Real estate investors often see California as an endless land of opportunity because of its high demand for housing. Properties can appreciate quickly in The Golden State because of this demand. This makes it a fertile ground for real estate investment, especially for wholesalers.
However, California’s state government has strict oversight and numerous laws to protect motivated sellers. With this being said, you need to learn how to color within the lines to wholesale real estate in California.
Is wholesaling real estate legal in California in 2024?
Wholesaling real estate in California is legal, but there are some caveats. The state laws and oversight from government agencies regarding licensing limit the ways you can operate as a wholesaler in California. If you can work within these limitations, there are a lot of real estate investment opportunities across the state. To get started as a wholesaler in California, investors must understand the three basic formats for wholesaling real estate.
For more details refer California Department of Real Estate Real Estate Law 2024
Do note, that the 2024 Real Estate Law does not contain all laws relevant to real estate. The 29 Codes which comprise California law are available in their entirety at the official website for California legislative information.
Contract assignment
Contract assignment occurs when an investor signs a contract with a motivated seller and then sells the contract to a cash buyer. The sale of the contract must occur before the agreed upon closing date. With a contract assignment, the wholesaler never actually purchases the property.
Buy and sell agreements
In a buy and sell agreement, the wholesaler buys a property and holds it for a period of time before reselling it. This is a common deal structure in situations where the buyer needs some time to secure the funds to buy the property.
Double closing deals
In a double close scenario, the wholesaler actually buys the property at closing, then sells it to a cash buyer immediately at a second closing. The main advantage of a double closing is that the wholesaler is able to keep their profit confidential. Double closings appeal to the seller because it frees the seller from having to wait for the wholesaler to find a buyer. Additionally, both the seller and the buyer are able to maintain their anonymity.
Working outside these deal structures could have legal consequences for unlicensed wholesalers. This is why many wholesalers in California choose to get a real estate license.
Do you need a license to wholesale real estate in California?
Wholesalers don’t need a license if they’re doing one of the three deal types listed above. They also must avoid marketing the properties if they’re unlicensed.
Alternatively, wholesalers who have a real estate license have the freedom to perform the duties of a traditional realtor or broker. This means that they can market the property to prospective buyers. They are also able to collect commissions if they choose to structure their payout that way. In addition, wholesalers who have a real estate license are able to market their properties.
California wholesale real estate legal tips
Wholesaling real estate in California can be difficult because state laws require licensing for those who market properties or advertise their wholesaling services. Wholesalers who don’t have a license but advertise their properties can incur penalties of up to $20,000 plus legal costs.
Given this restriction, wholesalers must depend on their network of private contacts and known buyers to make deals. While this may sound like a major hurdle, this is the typical buyer pool for most wholesalers. Even licensed wholesalers look to their professional networks first when looking for potential investors.
Wholesalers in California can ensure that they’re staying on the right side of the law by adhering to the three types of real estate wholesale deals because:
- Contract assignment deals without marketing are legal because you are simply securing a sales contract and offering it to a buyer privately.
- Buy and sell agreements work because you hold the property for an assigned period of time before reselling it as the owner.
- Double closings work for similar reasons, passing the property through your hands, so you’re selling it to the end owner.
How to profit from wholesale real estate in California
The key to profiting from wholesale real estate is understanding how to optimize each of the three wholesale deal types. Savvy wholesalers can also profit by partnering with real estate agents. Alternately, becoming licensed can help you simplify the process and increase profit margins by eliminating broker fees.
Making the most of a contract assignment
Legally assigning a contract in California means you have permission from the seller to contract the sale at a specific cost. You then find a buyer to accept assignment of the contract at the seller’s cost plus your assignment fee. Buyers must get full disclosure of your fees under this structure.
This form of wholesaling is most accessible when you have a network of cash buyers who have the capital to buy properties. If you are able to establish relationships with the right investors, you can profit from assignment fees without investing your own money.
Profiting from buy and sell agreements
This is probably the most straightforward method for wholesaling from a legal perspective. It is also the easiest path to profit, but it requires keen judgment and working capital.
In a buy and sell agreement, you buy the property from one party and hold it for a set period of time. At the end of this period, you sell it to an investor. As the property owner, you’re simply buying at one price and selling at another. The process resembles house flipping, although the wholesaler makes no improvements to the property.
The eventual buyer is determined before the holding period. The advantage of this arrangement is that it gives the buyer time to line up funding. In the event they’re unable to do so, the wholesaler can sell the property to a different investor.
This method works well if you work with investors who are interested in buying certain types of property but generally have to secure funding for new investments.
Lining up a double closing
In a double closing, the wholesaler closes twice on the same property. In a double close transaction, the wholesaler closes with two parties instead of one.
First, the wholesaler closes on the purchase with the seller, providing the property owner with the agreed upon amount for the sale. Then in the same meeting, the wholesaler sells the property to the buyer. In California, the transaction takes two days to finalize because of state laws governing title transfers.
With the right escrow arrangement, it’s possible to use the funds from the buyer’s purchase to cover the payment to the seller. This is a complex maneuver and we recommend hiring an attorney to execute it correctly.
Double closings work well when you have an experienced buyer who you’re confident will be able to complete the transaction.
Expenses in wholesaling
California is a unique market compared to the rest of the United States. The current median sale price for a home in California is $799,000, the highest in the country. As a result, some investors avoid California because of the expensive buy-in. Other investors are enticed by the high cost of housing because of the eventual payoff. This includes wholesalers based in California and those investing virtually.
If you’re a wholesaler and you choose to pursue contract assignment, you can get started without a significant financial commitment. Some wholesalers like to submit an earnest money deposit to demonstrate their commitment to the deal. Investors can choose to give homeowners a deposit of $500 to $2,000, but it is not required.
Wholesalers who do double closes must buy the property first, even though they sell it immediately to the buyer. In this situation, wholesalers can get transactional funding, which they repay to the lender within 48 hours to two weeks. Transactional funding can cost the borrower 1% to 2.5% of the loan principal, so wholesalers on a tight budget should take this into consideration.
Wholesalers can use transactional funding for buy and sell agreements, but only if they hold the property for less than two weeks.
Key Takeaways
Wholesaling is a great way to start or grow a real estate investing career in California. However, you need to be familiar with state laws before you start.
As we stated earlier, wholesaling real estate in California is perfectly legal but there are stringent regulations for unlicensed wholesalers. Wholesalers who follow California’s wholesaling regulations and limit their deals to the three deal types outlined above won’t encounter any problems.
