Is Wholesaling Real Estate Legal In Canada?Mar 03, 2022
Is wholesaling real estate legal in Canada? In this guide, we will cover everything you need to know about wholesaling real estate legality in Canada including:
- What Is Wholesaling Real Estate?
- Can You Do Wholesaling In Canada?
- Is Wholesaling Real Estate Legal In Canada?
- Do You Need A License To Wholesale Real Estate In Canada?
- How To Do Wholesale Real Estate In Canada Legally?
- What Are The Benefits Of Wholesaling Real Estate In Canada?
- How To Buy A Wholesale Deal In Canada?
- Is Wholesaling Real Estate Legal In Ontario?
- Wholesale Real Estate Ontario Contract
- Final Thoughts
Like most of the US, the Canadian real estate market has recently appreciated at unprecedented rates. Most real estate gurus have run out of adjectives to describe these defining market metrics, which shattered previous home price records in November.
The Canadian Real Estate Association (CREA) notes that home prices (from the MLS Home Price index MLS-HPI) rose 2.7 percent month-over-month across Canada - this translates to a record increase of 25.3 percent year-over-year. The chart below is an aggregate of benchmark prices for various property types -
The current market was so strong that even before the end of 2021, there were more real estate sales through the Canadian MLS than all the sales transacted in 2020 – another record performance.
The extraordinary nature of the current real estate home price rise has been an ideal backdrop for real estate wholesalers in Canada because wholesaling real estate, as a short-term investment strategy, dovetails with a rising or expanding market.
It is estimated that investors bought up about one-fourth of all buyers in the Canadian market.
A Quick Look Around Canada:
Year-over-year growth in the real estate market includes –
- British Columbia – nearly 25%
- Alberta & Saskatchewan – approximately 7%
- Manitoba – about 13%
- Ontario – approximately 30%
- Montreal – just over 20%
- Quebec City – 10%
- New Brunswick – more than 30%
- Newfoundland & Labrador – more than 10%
Most investors know these growth rates are not only unprecedented but also not sustainable. Likely, the current real estate market will slowly shift to a more balanced position, which means there will be more listings and, thus, more opportunities for investors.
What Is Wholesaling Real Estate?
Wholesaling real estate offers a short-term technique or strategy for investors. From its most simplistic perspective, a real estate wholesaler is a mediator or middleman that connects buyers and sellers. Wholesalers market the only asset they can legally sell without a real estate license – their right to purchase a property at mutually agreed-upon terms.
A real estate wholesaler looks for a well-priced (i.e., below market value) property. These are often found on real estate websites like Zillow or Redfin. Motivated sellers benefit from a wholesaler’s service because a distressed property (like a foreclosure) is easier to sell as-is to a wholesaler than a retail client.
This wholesale investment choice can be a condo, one-family, or investment property, a rental property to name a few. More times than not, the price has been reduced because the seller needs a quick sale, or some sort of correctable obsolescence or repairs are needed. For example, a seller may need to unload a property due to financial challenges, family emergencies, or health issues.
The real estate wholesaler then executes a real estate purchase contract with the buyer that details the transaction’s terms. This executed contract grants the buyer the exclusive right (also known as equitable interest) to buy the property through the Doctrine of Equitable Conversion.
This same principle transfers the seller’s interest to personal property while maintaining possession until closing.
Before closing the original real estate purchase agreement, the wholesaler assigns his "equitable right to purchase the subject property" to a different end buyer, often a cash buyer. It is not unusual for a wholesaler to have a buyer lined up before an offer is made on an investment property. This offers a guarantee that the investment properties sell quickly. The difference between the purchase price of the first and second contract is the wholesaling fee or gross profit.
To be effective, a real estate wholesaler in Canada must complete two simultaneous tasks –
- Create and update a curated list of buyers.
- Locate properties that meet the wholesale investment model.
A cash buyer’s list can include another real estate investor looking to flip or hold the property long-term for appreciation and rental income.
Can You Do Wholesaling In Canada?
Wholesaling in Canada is legal; however, a wrong decision may create legal problems for those who are unprepared or inexperienced real estate wholesalers. The primary factor that allows a real estate wholesaler to work within Canadian law is the fact they are selling/marketing their "equitable interest", not the property itself.
Selling/marketing the real property would require a real estate license which means becoming a real estate agent or realtor.
On the other hand, selling or marketing your equitable interest is completely within the law. Although it may seem like a distinction without a difference, the differential is quite critical to staying with Canada’s legal limits.
As a wholesaler, you are marketing a property for yourself, not as a representative of another, which requires a license.
Canadian Real Estate License Laws By Province
Education and other requirements for real estate licensing vary by province in Canada.
- Ontario – The Real Estate and Business Brokers Act 2002
- Quebec – The Real Estate Brokerage Act
- Nova Scotia – The Real Estate Trading Act & Regulations
- New Brunswick – The New Brunswick Real Estate Agents Act & Regulations
- Manitoba – The Real Estate Services Act
- British Columbia – The Real Estate Service Act
- Prince Edward Island – The Real Estate Trading Act
- Saskatchewan – The Real Estate Act, Regulations & By-laws
- Alberta – The Real Estate Act
- Newfoundland/Labrador – The Real Estate Trading Act
Is Wholesaling Real Estate Legal In Canada?
Real estate wholesaling is not illegal if the wholesaler understands the legal limits set forth by Canadian law. Implied in the previous sentence is the requirement that you, as a wholesaler, understand the law and the legal implications for potentially violating it.
But note, wholesalers in Canada are advised to take an ethical approach (including transparency) to ensure there are no surprises for unsuspecting homeowners who are selling their homes.
As a wholesaler, it is prudent to disclose to end or potential buyers that you are not the current owner and are only selling the right to buy the property, as delineated in the executed purchase and sale agreement.
Do You Need A License To Wholesale Real Estate In Canada?
With so many laws and regulations regarding real estate and licensing, many would wonder if it is legal to wholesale real estate in Canada. Fortunately, if done strategically and within Canadian legal limits, wholesaling is legal and, at times, quite lucrative.
Many wholesalers eventually choose to earn a real estate license that specializes in locating properties and negotiating these wholesale properties for potential cash buyers. These are the real estate oversight agencies and associations for each province in Canada –
- Ontario (Toronto) – The Real Estate Council Of Ontario
- Quebec – The OACIQ
- Nova Scotia – The Nova Scotia Real Estate Commission
- New Brunswick – The New Brunswick Financial and Consumer Services Commission – Real Estate License
- Manitoba – The Manitoba Security Commission
- British Columbia – The British Columbia Financial Services Authority
- Prince Edward Island – Consumer, Corporate & Financial Services
- Saskatchewan – The Financial & Consumer Affairs Authority of Saskatchewan
- Alberta – The Real Estate Council
- Newfoundland/Labrador – Digital Government and Service – Real Estate Regulation
How To Do Wholesale Real Estate In Canada Legally?
There are several ways to complete a wholesale transaction in Canada, and the most popular are discussed below.
The Buy & Assign Exit Strategy
With a fully executed contract, the wholesaler has the legal option to market/sell their "right to buy the property" to another buyer. Wholesalers can use an Assignment of Contract to accomplish this task.
An Assignment is a legal instrument that transfers the wholesaler’s rights (aka, as the original buyer or assignor) to the new buyer (aka, the assignee).
The assignee is often a cash buyer who may regularly work with the wholesaler.
The Double Close Exit Strategy
Another closing strategy that Canadian real estate wholesalers use is the Double Close. As its name suggests, the double close includes two closings – usually performed back-to-back.
The wholesaler purchases the subject property as the principal buyer in the first closing. However, the real estate wholesaler is the seller in the second transaction.
The difference in the contracted price in each contract is the wholesaler’s gross revenue. But note, a double close includes twice the closing costs. This additional cost offers protection to the wholesaler as there is no question that a real estate license is not a requirement.
Wholetailing goes a step beyond simple wholesaling because the investor purchases the property instead of assigning the right to purchase to another end buyer. Wholetailing a real estate deal is not considered a true flip because there are only a few modifications and repairs to be made as an enhancement to the property’s market value. Conversely, flippers would perform significant renovations.
Another difference of this strategy is that the end buyer of a wholetailing deal can be a retail buyer and not another investor.
This is because the wholetailer chooses to update and modify the property to be able to market it to a wider investor pool and likely generate a larger profit (from a higher price) than simply wholesaling deals.
What Are The Benefits Of Wholesaling Real Estate In Canada?
There Is No Need For A Large Cash Investment or Perfect Credit
The primary reason to consider wholesaling real estate is the fact that it doesn’t require a large cash investment. Additionally, there is no credit review or ongoing mortgage payments as the property is sold quickly.
This investment strategy for Canadian investors does not require you to save a significant cash investment.
It Is A Short-Term Investment
Wholesaling, by its very nature, offers a quick turnaround. The part of the process that takes the most time is researching and finding investment properties that meet your investment criteria.
Wholesaling real estate offers a return on your investment without waiting for a renovation to be complete or the receipt of future rental income.
Wholesaling Real Estate Offers An On-Ramp For Beginners
Wholesaling, at its basics, is a simple process. It offers new investors the opportunity to enter the market without solid credit, large amounts of capital, learning the art of real estate investing, building a list of buyers, and evaluating a viable real estate wholesale deal.
Its Offers Relatively Low-Risk Investments In Terms Of Real Estate Strategies
Prudent investors prefer low-risk investments, which are not always visible for beginners to identify. Wholesaling offers a short-term, low-risk investment as only a small cash investment (with the provision of an earnest money deposit in escrow) is required.
Most wholesalers also have established relationships with lenders in case they need to access funding.
How To Buy A Wholesale Deal In Canada?
The end buyer in a wholesale deal is typically an investor who plans to hold the property for rental income or further renovate to raise the purchase price for the next buyer.
If you are interested in becoming a cash buyer, who takes out the wholesaler, note these important considerations –
- The end buyer saves time (and therefore money) because the wholesaler does much of the legwork by sorting through potential properties.
- Wholesalers are on the clock as there is a legally binding contract with a closing deadline. As such, when negotiating, remember that wholesalers are highly motivated property owners (aka sellers).
- Buying a property from an unlicensed individual creates a bit of risk as there would be no governing oversight body to help should the deal become problematic. Due diligence offers the best defense against this potential risk.
Is Wholesaling Real Estate Legal In Ontario?
Yes, it is legal to wholesale real estate in Ontario without a real estate license if the transaction stays within the legal lanes of Canadian law. The Ontario law that defines the legal boundaries of real estate licensing is The Real Estate and Business Brokers Act (2002).
Specifically, Ontario law states that no person shall trade in real estate (as a broker or salesperson) unless appropriately licensed and registered.
The salient point in this law is that the asset being sold is "real property", which differs from the asset a wholesaler is marketing – the right to purchase the property according to the terms of the executed contract. As a result, real estate wholesalers must be diligent in their efforts to market their equitable rights, not the property as if they were owners.
However, Ontario real estate law offers these exemptions, noted Subsection 5(1 a-k), and shown below.
But note, a wholesaler should make sure that the wholesale contract does not expressly prohibit assignments or be heavily conditioned with approval from the seller required to assign your equitable interest. Without an explicit clause prohibiting assignments, a wholesaler may assign their rights to another end buyer.
Wholesaling real estate requires an investor to have a working knowledge of the local real estate market and its customs.
This would include knowledge of what actions require a license in Ontario, as well as state real estate laws. In addition, wholesalers must only market or sell their equitable ownership if they avoid those actions requiring an Ontario real estate license.
Wholesale Real Estate Ontario Contract
A Canadian real estate wholesale deal typically uses two legal instruments – a Purchase Agreement and an Assignment of Contract.
If you are unfamiliar with these documents, it is prudent to speak with a real estate attorney who can offer the appropriate legal advice for your wholesale real estate deal.
The Real Estate Contract or Purchase Agreement
The wholesale real estate contract used for Ontario real estate includes a tremendous amount of information that details the terms for each party.
At the very least, a contract will include -
- The Names & Contact Information Of All Relevant Parties - This would include the wholesaler, as the buyer, plus the seller. Lawyer and real estate broker names may also be included, if applicable.
- The Description Of The Subject Property - The street address & the legal description of the property.
- The Condition Of Premises - This section delineates the property’s physical state, including existing damage and necessary repairs, if applicable.
- The Purchase Price And Financing Terms - The agreed-upon price and financing terms are recorded along with where deposits will be held.
- The Deed Type - What type of deed is being used to pass title.
- The Closing Date - This is the day when the paperwork is executed, and the title changes hands in accordance with the contract terms.
In addition, a contract may also include additional clauses and relevant contingencies, as follows –
- The Financing Contingency - This allows for the cancellation of the real estate transaction if a buyer cannot secure the necessary financing. This is not applicable to cash buyers.
- The Inspection Contingency - This allows for the cancellation of the transaction if the buyers are dissatisfied with the home inspection report.
- The Marketable Title Option - This allows for the cancellation of the transaction if the buyer can’t obtain title insurance through a title company.
- The Buyer And Seller Default Clauses - This clause outlines what happens if either contract party defaults.
- The Risk Of Loss And Damage Clause - This clause protects the buyer if the subject property sustains damage while under contract but not yet closed.
- The Adjustments Clause - This clause may include modifications for property taxes or utilities. The specifics depend on the location of the property.
- The Statement Regarding Lead-Based Paint - This disclosure requires all parties to acknowledge that there is no lead-based paint on the property.
- The Addenda - Offers space of additional contingencies, if applicable. Caution – sellers or their representatives may use this section to require any assignments to be approved by the seller.
The Assignment Of Contract
A wholesaler uses an Assignment of Real Estate Purchase and Sale Agreement to legally transfer their equitable interest (granted in one contract) to another buyer if the contract does not specifically prohibit this action.
The assignment contract stipulates the name of the new buyer who is assuming the equitable interest until closing.
The Assignment of Real Estate Contract includes a copy of the original purchase and sale agreement. This assignment provides the new buyer with the transaction’s details – including conditions, pricing, and stipulations if it applies.
The Assignment of Real Estate Contract also includes -
- The wholesaler’s payment terms.
- The date of the assignment.
- The date the assignment was executed.
The new buyer will generally provide a small earnest money deposit, with the balance received at or after closing.
Wholesaling is a great way for new and experienced Canadian investors to enter the market with a relatively small investment and, therefore, a low risk. However, wholesalers in Canada must carefully walk a fine line to avoid any actions that require a real estate license.
This would include only selling your "right to purchase the property" – and not the property itself.
Real estate wholesalers must remain vigilant and seek the proper training to ensure they understand the legal boundaries of local and national laws to build up a successful career. But, real estate wholesaling is not only legal in Canada; it can be quite a lucrative investment strategy.
*Disclosure: Real Estate Skills is not a law firm and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs