In its simplest terms, wholesaling is a real estate investing strategy where you get a property under contract and then assign that contract to another investor (buyer) for a fee. Well, wholesaling real estate deals has been a highly debated topic for years as some profess that it is illegal as it violates real estate licensing laws.
And I’m frequently asked…”Is it illegal?”
The correct answer is… “It depends.”
Here’s what you need to be clear about…
If you get paid to find someone a deal, that is a commission and you have to be licensed.
Common Wholesale Deal Arrangement
For example, let’s suppose you work with a cash buyer in your market and you find a smoking deal from a motivated seller for $120,000. So you call your cash buyer and tell him about this awesome deal that you’ll bring to him for $130,000. Your cash buyer agrees and you hook him up with the motivated seller. He contracts and pays the seller $120,000 and you $10,000. Case closed – good work!
Or not! That $10,000 fee you earned is commissioned sales and you just violated licensing law.
How I Got Into Wholesaling Hot Water
First of all, you need to understand that real estate law is governed on the state level so each state has their own specific rules and regulations but the general rule of thumb is that if you help someone buy or sell real estate for a fee, you need to be licensed and comply with state licensing law.
Licensing law is supposed to protect the consumer. In other words, if you are going to help someone buy or sell a property, you need the proper education, training, and supervision and held to a certain ethical and moral standard for the protection of that buyer or seller.
Unfortunately, (in my opinion) like most government agencies, the law is often exploited (all about the money). I’ll give an example… About a year ago I was accused of violating licensing law by the state of Idaho. One of my bird dogs used a real estate agent to make an offer on a property that was rejected. The agent was upset for whatever reason and filed a complaint with the state of Idaho real estate commission board.
The problem was the bird dog made the offer in my entity name and not in his own name. The board fined me $2500 claiming that my bird dog was not licensed (even though he was using an agent to make the offer). My argument was 2 fold:
1) We had agent representation on the offer (consumer protection)
2) The offer wasn’t even accepted so nobody got any money!
The code enforcer pointed out to me that the codebook for Idaho states that even if you are “making offers” for someone else, you are in violation (yes, even though an agent was making the offer). The whole thing was just ridiculous but such is government policy. Bottom line, they wanted $2500 from me.
Proper Way To Wholesale Legally
The proper way to wholesale without violating licensing law is to make offers in your own name and then assign your binding and legal contract to a new buyer for a fee.
Using the same example above,you would get that deal under contract for $120,000 in your name (or entity) and then using an assignment clause, assign your contractual rights to your cash buyer for $130,000.
Keep in mind, assignments are NOT usually enforceable. In other words, if your cash buyer flakes out on you, then you are ultimately bound by the original terms of the contract.
When it comes to wholesaling and commissioned sales be sure you know the difference.
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