Wholesaling real estate has become a popular investment strategy for both new and experienced real estate investors. However, it is often preferred by newbies because, as a short-term strategy, it requires little in terms of capital investments – just an earnest money deposit that is held in escrow until the transaction is complete.
But, like all real estate investing, there are pros and cons to the practice and market factors that must be understood to be successful.
What Is Real Estate Wholesaling?
Real estate wholesaling is an investment technique in which an investor – aka – the wholesaler, enters into a real estate contract to buy a property - but chooses to assign the “rights awarded by the contract” (known as Equitable Conversion or Equitable Interest) to another buyer – with an assignment of contract, often before they have closed. The final buyer is known in the biz as the end buyer.
Real estate wholesale deals provide new investors the opportunity to learn the real estate game from the inside out while gaining valuable negotiation talents.
A wholesaler can profit as follows -
The time it takes to execute the first contract and to finally close is when the property ownership becomes somewhat divided. During this specific time –
At this time, real property is said to have dual ownership – legal ownership and equitable ownership divided with the seller and the buyer, set forth by state law.
Relevant National Real Estate Market Metrics
According to Core Logic, nationwide home prices (which includes distressed sales) increased 18.1% between August 2020 and August 2021. This 18.1% is noted to be an all-time year-over-year high! Home prices tend to increase over time, but as the graph below notes, recessions and other economic events may depress home prices, even if only temporarily.
The Current Rhode Island Real Estate Market
Like most real estate markets, the Rhode Island marketplace was on fire during 2020 and appears to be headed, at breakneck speed, in a similar direction. From January 2020, the median price of a single-family home rose more than 12.5% - to $334,000.
However, from August 2020 to August 2021, Rhode Island’s year-over-year appreciation hit the top ten list with an increase of 21.5%, at position nine, behind Florida.
Much of the price appreciation across real estate markets can be attributed to Rhode Island's lack of available land, meager inventory, and changing demands of homeowners during the 2020 pandemic.
The inventory, typically considered to be in balance with a 5-to-6-month inventory, has heated to where most of the state is significantly short on inventory – with only two months available. Note some sections of the state (represented in gray) have NO INVENTORY, as seen on this graphic.
Rhode Island is a state in the New England region that was admitted as the thirteenth state in 1790 as one of the original thirteen colonies. Also known as the Ocean State, Rhode Island is sandwiched between Massachusetts and Connecticut, with much of its border along the Atlantic Ocean, with a shared ocean border with New York.
Rhode Island is the United States’ smallest state with approximately 1,200 square miles, of which about 14% of Rhode Island is covered by water.
Rhode Island is known for the state’s Gilded Mansions (built between 1870 and 1900s) and the sport of sailing. Many of these mansions were owned by wealthy industrialists from New York and Pennsylvania.
Rhode Island is divided into 39 municipalities, each operating independently, with an overall population that is less than ¼ of Kentucky’s population, but 30% bigger than the populations of North Dakota and Vermont respectively.
The largest cities in the Ocean State are as follows –
The city of Providence is Rhode Island’s capital, its largest city, and one of the nation’s oldest, founded by Roger Williams in 1636. It is located where Narragansett Bay meets the Providence River.
Providence is also home to 13 accredited institutions of higher education, including the Ivy League Brown University (founded in 1764) and the esteemed, world-renowned Rhode Island College of Design - RISD (founded in 1877).
The following represents the larger trade and professional organizations in Rhode Island dedicated to the real estate profession and individuals working in real estate. Each of these professional organizations is a member of the National Association of REALTORS (NAR) –
Founded in the late 1940s, the RIAR is among the largest trade organizations in the state, with more than 6,000 professional members. The Rhode Island Association of REALTORS offers property owners and professionals a forum for professional development and voice for the state’s real estate market.
Founded in 1907, the Greater Providence Board of REALTORS® is one of Rhode Island’s largest membership organizations that serves a couple of thousand real estate and appraisal professionals. The GPBOR is a charter member of the NAR.
Kent Washington Association of REALTORS’ mission is to provide necessary resources as well as support services that help professional members maintain the required high standards of integrity and professionalism while protecting the public.
Chartered in the early 1920s, the NRIBOR is a professional trade organization serving the communities of Central Falls, Woonsocket, Pawtucket, Cumberland, and North Smithfield. The NRIBOR seeks to advocate for property owners and members of the real estate professional community and to provide the tools required to support their success.
Founded in the late 1950s, the Newport County Board of REALTORS has been serving Newport County for more than five decades. Its mission is to promote high conduct standards that serve both professionals and area homeowners.
The RIREC is the state agency tasked with the responsibility of managing real estate activities and licenses of each real estate agent across the State. The RIREC is housed in Rhode Island’s Department of Business Regulation. The commission duties are authorized in Title 5, Chapter 20.5-12 – Real Estate Brokers & Salespersons’ Commission Creation, etc. For the provisions of this statute, the term "real estate" is defined as follows –
There are three categories of real estate licenses in Rhode Island which is also defined in Rhode Island law § 5-20.5-1. Definitions.
A Real Estate Salesperson –
An Associate Broker –
A Real Estate Broker –
Additional license requirements are found in Section 5-20.5-6. Licensees in Rhode island will find these license renewal terms –
It is also important to understand who is not required to be licensed in Rhode island –
The statute specifically notes that a license is not required for anyone who, for investment purposes, acquires, rents, sells, or deals in real estate. [See Persons Exempt 5-20.5-2(2)]
Rhode Island law § 5-20.5-10 for nonresidents includes the following –
But note, there are specific reciprocity requirements for salespersons residing in the neighboring states of Massachusetts or Connecticut.
In May of 2020, the Rhode Island Supreme Court issued a ruling requiring whether a residential closing – at least purchase and sale transactions- is considered the practice of law. Note this ruling did not explicitly address the closings of refinances and allowed non -attorneys (not representing a party to the contract and not offering legal advice, among other requirements) to close the transaction.
Wholesaling real estate in the Ocean State is considered legal if the wholesaler remains within the legal limits of real estate law in the state.
When the wholesaler executes a contract of sale, they receive ‘equitable rights’ along with the right to purchase the subject property – dictated by the purchase agreement’s terms. Real estate wholesalers in Rhode Island are simply acting as any other middleman in the economy – if their choices do not violate Rhode Island license law.
The wholesaler has every right to assign their "buyer’s right to purchase" to another willing buyer or "cash buyer" if the contract permits assignments. Most real estate sales contracts are, by default, assignable, although the seller or their representative may choose to modify the contract in this regard.
Remember - A real estate wholesaler has only one asset they can sell LEGALLY – the rights/obligations given as the purchaser in a fully executed purchase agreement.
Wholesalers are advised that it is a good business policy to contact a Rhode Island real estate attorney should a legal question or issue arise.
Real estate license law in Rhode Island does not explicitly address wholesaling per se. Real estate laws are found in two statutes –
These two statutes require licenses under these circumstances as stated in § 5-20.5-1. Definitions-
Note that Rhode Island’s consequences for violating a provision of the Real Estate Brokers & Salespersons statute are as follows –
No, real estate wholesalers in the state of Rhode island will not need to be licensed by the Real Estate Commission if their actions stay within the legal confines of Rhode Island law. However, following these suggestions will help wholesalers avoid legality issues in the state -
The most direct way to avoid violating license law in Rhode Island is to complete the transaction by using a double close. As its name implies, a double closing consists of two closings – which may occur back-to-back.
In the first closing, the wholesaler is the buyer. In the second closing, the wholesaler becomes the seller. The difference that exists between the first and second sale price is the wholesaler’s assignment fee or gross revenue.
But note, although more circumspect, the double close includes double closing costs. Astute investors would likely agree that the extra costs to close are well worth it due to the protection offered by this closing method.
The wholesaler’s ultimate objective is to find a well-priced property that is priced below market value. An off-priced property has become more easily accessible with the availability of the modern digital landscape, including Zillow and Redfin and a wide variety of foreclosure options.
With the proper training, the real estate wholesaling investment strategy is an intelligent way to learn how to evaluate potential wholesale properties while building a buyers list and a network of potential lenders as wholesaling offers the opportunity to invest -
Wholesale real estate deals close faster than fix and flip deals, which is why it is sometimes the preferred technique, simply by virtue of the investment model.
Are you ready to wholesale in Rhode Island?
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