As the most populous state in the nation, California offers almost unlimited opportunities for people who want to pursue careers in the real estate industry.
Many people become agents and brokers or enter into related fields such as real estate investing, mortgage and title, real estate attorneys, insurance/inspection experts, and many others.
One possible career option that sometimes gets overlooked, and one that generates a fair amount of questions, is whether or not wholesaling is legal in California.
Here are two of the most important things to remember if you’re considering creating a wholesaling business in California.
You can make a good living and maybe even a lot of money if you choose this career.
You can get into a lot of trouble if you DO NOT do it the right way.
The California Department of Real Estate (DRE) has several laws to protect motivated sellers and the public interest by actively overseeing licensure, regulation, education, and enforcement.
If you’re considering any kind of activity related to real estate deals in the state, it’s incumbent on you to fully understand California's real estate laws that are in place.
The most common ways to structure a wholesaling deal are:
You can inject a certain amount of creativity and flexibility when putting deals together. Many people often form partnerships to turbocharge the wholesale process, including their financing and lender capabilities, escrow, legal advice, real estate market, and industry knowledge, or other related talents so that they can complete more deals.
No state in America offers the amount and high-end diversity of potential real estate opportunities as in California.
You can legally wholesale real estate in California, but if you’re not careful, you could also end up wholesaling on the wrong side of state laws as well.
As an unlicensed wholesaler, you can only find properties and match them to buyers, collecting a fee for the service you provide. The key is that you’re only assigning the rights of a contract to a real estate investor.
You can also execute a double closing or buy and sell arrangement. With a double close, you buy and sell the property either within a day or two. With a buy and sell agreement, you sell the property after a longer period of time (but always intending to be a middle person).
When you’re a licensed Realtor and you have contracted with a seller via a Listing Agreement, you market the property to attract buyers and collect a commission when the property is sold. As a wholesaler, you market the rights to the contract with a seller that allows you to assign purchase rights to a buyer.
As a wholesaler, you are not allowed to market the property itself, only the contract. And even then, it's wise to limit marketing only to your pre-existing buyer’s list, personal contacts, or through private conversations with potential buyers.
Assigning a contract is the lowest barrier to entry for new wholesalers because it costs you virtually nothing (many times including no required earnest money), other than a few small legal fees, to complete a deal.
A double close or a buy and sell deal requires working capital to complete a purchase of an investment property before selling it to an end buyer. While the upfront monetary outlay can be considerable, this is balanced because you don’t need to disclose profits you’ll make by facilitating the deal.
By contrast, assigning a contract requires you to reveal the amount of your fee to the buyer, but not necessarily the seller, as part of the negotiation process.
Some California wholesalers concerned about fees vs. commissions and staying on the right side of the law choose to minimize risks by getting a California real estate license.
We have already mentioned some of the legal requirements to wholesale real estate in California. Here are some additional specific laws you need to know about.
The Business and Professions Code details oversight of real estate law in California.
For example, Section 10016 defines a “Real estate agent” as a natural person licensed as a salesperson under Chapter 3 of this part and who, for compensation or in expectation of compensation, is retained by a real estate broker to do one or more of the acts set forth in Sections 10131, 10131.1, 10131.2, 10131.3, 10131.4, and 10131.6.
In addition, Section 10130 states, “It is unlawful for any person to engage in the business of, act in the capacity of, advertise as, or assume to act as a real estate broker or a real estate salesperson within this state without first obtaining a real estate license from the department, or to engage in the business of, act in the capacity of, advertise as, or assume to act as a mortgage loan originator within this state without having obtained a license endorsement.
Section 10139 gets into more details regarding penalties and states, “Any person acting as a real estate broker, real estate salesperson, or mortgage loan originator without a license or license endorsement, or who advertises using words indicating that he or she is a real estate broker, real estate salesperson, or mortgage loan originator without being so licensed or without having obtained a license endorsement, shall be guilty of a public offense punishable by a fine not exceeding $20,000, or by imprisonment in the county jail for a term not to exceed six months, or by both fine and imprisonment...".
These laws place limitations on what various entities can or cannot do in the course of a real estate transaction. While they don’t specifically address wholesaling, the broad nature of these laws does have an impact on wholesaling as well.
The short answer is “no” you don’t need a real estate license to wholesale property in California.
If you want to transact wholesale deals, most people agree that getting a license is not a bad thing either. As a licensed agent, you won’t need to worry about contract assignment limitations or restrictions on how you can market a property.
If you are a licensed agent, you must disclose this when you enter into a contract.
If you don’t disclose that you are an agent or that you have an agency relationship with a brokerage, you could be setting yourself up for civil penalties that could result in extensive damage awards.
Co-wholesaling real property means that you are creating a joint venture with another entity for the purposes of getting a piece of real estate under contract or working with a flipper to complete the sale through an Assignment of Contract, Double Close, or Buy and Sell arrangement.
The critical thing to remember is that you must disclose the nature and real estate investment relationships of each party in the co-wholesaling venture so that full transparency is maintained.
Read Also: What Is Co-Wholesaling & How To Do It?
Just as the name implies, reverse wholesaling means that a wholesaler develops a cash buyer's list and lines up a qualified buyer first, and then goes about the tasks of securing properties under contract to complete a transaction.
This process is also legal in California, and as long as you follow all current laws and regulations regarding real estate transactions, you should encounter no problems.
The most common form of real estate purchase contract in California is the California Association of REALTORS® Residential Purchase Agreement (C.A.R. Form RPA).
The RPA includes all the essential provisions, disclosures, and disclaimers needed to create a binding contract.
If you’re interested in doing a deep dive into the details of an RPA, we suggest you go here.
Otherwise, here’s what the first page of the multi-page agreement looks like.
In California, an RPA contract is not assignable. If you want to enter into an agreement to assign a contracted property, you’ll need to have the RPA amended. An amended contract isn’t necessary using the Double Close or a Buy and Sell method of wholesaling properties.
To facilitate an assignment of a contract, it’s necessary to complete an Assignment of Agreement Addendum (CAR Form AOAA). A wholesaler can assign the Agreement to another person only if they get approval from the Seller.
You also have the option of completing another RPA instead, which will create a new contractual arrangement as well.
Here are some important legal issues to be concerned with when wholesaling real estate in California.
Contingency clauses further define a deal’s legality, protecting buyers and wholesalers from entering into bad deals that can cost a lot of money.
These clauses are “if/then” legal language written into real estate purchase agreements giving either party the right to back out of the deal if certain conditions are not met.
The most common contingency clauses in California are:
All real estate transactions, including wholesaling deals, must take place with complete transparency to ensure integrity. Failure to disclose critical information often leads to litigation.
In California, just as buyers are required to disclose if they are wholesalers or have a real estate license, by law, sellers are required to disclose all material facts about a property as well. California disclosures may include:
It is usually accompanied by the following real estate disclosures:
We can’t stress this enough because this is where many people go astray. If you are assigning a contract as a wholesaler, the ONLY thing you can do is market the contract’s rights for the property you represent. You CANNOT market the property itself.
The way around this is to get your real estate license, and then you can actually market the property itself as long as you also have a signed listing agreement in place as well.
You can definitely do well as a real estate wholesaler in California.
The key is understanding all related laws, including those related to contracts, disclosures, contingencies, and how you can conduct marketing activities.
With effort and drive, you will be able to position yourself nicely to capitalize on California’s ongoing love affair with real estate.
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