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 –
Most investors know these growth rates are not only unprecedented but also not sustainable. It is likely that 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.
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 –
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.
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.
Education and other requirements for real estate licensing vary by province 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.
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 –
There are several ways to complete a wholesale transaction in Canada, and the most popular are discussed below.
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.
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.
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.
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, 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.
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.
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 –
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.
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 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 -
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 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.
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