Is Wholesaling Real Estate Legal In Washington State?

Real estate wholesaling has recently become a popular investment technique. However, its machinations are nothing new and legal if the real estate wholesaler stays within the legal limits set forth by the state of Washington.  Wholesaling real estate in Washington has these advantages -

• Wholesale properties offer investors an entrance ramp into real estate with little capital requirements. Most wholesale transactions do, however, require buyers to put an earnest money deposit with a neutral party as an act of good faith – until the transaction is complete.
• Wholesaling houses a profitable investment technique, primarily implemented during a rapidly appreciating market, with a couple of viable exit strategies, including the double close.
• Real estate wholesaling is a smart way for new wholesalers to obtain practical experience. While learning the trade, less experienced real estate wholesalers can also build a good buyers list of cash buyers, other types of end buyers, and a network of lenders and lending professionals.

Much of the legality-based brouhaha from real estate wholesaling opponents asserts that wholesalers are performing actions that rise to a level defined by Washington law as needing a real estate license.

Real estate wholesalers combine two principles – the wholesaling principle (one of the foundational principles of capitalism) that seeks to buy low and sell high in a self-governing market, with the theory of equitable interest – the fundamental rights awarded when the contract of sale is executed.

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In legalese, the purchase agreement legally re-defines the subject property’s ownership based on the Principle of Equitable Conversion (or Equitable Title/Interest), which refers to the division of the property’s interests.

The rights to the contract can be transferred to a new buyer, another end buyer, by the use of an assignment of contract.

The wholesaling business, which resembles its related real estate strategy of fix and flip, is typically done when an investor enters into a contract of sale for a property (rental property or owner-occupied property) that is likely to be priced below its market value. A reduced price is typically caused by financially challenged sellers or those who are motivated otherwise.

Real estate investment and wholesale opportunities are available in a variety of places across the digital landscape. Think foreclosure auctions, divorce proceedings, Redfin, Zillow, Craigslist, MLS, the liquidation of an estate, bankruptcy, or divorce, among others. 

• What Do You Need To Know About Wholesaling Properties In Washington?
• Is Wholesaling Real Estate Legal In Washington State?
• What Are The Wholesaling Laws In Washington State?
• Do You Need A License To Wholesale In Washington?
• Final Thoughts

What Do You Need To Know About Wholesaling Properties In Washington? 

Washington state is the most northwestern contiguous state located in the Pacific Northwest, United States. Of the contiguous states, Washington is the furthest (in distance and climate) from Florida. Washington was admitted as the forty-second state to the union on 11/11/1889. Its flag and name honor the first President.

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The State of Washington covers more than 72,000 square miles, which makes it the 18^th largest state. As the 13^th most populous state, Washington’s population is currently –

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The five largest cities in Washington, the Evergreen State, are as follows –

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Interestingly, Olympia, the capital of Washington, does not make the top five cities as its population is approximately 52,000 as of 2019.

Real Estate Trade Organizations in Washington

Below are the larger professional organizations in the state dedicated to the real estate profession and each brokerage and individual working in real estate. Each of these professional associations located in Washington state is a member of the National Association of REALTORS (NAR) –

• The Washington REALTORS (WR)

The statewide professional association for REALTORS, with more than 22,000 members, offers a variety of benefits to its members. WR offers symposiums and education, discounts, insurance, training events, and legal support initiatives to the entire Washington state real estate market.

• The Seattle King County REALTORS (SKCR)

Established in 1908 as the Seattle Realty Board, the Seattle King County REALTORS represents the real estate community and professionals in and around the Puget Sound vicinity. SKCR offers support and resources to ensure the market and its players are held to the highest ethical standards.

• The Tri-City Association of REALTORS (TCAC)

Founded in 1946, the Tri-City Association is recognized as the largest of the trade organizations in the Tri-city area. More than 1,000 professionals and 70 real estate firms make up TCAC’s membership. TCAC is known as an effective vocal advocate in the southeastern portion of Washington State.

• The Tacoma Pierce County Association – REALTORS (TPCAR)

The TPCAR offers the resources and support of real estate professionals in and around the Pierce County area. With more than 30 industry partners, the Tacoma Pierce County Association offers professionals the support needed to succeed in this market.

• The Clark County Association of REALTORS (CCAR)

The CCAR performs as the advocate of real estate professionals and property owners in the southwest portion of Washington state. With more than 2,000 members, the Clark County Association provides education and professional development tools online and on-campus.

The Washington State Department of Licensing (DOL) is the state agency responsible for administering and enforcing real estate laws and licenses in the state. The Real Estate Commission within the Department of Licensing primarily administers these laws – RCW (Revised Code of Washington (Washington State Laws) 18.85, RCW (Real Estate Brokerage Relationship) 18.86 and RCW 18.235 (Uniform Regulation of Business & Professions Act) and WAC 308.124A.

According to the Washington Department of Licensing,

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The Department of Licensing issues two types of licenses for each real estate agent in the state, both at the real estate broker level who have the legal authority to manage real estate transactions in the state. A broker in Washington can be a managing broker or a designated broker after meeting the licensing requirements.

While the state offers some semblance of license reciprocity, it requires the submission of paperwork and the passing of various portions of the state exam to accomplish this goal. WAC (Washington Administrative Code) Title 308, Chapter 124A- (Real Estate – Licensing and. Examination) notes the process and requirements –

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Is Washington State A Real Estate Attorney State?

Finally, it is noted that Washington state is not an attorney-close state, but one considered an ‘escrow state,’ although legal representation, considering the amount of money involved, is always encouraged.

Read Also: How To Wholesale Real Estate Step By Step (The Simple Process)

Is Wholesaling Real Estate Legal In Washington State? 

Yes, in a word, if practiced within the confines of Washington State law, wholesaling real estate (from single-family, owner-occupied to an investment property) is legal in Washington. 

The key is to complete the wholesale transaction without acting in a manner that would require a real estate license as defined by Washington state laws and regulations. More specifically, a real wholesaler must remember that in order to stay within the law, they must ONLY sell/market the rights (i.e., the right to buy specific real property, etc.) established by the Doctrine of Equitable Conversion – upon execution of a legally-enforceable contract.

From this purview, wholesaling real estate in Washington would be considered legal. However, wholesalers must have a true understanding of the legal boundaries as defined by Washington’s license law – which, like most states, is likely to change annually, sometimes even more often in response to emergency measures.

Remember, real estate wholesalers have the legal option– as the buyer in a legally enforceable contract - to sell their ‘right to purchase defined by the contract’ to another buyer, cash or not. Herein lies the line in which a wholesaler cannot cross to stay within the legal limits of Washington law.

Real Estate Skills Tip: Real estate wholesalers can ONLY legally sell/market one thing– the right granted by a fully executed contract to purchase.

What Are The Wholesaling Laws In Washington State?

The real estate laws that govern the actions of real estate licensees in Washington are found in– RCW (Revised Code of Washington (Washington State Laws) 18.85, RCW (Real Estate Brokerage Relationship) 18.86, RCW 18.235 (Uniform Regulation of Business and Professions Act) and WAC 308.124A.

The most important aspect to consider is that Washington state real estate wholesalers must NOT perform any actions that require a license in the state. According to RCW18.85.011, the definition of a broker is as follows –

(2) "Broker" means a natural person acting on behalf of a real estate firm to perform real estate brokerage services under the supervision of a designated broker or managing broker.

Further, this same law identifies those actions that define a broker’s services –

However, it is equally essential to understand those individuals who are exempt from Washington state licensing laws (RCW – 18.85.151) -

The entrepreneurial spirit is alive for those who wish to wholesale real estate in Washington state. Successful real estate wholesalers understand the benefits of taking the time required to comprehend how to navigate a real estate wholesale deal without violating Washington state law, or if uncertain, seek the advice of a real estate attorney licensed in the state. 

Do You Need A License To Wholesale In Washington?

Real estate investors in Washington State may wholesale real estate if their actions and behaviors do not fall within those that require a license in the Evergreen State. As noted above, a real estate wholesaler must not represent themselves in any way that implies (ostensibly or otherwise) that they are licensed or marketing real property – instead of marketing the rights awarded from the executed contract. 

Real estate wholesalers working in Washington should take note of the guidance offered by the Department of Licensing in Washington more than a decade ago (2010) in response to professionals in the real estate business.

As the Department of Licensing has offered guidance (as opposed to a formal rule), it is something not to take lightly as it leaves potential consequences very much a possibility. The guidance issued was directed specifically to those individuals/firms/businesses who are engaged in wholesaling real estate contracts in the state. {Reference RCW 18.85, 18.86.030 & 18.235}

While an owner has the legal right to sell/market their own property, the Department of Licensing (DOL) may take issue if another individual somehow obtains an interest in this property (legally from the owner through an executed contract) with the intent of finding an alternate buyer before closing the sale with the original owner. The Department of Licensing could potentially take action as the person would be constructing a real estate deal for others.

Technically, this individual would fit the ‘definition’ of ‘an owner, and thus exempt from licensing requirements,’ but the DOL would consider this a misuse of the legal exemption. The following offers some guidance as to where the DOL may take issue with a wholesaler’s actions –

• If the investor is managing multiple properties in this regard.
• If the investor never intends to close the original deal but is maneuvering to market one’s rights.
• Receives an assignment fee.
• If the investor insists on the right to terminate the transaction at no cost, among others.

Essentially, these issues would create an illusory contract for the seller (a considerable and untenable disadvantage in legal terms) and are thus, not permitted.

If a wholesaler is to remain on the legal side of the law, real estate wholesalers should seek legal advice and disclose, in writing, all facts (material or otherwise) and the wholesaler’s true intentions. This ensures all parties have full disclosure to make well-informed, educated decisions with regard to the transaction.

The Double Close

The easiest & most direct way to avoid this potential legal pothole is to choose to do a double closing, which ensures you, as the buyer, had every intention of concluding the original transaction. To boot, it also allows you to sell the newly purchased property as the owner – within Washington law.

It also helps to be transparent, issue a disclaimer (if applicable), and act honorably. But note, with this more cautious exit route, there are double closing costs – which most would say is money well spent considering the protection it offers.

Potential Violations in Washington State

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Note, RCW 18.85.361 identifies the potential disciplinary action for violations

Final Thoughts

Real estate investing – whether your strategy is wholesaling, flipping, or holding long-term properties for rental income and potential appreciation, is and has always been one of the best professions for business capitalists and entrepreneurial types. But all real estate investors implementing a wholesale contract must stay within the legal lanes defined by Washington law.

Many wholesalers simply start with distressed properties, which are typically priced below market value. Even basic websites like Craigslist, Redfin, or Zillow can help you locate an investment or rental property to start your wholesaling career. But tread carefully, real estate wholesalers are no longer operating under the radar in Washington state, and while there is nothing illegal about wholesaling at the moment, it may change in the future.