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 on the California wholesale real estate market.
Is Wholesaling Real Estate Legal In California?
The short answer is yes, but only if you do it the right way. The state’s laws and oversight from government agencies regarding licensing limit the ways to operate as a wholesaler. If you can work with those limitations as you design your business plan, there are a lot of opportunities all over the state. The key is understanding the three basic formats for wholesale real estate deals the law allows:
- Contract assignment
- Buy and sell agreements
- Double closing deals
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 CA?
You don’t need a license if you’re doing one of the three deals listed and you obey the law by avoiding marketing the properties. Having one allows you to perform the duties of a traditional realtor or broker, though. That means you can market the property to prospective buyers and even collect commissions if you choose to do that instead of wholesaling a particular property. On top of that, the information covered in licensing classes contains most of what you need to know to stay within state laws when you make a deal.
California Wholesale Real Estate Legal Tips
The reason there’s a limited selection of deal structures that work on the wholesale property market in California is that the state’s laws require anyone who markets properties or advertises their services brokering deals to be licensed appropriately. Without at least 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 connecting 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 seeking them.
Making Wholesale Real Estate Profitable In California (cover the methods on how to do this legally)
It’s not easy to make a profit exclusively through wholesaling properties, 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 with the right capital on hand. The key is understanding how to optimize each of the three wholesale deal types and when to use traditional methods and licensed brokers. Of course, you could always become a realtor or broker to simplify those choices and cut expenses.
Making the Most of 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 know many investors working in the state who have the capital to buy properties that consistently fit their established criteria. If you have those contacts, you can make your money while feeding them the acquisitions they need with no capital risk of your own.
Profiting From Buy and Sell Agreements
This is probably the most straightforward method for wholesaling from a legal perspective and the easiest to make profitable, but it requires keen judgment and a lot of 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 with a flip. 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 aren’t always liquid enough immediately.
Lining Up Your Double Closing Income
The double closing 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 from 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 about 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 maneuver is complex enough you should consult an attorney to make sure it is executed correctly. This type of wholesaling works well when you have a lot of interested contacts looking to buy in an area where you’ve identified motivated sellers so you can funnel the deals through. Improving your lead generation methods with the right tools will go a long way toward helping you find those pockets of sellers, so get invested in learning how to make the most of them today.