Is Wholesaling Real Estate Legal In Delaware?Oct 07, 2021
Real estate wholesaling has made investment headlines lately. While it is not a new real estate investment strategy, its recent popularity can be attributed to some of the benefits it offers real estate investors. Here are the impressive benefits available to consider for both investors and wholesalers –
- Wholesale real estate investing allows you to enter the real estate marketplace with little capital requirements when compared to other available and profitable real estate investment strategies, like fix and flips, etc. Wholesalers are required to provide an earnest money deposit as evidence of good faith.
- Real estate wholesaling can be profitable, primarily when implemented during a market that is rapidly appreciating.
- A real estate wholesale deal is a terrific way to learn the business from the inside out and build a network of referrals, lenders, and, most importantly, a curated buyers list of cash buyers.
Real estate agents and licensees often voice their concern that real estate wholesaling is a real estate transaction that violates license law as the actions and behaviors required to complete the strategic task mimic those that require a state-issued real estate license.
Real estate wholesaling is simply a strategy in which an investor acts as a middleman, a tenet of a free and open market economy. The reality is wholesaling principles are present throughout a competitive market – from a car dealer to the local grocer and beyond.
Opponents of real estate wholesaling fail to recognize that a wholesaler is not selling the real property but their right to buy the property as determined by the details written in the real estate contract.
To buy the subject property, flippers and real estate wholesalers find a property priced below market value and enter into a purchase agreement or real estate contract. Note, the below-market price is typically available from homeowners or motivated sellers in financially challenging situations – selling either their owner-occupied property, their rental property, or investment property of another type.
The contract of sale is the legal instrument that re-defines the subject property’s ownership. The redefined ownership of the property is based on the Principle of Equitable Conversion or Equitable Interest.
Real estate wholesale deals that provide positive cash-flow opportunities have become easier to find in the modern, digital real estate landscape. Consider checking out Redfin or Zillow, Craigslist, or try these other sources - liquidation of an estate, foreclosures, bankruptcies, or divorce, among others.
- What Do You Need To Know About Wholesaling Houses In Delaware?
- Is Wholesaling Real Estate Legal In Delaware?
- What Are The Wholesaling Laws In Delaware?
- Do You Need A License To Wholesale Real Estate In Delaware?
- Wholesale Real Estate Contract Delaware
- Final Thoughts
What Do You Need To Know About Wholesaling Houses In Delaware?
The state of Delaware was a member of the 13 colonies and the first state that ratified the United States Constitution – in 1787. Delaware covers 1,982 square miles – making it the second-smallest state. Only three counties define Delaware – the fewest number of counties in any state.
The state’s name is taken from the nearby Delaware River – named for the English Nobleman Thomas West, who was the third Baron De La Warr and the ruling governor of Virginia’s colony. Delaware, Maryland, and portions of Virginia make up the Delmarva Peninsula –
The population of Delaware as of 2021 approached 1,000,000, which makes Delaware the 5th-most densely populated state in the nation -
The five largest cities in Delaware are –
The capital is Dover, which is the state’s second-largest city, with Wilmington having nearly two times the population of Dover.
Delaware has been a corporate tax haven, evidenced by the fact that Delaware is the domicile state of more than 50% of New York Stock Exchange (NYSE) listed businesses!
Real Estate Trade Organizations in Delaware – The First State
The following organizations are the larger professional organizations in Delaware that are dedicated to the real estate profession -including every brokerage and individual working in Delaware real estate. Each of these real estate professional associations is a member of the National Association of REALTORS (NAR) –
Located in Dover, the Delaware Association of REALTORS is the state’s leading advocate in safeguarding property rights and the essential resource for real estate professionals serving the public. The DAR’s headquarters is housed in one of the last standing 18th-century wood-framed buildings, estimated to have been moved to the Water Street location in the 1830s.
- New Castle County Board of REALTORS (NCCBOR)
With more than 2,000 real estate agents in New Castle County, the NCCBOR is one of the largest professional real estate organizations in the state of Delaware.
Established in 1950, the SCAR has more than 1,500 REALTOR members engaged in the profession of real estate in more than 100 offices across Sussex County. The Sussex County Association of REALTORS offers resources and benefits to real estate professionals practicing in Delaware’s Sussex County.
Founded in the mid-1940s, KCAR is the professional association for real estate professionals in Central Delaware. The Kent County Association of REALTORS sets forth policies, guidelines, and advocacy groups to protect and enhance property ownership in Delaware. KCAR has more than 400 members.
Real Estate activities (including real estate brokerage services) and licensing functions are administered by the Delaware Real Estate Commission (DREC), which is housed in the state’s Division of Professional Regulation. The Real Estate Commission’s authority is defined in Delaware Code, Title 24 Professions and Occupations Chapter 29 – Real Estate Services, Brokers, Associate Brokers & Salespersons.
In Delaware, the Real Estate Commission issues three types of real estate licenses – a real estate broker’s license, an associate broker’s license, or salespersons’ license. These varying licenses are described below (Title 24, Chapter 2902 (a) 1, 2, 23) -
License Reciprocity in Delaware – Title 24 § 2909. Reciprocal licensure
Licensees and real estate agents from other states may be eligible for license reciprocity in the state of Delaware, as follows –
Note, though, the level of real estate license reciprocity may require additional conditions.
For a salesperson’s real estate license (Chapter 2909(b)) –
For an Associate Broker’s real estate license (Chapter 2909(c)–
For Real Estate Brokers real estate license (Chapter 2909 9(d)) –
Is Wholesaling Real Estate Legal In Delaware?
Wholesaling real estate in Delaware is a legal investment option if a real estate wholesaler stays within the legal limits of real estate law in Delaware.
As noted above, when a real estate wholesaler becomes the buyer in a legally enforceable contract of sale, they are awarded the right to purchase the subject property – according to the terms delineated in the purchase agreement. A real estate wholesaler is simply acting as a middleman if their actions do not rise to the level required of a Delaware real estate license.
The sale of the ‘buyer’s right to purchase’ is accomplished with the use of an assignment of contract. This legal instrument permits a buyer to sell the rights awarded by the Principle of Equitable Conversion. Most real estate contracts are, by default, assignable unless the purchase agreement has conditional provisions or completely disallows it.
Remember - A real estate wholesaler can only sell one thing LEGALLY – the rights/obligations given as a buyer in a fully executed contract.
What Are The Wholesaling Laws In Delaware?
Delaware law is clear regarding license requirements –
However, Delaware’s license law, according to § 2901 (e, 1-5), these are situations and circumstances for which a Delaware license would NOT be required –
Item #1, noted above, does reference the fact that the following individuals would BE EXEMPT if they had “common ownership or control” (see Principle of Equitable Conversion) of said property –
- Lessor or lessee
However, investors dealing in wholesale properties are advised to work both cautiously and with great transparency – those with nothing to hide, hide nothing!
According to Chapter 2901 (License Requirements), anyone who engages in providing real estate services without a license is in violation of Chapter 29 – Real Estate Services, Broker Associate Brokers and Salesperson, subject to the provisions in Chapter 10161 Title 29.
Do You Need A License To Wholesale Real Estate In Delaware?
No, Delaware real estate wholesalers do not need a real estate license if their chosen actions do not violate Delaware's real estate & license laws. However, real estate wholesalers who follow these suggestions will find it easier to steer clear of any legality issues.
- A real estate wholesaler’s actions should be transparent throughout the transaction; this includes their ultimate intentions. A strongly and smartly worded purchase agreement is the simplest way to accomplish transparency.
- Manage the expectations of the contract’s parties.
- A real estate wholesaler’s actions should be done with integrity. Offer a disclaimer when appropriate.
- Don’t market/sell the real property. Do market/sell your right to purchase real property as defined by the purchase agreement’s terms.
Additionally, it is noted that the state of Delaware is recognized as one of the several "Attorney Closing States" in the nation. This essentially means that real estate closings must be performed by a Delaware attorney in good standing with the Delaware State Bar.
As a result, a seasoned Delaware real estate attorney with wholesaling experience can become a real estate wholesaler’s greatest source of legal advice to avoid legal potholes created by Delaware law. To boot, Delaware law mandates that you are protected by a licensed representative of the legal field.
Wholesale Real Estate Contract Delaware
To wholesale real estate in Delaware, investors use two fundamental legal/financial instruments to accomplish their objectives. The wholesale contract in Delaware and the assignment of the contract are the two forms, each of which is discussed and shown below.
A purchase agreement is considered a bilateral contract. The contract of sale defines the terms and conditions of the sale, with each party to the deal responsible for certain obligations. Another standard contract language will likely include the following -
- The legal description of the property the wholesaler has the right to buy – i.e., metes & bounds, etc.
- The provision of earnest money as a sign of good faith, typically held in escrow.
- Those items (i.e., furniture or appliances, for example) that will be included in the sale
- The sale’s financial terms
- The option for either party to modify the terms of the contract with the addition of other written provisions that are mutually agreeable
But note, Delaware’s contract includes this provision – (Item 29 – Succession) that can be found on page 8 of the contract –
The Assignment of Contract
The Delaware law permits an assignment of the contract, but only with the seller’s prior written approval. It is also noted that the seller can only withhold consent if the assignment would adversely affect the seller’s position or interest.
The Assignment of Contract is a legal document that transfers an Assignor’s rights/obligations (the assignor in this instance is the real estate wholesaler) to another end buyer – who is then known as the Assignee. The state of Delaware does not have a specific document, but to provide some perspective, the following is a general assignment of contract –
The Double Close
The most direct way to avoid a potential legal issue as a real estate wholesaler in Delaware is to choose to do a double closing. As the name suggests, there are two closings – which typically occur back-to-back. In the first closing, the real estate wholesaler is the buyer, whereas, in the second closing, the real estate wholesaler is now the seller.
The difference between the two sales prices (minus the cost to do business) would be the profit or assignment fee. But note, although more cautious, there are double closing costs included – which most would say is money well spent considering the protection it offers.
Real estate wholesaling has become a wildly popular investment strategy in the recent past, although as an investment strategy, there is nothing new (or improved) about wholesaling real estate deals. Real estate wholesaling offers new investors a way to inch into the real estate market, with little capital required.
But, considering the potential consequences for errors and unexpected consequences, real estate wholesalers should approach wholesaling proactively, get the proper training required, and engage with great prudence and transparency.
The fact that Delaware falls within the list of attorney-close states helps real estate wholesalers avoid legality issues while the transaction closes. Real estate wholesalers should take advantage of their chosen attorney’s legal knowledge and location experience to ensure they have the best outcome.
*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