Investors often see California as an endless land of opportunity because it is both incredibly large in area and very crowded. As a result, markets move quickly. This makes it a fertile ground for real estate investment, especially for wholesalers. The state government has strict oversight and many laws to protect motivated sellers. With this being said, you need to know how to color within the lines to make a killing wholesaling real estate in California.
Is wholesaling real estate legal in California?
The short answer is yes, but only if you do it the right way. 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 when designing your business plan, there are a lot of opportunities across the state. The key is understanding the three basic formats for wholesale real estate that are permitted by law:
In a contract assignment scenario, you sign a contract with a motivated seller and then sell the contract to a cash buyer before the closing date. This means that you never actually purchase the property.
Buy and sell agreements
In a buy and sell agreement scenario, you buy the property and hold it for a set period of time before reselling it.
Double closing deals
In a double close scenario, the wholesaler actually buys the property at closing and then turns and sells it to a cash buyer immediately at a second closing.
Working outside this set of deal structures could have legal consequences for unlicensed wholesalers, which is why many investors choose to get a real estate license.
Do you need a license to wholesale real estate in California?
You don’t need a license if you’re doing one of the three deal types listed and you avoid marketing the properties. However, having a license allows you to perform the duties of a traditional realtor or broker. That means you can market the property to prospective buyers and collect commissions if you choose to do that instead of wholesaling. In addition, the information covered in licensing classes contains most of what you need to know to stay within state laws when negotiating a deal.
California wholesale real estate legal tips
The reason there’s a limited selection of deal structures that work for the wholesale property market in California is because state laws require anyone who markets properties or advertises their services brokering deals to be licensed appropriately. Without at minimum a sales license, if not a full broker’s license, penalties for advertising oneself in ways that fit the legal definition of a real estate salesperson can run to $20,000 plus legal costs.
- Assigned contract deals with no 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
The limitations against marketing the property mean that you’ll have to depend on your network of private contacts and known buyers to make deals. At the same time, most investors find those are exactly the people in the market for wholesale properties, and they often look to their professional networks first when looking for property investments.
How to profit from wholesale real estate in California
It’s not easy to make a profit exclusively wholesaling real estate, but it is possible. This niche is easiest to occupy when it is part of a diverse strategy, but it can also be a powerful area to focus your efforts if you have capital on hand. The key is understanding how to optimize each of the three wholesale deal types and when to use traditional methods and partner with licensed brokers. Alternatively, getting a real estate or broker license 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 make a deal with the seller to contract the sale at a specific cost, then you find a buyer to accept assignment of the contract at the seller’s cost plus your fees. Buyers must get full disclosure of your fees under this structure. This form of wholesaling is most accessible when you have a network of investors who have the capital to buy properties that fit their established criteria. If you are able to establish relationships with the right investors, you can profit from assignment fees without investing your capital.
Profiting from buy and sell agreements
This is probably the most straightforward method for wholesaling from a legal perspective and the easiest path to profitability, but it requires keen judgment and working capital. You buy the property from one party and sell it to another, holding it for a set period of time. As the property owner, you’re simply buying at one price and selling at another like you would when you flip a house. The difference is that you make no improvements–you line up the eventual buyer upfront and then essentially close to hold the property for them. They have the window in the buy and sell agreement to line up their funding and get ready for the second closing, and you have a property to sell if they default. This method works well if you have contacts who are enthusiastic about buying certain types of property but don’t always have immediate liquidity.
Lining up your double closing income
The double close is what it sounds like. You have a meeting with three parties instead of two. First, you close a purchase from the seller, providing the capital they need to get out of the property with a fast closing. Then in the same meeting, you close to sell the property to your buyer. In California, this process takes two days because of state laws governing title transfers. With the right escrow arrangement, it is even possible to use the funds from your finalized sale of the property to cover the payment to the seller. However, that manoeuvre is complex enough that you should consult an attorney to make sure it is executed correctly. This type of wholesaling works well when you have interested contacts looking to buy in an area where you’ve identified motivated sellers and can help facilitate deals.
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 long as you know the laws and keep your deals within the 3 deal types discussed above, wholesaling is perfectly legal in California. Just remember that unless you have a real estate license, you are not permitted to publicly advertise your deals.
Click here for more information about how to get started wholesaling real estate in California. You’ll find a breakdown of the market trends, laws, and information to help you better understand the California real estate market.