Real estate investors have been flocking to Texas in droves, right behind all of the new residents who have moved to Texas in the past few years. The state had already been a magnet for new arrivals, but in 2022 alone, Texas attracted over 230,000 new residents from other states.
Those new residents have created a surge in demand for housing across Texas, causing the prices in already in-demand markets such as Austin, Dallas, and Houston to experience drastic increases in average home prices. Meanwhile, smaller markets such as Waco and Amarillo have also seen increased demand.
This has made wholesale real estate in Texas a lucrative prospect. While the state has certain regulations that wholesalers need to understand, there are a lot of exciting investment opportunities for wholesalers in the Lone Star State.
Is wholesaling real estate legal in Texas?
Wholesaling in Texas is legal as long as wholesalers operate within the state laws and guidelines. There are three different strategies that wholesalers can use to legally operate in Texas.
Contract assignment
The most common disposition strategy for wholesalers is a contract assignment. In this scenario, the 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 personally purchases the property. Instead, they negotiate an option to purchase the property and the wholesaler turns it over to the buyer.
Buy-sell agreement
In a buy-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, 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 assignment fee 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 of the above deal structures could have legal consequences for unlicensed wholesalers. Wholesalers have more freedom when doing a buy-sell agreement or double closing because they are operating as a traditional buyer and seller in both situations, even though the transactions are part of a wholesaling strategy.
Getting Started Wholesaling in Texas
Wholesaling real estate in Texas is dependent on finding two essential components: a distressed property whose owner is eager to sell and a cash buyer. Wholesalers who are just getting started should start pursuing both as soon as possible.
Finding cash buyers before you have a property under contract may seem like the wrong order, but the last thing you want to do as a new wholesaler is to enter an agreement with the homeowner and then struggle to find a cash buyer. If you’re unable to find a buyer, the deal can easily fall apart and you won’t make any money after going through the trouble of finding a property.
While you’re doing this, keep your eyes open for distressed properties in your area. Your firsthand observations will only reveal properties with physical distress factors. In order to identify properties with financial distress factors, consider a real estate software subscription that will give you information about properties with financial distress factors, such as pre-foreclosures, properties in probate, or abandoned properties.
Another important step when you’re getting started is creating a limited liability company, or LLC, for your wholesaling business. LLCs are relatively simple and straightforward to form. You can create a Texas-based LLC online for a $300 fee. The main advantage to forming an LLC is that it protects your personal assets in the event of a lawsuit or business bankruptcy. Eventually, once your LLC has established credit, you could set up financing for subsequent real estate investments with your LLC as the borrower.
Last but not least, start practicing your pitch to potential sellers. You’ll be approaching people cold about selling their properties. You should be ready to explain clearly and calmly to homeowners why it’s in their best interest to let you wholesale their property. Then, once you have a property, start practicing your pitch to potential buyers.
Where to Find Cash Buyers in Texas
In order to find cash buyers, new wholesalers should network as much as possible. One of the best places to start is by joining a real estate investing club, which can be found in most markets. If there isn’t already an organization like this in your area, you should consider starting one.
You should also join online real estate groups to start learning more about the industry and networking with your peers. Not only will these in-person and virtual groups put you in proximity to cash buyers, they’re also a great way to learn from your peers.
Do you need a license to wholesale real estate in Texas?
Wholesalers don’t need a license to operate in Texas, but there are some restrictions that unlicensed wholesalers need to be aware of.
The chief limitation for wholesalers in Texas is that they cannot act as brokers and attempt to personally sell properties. That does not bar Texas wholesalers from assigning the right to buy a property to an end buyer.
The other challenge for unlicensed wholesalers is that they cannot publicly market the property they have under contract. They can reach out privately to prospective buyers, but they must clearly state that they have an assignment contract on the property.
Unlicensed wholesalers can sidestep these marketing restrictions by doing double closings or buy and sell agreements. In each of those scenarios, the wholesaler is personally buying and selling the property, so it’s not subject to the same regulations as a contract assignment.
Although a wholesaler can do deals without a real estate license, there are some advantages to having a license. The first benefit is that it allows you to freely market properties that are under contract. The other advantage is that if a home could sell for more in a traditional sale, the wholesaler can represent the buyer in that type of sale if the homeowner is amenable to the idea.
Texas wholesale real estate legal tips
In Texas, a real estate license is required in order to legally market properties. According to Texas Senate Bill 2212, unlicensed wholesalers who attempt to act as brokers, market their properties, or fail to disclose that they are wholesalers can pay a stiff penalty, which can be ”no less than, but up to three times the profit realized by the wholesaler.”
Given this restriction, unlicensed 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 Texas can ensure that they’re staying on the right side of the law by adhering to contract assignments, buy-sell agreements, and double closings because:
- Contract assignment deals are a legal strategy of securing a sales contract and offering it to a buyer privately.
- Buy-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.
Key Takeaways
Wholesaling real estate in Texas offers a lot of opportunity to resourceful real estate professionals. With a population of over 30 million that continues to grow, the demand for housing in Texas has never been higher.
While there are regulations that wholesalers in Texas need to heed, they still allow wholesalers plenty of room to operate and flourish. As long as wholesalers make a point of learning how the business works and apply themselves, they’ll be able to tap into the potential of a robust real estate market that’s continuing to grow.
