Unlike most real estate investment strategies, wholesaling gives you a chance to make a lot of money without investing much at all. That may seem too good to be true, but wholesaling is a legitimate opportunity. Of course, the promise of wealth without much risk raises the question: Is wholesaling real estate legal?
The good news is that wholesaling is not illegal, but you have to do it the right way to make sure you’re operating within the boundaries of the law. These are the key factors you need to know to legally make a lot of money in wholesale real estate.
Wholesaling compared to other real estate investment strategies
Most real estate investment strategies involve buying a property and renting it or flipping it for a profit. However, wholesalers don’t buy properties. Instead, they sign contracts with motivated sellers and then assign the contract to a cash buyer who pays them an assignment fee in return for the right to buy the house.
Because wholesalers aren’t buying houses, they don’t put much money into their investments, making wholesale real estate a relatively low-risk endeavor. The greatest risk a wholesaler will face is losing the earnest money that they pay to secure a deal and the money they invest in marketing campaigns.
The legality of wholesale real estate
Legally speaking, wholesalers act as intermediaries in real estate transactions. They find deals, sign purchase agreements on them, usually at below-market prices, and then transfer those contracts to other investors who close on the properties in their place.
Contract law states that nearly any contract can be transferred to another party unless the document specifically prohibits doing so. This means that you don’t have to be the one who buys a property once you sign a contract on it, and you aren’t breaking the law in any way by selling the contract to someone else for a profit.
You also have several legal ways to find and land these deals. You can leverage detailed property data, public records, and financial information to identify motivated sellers. You can even call, text, email, and send mail directly to leads informing them of your interest in their house. Once you have a contract, there’s not nothing that limits who you can transfer it to in exchange for an assignment fee.
However, there are a few things you cannot do in wholesale real estate:
- You can’t operate under contracts that are intentionally vague for the purpose of confusing sellers
- You can’t back out of contracts once you sign them
- You can’t bring the buyer to the deal before you sign a contract on it. Doing so would place you in the role of an unlicensed real estate agent, which may be illegal depending on the state and location where you’re operating.
Of course, these are all general guidelines. Wholesale regulations and laws differ greatly depending on the state where you’re working. In California, for instance, you cannot legally market a deal after signing a contract on it unless you have a real estate license. To assign a contract in California, you have to offer it to a buyer privately.
The bottom line is that you should be careful when you start wholesaling in your state, expand into a new market, or begin virtual wholesaling. The laws in your new market might be wildly different than you expect. The best thing you can do is research the laws and consult with a real estate attorney before taking action. This is the best way to avoid inadvertantly breaking laws.
Understanding real estate wholesale contracts
In wholesale real estate, there are two types of contracts you need to understand to operate legally. The first is a wholesale real estate contract, also known as a purchase and sale agreement. The other is a wholesale assignment contract.
When you and a motivated seller agree on a price for their property, you will both sign a purchase and sale agreement. This document functions much like a standard real estate contract, except it details your intention to assign the contract to a cash buyer for a profit.
The other contract you need to understand is a wholesale assignment contract, which you’ll sign with a cash buyer. This kind of contract takes care of the final half of a wholesale real estate deal, meaning it removes you from the transaction and secures your assignment fee. In it, you’ll detail the closing date, the assignment fee, the state of the property, and any stipulations involved in the contract. This agreement is essential to finalizing a wholesale real estate deal because it removes your equitable interest in the property and relieves you of your responsibility to close on it. After that, finishing the transaction is up to the cash buyer.
Should I get a real estate license to wholesale?
While you don’t need to be a licensed real estate agent to wholesale, it’s a good idea. Not only will the required classes and studying teach you a lot about the industry, you’ll also protect your business and open up new opportunities, including the ability to represent sellers if they want to sell on-market.
A real estate license will also make it easier to do business if you operate in a state where the laws aren’t as friendly to wholesalers. With a license, you’ll gain the option to market your deals to cash buyers more openly, and you won’t have any limitations on the number of deals you can do in a year. Obtaining your real estate license will also give you multiple options when you interact with motivated sellers. You can try to buy their house off-market, but if that isn’t the best option for them, you can represent them in a transaction on the MLS. While you might not make as much money per transaction this way, it can be an incredibly lucrative business model in the long run.
How to wholesale real estate ethically
Wholesaling real estate legally is important, but doing it ethically is arguably even more important. Unfortunately, not everything legal is ethical, and sometimes the allure of money creates ethical dilemnas.
While this might seem like a personal problem that each wholesaler has to deal with on their own, it has a negative impact on the entire industry. Dishonest and unethical wholesalers have given the industry a bad name by not caring about the homeowners they’re working with. As a result, wholesale laws have changed significantly over the past few years and have made the process more difficult. These laws have worked to prevent bad actors from harming sellers. Still, they’ve also made it more difficult for wholesalers who are trying to grow legitimate real estate businesses and help property owners who desperately need to sell.
If you’re going to wholesale real estate, there are several ethical considerations you should think about before you spend a single dollar marketing to sellers or generating leads. The first is how you represent the worth of a property when negotiating. As a wholesaler, your job is to sign contracts at low prices, but that doesn’t mean you should be dishonest about how much a home is worth in its current condition.
You also need to be honest with cash buyers. If you deceive them, you’ll quickly gain a bad reputation in your market. Some wholesalers have doomed their entire careers by failing to be upfront with influential investors. Lying to cash buyers also hurts other wholesalers. After enough wholesalers have lied to a cash buyer, they’ll start to distrust the profession, and there’s no such thing as wholesaling without cash buyers.
Overall, just be honest in your dealings. If you have to justify something so that you feel good about it, it’s probably not the right thing to do. Don’t lie to people, don’t pressure them, and don’t make threats or use scare tactics. If you follow these general rules of thumb, you shouldn’t have a problem being an ethical wholesaler.
Conclusion
Is wholesaling real estate illegal? Not at all! It’s one of the easiest ways to get into real estate investing, and the best part is that it doesn’t take much money to get started. As long as you have enough capital to buy a few bandit signs or invest in lead generation software, you can start wholesaling immediately.
