you have, the smoother your transactions will be.
With reverse wholesaling, instead of finding a real property and putting it under contract first, you find the buyer first, and then work to match that buyer with an appropriate property. Buyers often know what kinds of properties they want to buy, so you can better target your search to meet their needs, instead of wasting time and bringing them a property they won’t be interested in.
One of the most significant benefits of reverse wholesaling is that you can develop deeper relationships with the people who will help you complete your real estate deals, perhaps over and over again.
You can start to build a buyer’s list at any time.
With these relationships solidly in place, you won’t need to vet buyers and pre-qualify them repeatedly. In some ways, the most challenging part of your selling transaction will already be done before you even enter into it.
Also, if you have a highly motivated seller who wants a fast turn on a deal, which is often the case, you have a much better chance of locking in the selling contract if you can demonstrate tangible ways to assign the contract.
That makes it easier to move quicker, close more deals, and of course, make more money.
If you’re serious about wholesaling, you can undertake wholesaling and reverse wholesaling activities simultaneously. You will need to work both sides of the deal at some point anyway. Making good use of your time now, whether it’s finding sellers or buyers, will pay off later.
By effectively using technology, you can cast your net of potential buyers far and wide. You are less limited by geographical restrictions because more and more investors are comfortable with virtual transactions than ever before.
Networking will allow you to connect with potential buyers who are individual families looking for fixer-uppers, rental property investors, house flippers, and developers who are as interested in the value of the land as they are with the building that sits on it.
There is a right way and a wrong way to wholesale real estate. This may be obvious, but the right way is legal. The wrong way is illegal.
In addition to general applications, local and state laws will vary. Ignorance of wholesaling laws and regulations is no excuse.
Here are a couple of examples.
In Florida, assigning contracts in real estate deals is legal. The caveat is that as long as there is no language in the contract that prohibits it in a particular deal, that an assignment does not violate any public policies, or violate a state or federal statute.
In New York, you can’t broker any real estate transactions without a license (pretty much true in all states). Without a license, you can’t market or advertise a property for sale. That’s a clear violation of New York State law. You can only market the rights to assign a contract as a wholesaler.
It’s crucial that you understand the difference.
Real estate laws do change, so you need to stay abreast of those changes since they may or may not impact you as a wholesaler.
The most important thing you must not do is attempt to broker real estate without a license. This is why you must be clear when you enter into a contract with a seller that you will be assigning the rights of that contract to another entity, and not actually selling the property in question. Assigning a contract is legal. Selling a property without a real estate or broker’s license is not.
The workaround here is that you can always get your real estate license. Becoming a Realtor will require some time and cost on your part, but it may be worth it over the long-term.
As an adjunct to this, you’re not allowed to publicly market the property if you don’t own it, or you are a licensed Realtor. But you can privately transfer your rights in the selling contract to another party for a fee.
When you do market the property to private investors, you will need to disclose that you are not the owner, and instead, that you only hold a valid contract on the property.
You can also buy and sell the property as two independent transactions. This has its own set of challenges, as we discussed above. But when you buy a property outright, it’s yours to do with as you please, even if you turn around and immediately sell it to another party.
Do not be pennywise and pound foolish when it comes to seeking legal advice, either. Ensure you have a good working relationship with an experienced real estate attorney and preferably one who understands how to structure an airtight wholesaling contract.
This speaks to the overall concept of complete transparency. You should attempt to be fully transparent so that all parties have a clear and thorough understanding of the relationships and intent going forward.
Make sure your disclosures are complete, proper, and timely. There should be no surprises. Be responsive to any inquiries to help build confidence and move the deal forward.
In addition to maintaining appropriate legal standards, you must also be ethical at all times.
Your reputation is at stake in every real estate deal. Guard it zealously.
In most cases, the answer is no.
But you do need to understand what local laws are in place, since there may be limitations on the number of wholesaling deals you can do per year in some jurisdictions.
This is not to say that having a real estate license won’t benefit you, because it will. You will not be bound by contract assignment limitations or how you market a property when you are licensed.
However, if you are a licensed agent, in most states, you’ll need to disclose that fact upfront when entering into a contract with a seller or a buyer. Again, this speaks to full transparency, which should be a wholesaler’s goal on every transaction.
Also, as a real estate agent, you’ll earn a commission on the sale of the home, instead of collecting an assignment fee. That could impact the amount of money that you receive.
The bottom line is that a real estate wholesaler sells the contractual rights to a property, but a real estate agent sells the actual property.
Wholesaling is legal in all 50 states.
The catch is that you need to understand the local and state real estate laws that govern wholesaling activities.
To get an overview of the real estate state laws and better understand the requirements of conducting real estate transactions and wholesaling in your state, click on the appropriate link below.
A real estate wholesaling business is a legal and legitimate way to facilitate a real estate transaction and earn a nice fee in the process.
Solving problems for sellers and presenting opportunities for buyers can be a rewarding experience when you creatively work to bring quality solutions to the table that benefit all parties.
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