Real estate wholesaling is a great way for beginners to enter the lucrative market of real estate investment without much capital. It requires a good amount of work and effort but if you’re willing to learn and put the sweat equity into it, wholesaling real estate can be a great way to make money. It’s also a great way to learn the ropes of bigger, more passive deals in real estate investing. Unfortunately, some confusion and misinformation have led some investors to question the legality of real estate wholesaling. So, let’s discuss the question: is real estate wholesaling legal?
All Real Estate is Local
Every business model has its legal implications and requirements. Wholesaling is no different. Unfortunately, there have been some unscrupulous real estate investors throughout time and many sellers aren’t savvy. Lawmakers want to try to protect sellers from these investors. There are also often powerful lobbies at play that want hurdles in place to protect their own businesses.
All real estate is local. Often that maxim is used to talk about markets but laws are no different. No matter what you read here or anywhere, do the research in your area. This article and others like it can help point you in the right direction but it’s a few hours of research or legal counsel to make sure you know the laws in your area and how to follow them. If you’re willing to do that, you can make good money in real estate wholesaling.
Do you need a license for real estate wholesaling?
Licensing requirements are a common question when it comes to wholesaling. Some areas have a licensing requirement but it’s important to understand what the requirement is for.
In general, you do not need a license for wholesaling. However, in some areas, there is a caveat here. You may need to be a licensed real estate agent to be in the middle of a real estate transaction. In other words, you don’t need a license to buy real estate for yourself. You might need to be licensed to act as a middle person and assign a contract.
So in some areas, if you aren’t a real estate agent, you must rely on double closings to wholesale real estate rather than assigning a contract.
The downside to this is that you will need more funds because you will have to purchase the house, if even for a few minutes before you can sell it. This will also often reduce your profit because you may have to pay closing costs like assignment fees and other taxes. In a contract assignment, there is only one transaction so you can have the end buyer pay those (which they’ll probably also have to do in a double closing because two closings mean two sets of fees and taxes).
Disclosing Your Role
If you are selling the contract, you need to disclose that you aren’t the person selling the property. In that case, you are basically selling the rights to purchase the property.
If you purchase the property with the intention of reselling it through a double closing, you must disclose that you don’t currently own the property.
This shouldn’t be a hurdle. It’s always better, to be honest in business. Your reputation will follow you, and buyers and sellers will respect your honesty and trust you more. There’s nothing to stop them from going forward with the transaction. Sure, one side or the other could try to capture the profit the wholesaler is making, but they didn’t.
You are providing both of them a service. You are helping the seller unload their property using your expertise and network. You are helping the buyer find a property for their portfolio by bringing a negotiated deal to their doorstep.
While it’s not a sure thing, you will less likely get in legal trouble if you are above board on everything. They can’t argue they didn’t know if you are transparent.
In states where the title company does the closing one risk is that some title companies won’t close on a property if you’re not the final buyer, so this may be another case for the double closing.
Some General Legal Principles
While in some areas, it is perfectly legal and fine to be a middleman. Here are some principles that should help you in most markets. Always consult with a local attorney who has experience in these transactions. This is intended to give you information on questions and information to seek.
Put Yourself in the Position of Being the Principal Buyer
It may be more expensive but it’s a lot less risky to put yourself in a position where you are the buyer of a property. Then you will become the principal seller when it’s time to sell the property. These might…even should…happen on the same day or at the same time.
Use Valid Agreements
It can be tempting to have a series of handshake agreements. These are legitimate estate deals. You run a legitimate business. Treat it like a business. A business uses written, valid, and binding agreements. Doing business this way provides you with credibility and protection.
Have a Backup Plan
Every real estate investment deal should have several exit strategies. Make sure to have one of your own in the event that a deal falls through.
Be Truthful In Your Marketing
If you don’t own the property yet, make sure to only market what you actually have. You actually own a purchase agreement. Sell it that way. This will provide you with protection and transparency.
You Make Real Estate Wholesaling Legal
If you are getting into real estate wholesaling, it’s your business. You need to treat it like that. Businesses find legal counsel. They understand the laws that affect their business. A real business also works to be transparent and operate honestly, or they often don’t operate for long.
Run this like a business. Follow a few simple rules to protect yourself legally.
- Know the rules in your area. Do the work. Follow those rules
- Disclose what you are required to disclose
- Be transparent in your business dealings
- Use written agreements
Doing these things will help keep you out of trouble and have a long-lasting business.
Disclaimer: This information is provided for education and entertainment. It isn’t legal advice. You shouldn’t be taking legal advice from a blog anyway. Please consult actual legal counsel in your area.