First, lets look at what wholesaling is with an example.
Your sister’s neighbor Betty owns a 1972 house that needs updating. She decides to downsize. During a conversation with your sister you learn that Betty wants to sell, but doesn’t want to use a Realtor. You drop by Betty’s house and offer her $150,000. She accepts and you both sign a contract, a purchase and sale document. The contract states that you will buy the home for $150,000 within the next 21 days, and gives you the right to assign the contract.
Because you’ve visited your sister often, you’ve noticed many houses being flipped by an active investor. You make a point go to the latest house they bought, introduce yourself to the workers and learn the investor’s name is Joanna and get her phone number. You call Joanna and describe Betty’s property. After a day of number crunching, she texts you back to offer $154,500.
You and Joanna then sign an “assignment contract” where you give Joanna the right to buy the home from Betty.
You give all the paperwork over to the local title company to process. At closing, Betty gets her $150,000, Joanna (the flipper) pays $154,500 for the house. And you, the wholesaler, keeps the $4,500 difference as your wholesale fee.
You never owned the property, but made $4,500 for bringing together Betty and Joanna.
Please note the purpose of this example is to provide a brief understanding; wholesaling, in practice, is complex, involves skills, time and much effort. There are many other possible ways to structure a wholesale deal. Consult an attorney prior to wholesaling any property.
Please be aware that this material does not serve as legal advice. To safely practice wholesaling, be sure to consult Federal and State laws specific to your area before executing any deals. Laws are very state-specific, as with any business or contractural transaction, you should consult an attorney before engaging in any kind of real estate activity.
Is wholesaling legal, is one of the more “hotly debated” topics. The essence of the debate on whether wholesaling is illegal revolves around the term “brokering.” Although each state has its own definition, a broker is someone who helps put a deal together.
Here is how the state of Florida defines a broker:
“‘Broker’ means a person who, for another, and for a compensation or valuable consideration directly or indirectly paid or promised, expressly or impliedly, or with an intent to collect or receive a compensation or valuable consideration therefore, appraises, auctions, sells, exchanges, buys, rents, or offers, attempts or agrees to appraise, auction, or negotiate the sale, exchange, purchase, or rental of business enterprises or business opportunities or any real property or any interest in or concerning the same.” (source)
The argument to it being illegal stems from question is the wholesaler acting as a “broker” in the deal without being licensed.Those who defend wholesaling without a license say that wholesaling is not brokering, but simply signing a contract and then assigning that contract to another, and therefore the law does apply to this situation. They are not selling a property, but simply selling the ownership of a real estate contract.
To further complicate the situation is the issue of “marketing” a property that you do not currently own. Most states also include “marketing a property” as brokering. For example, if you, as the wholesaler, buy a property from Betty and then sell it to Joanna, if you had put the ad for the house on Craigslist or elsewhere, are you marketing the property? Most definitely! But what if you weren’t marketing the property? What exactly defines marketing? If you knew the cash buyer Joanna and told her about the deal, is that marketing?
If you were to ask ten different lawyers, you might get ten different answers. Consult your attorney.
How do you protect yourself from potentially breaking the law? You should talk to an attorney.
Here are other ways to make money from the sale:
Get Your License: Simple. No one can accuse you of brokering without a license if you have a your license. Yes, this might cost you a couple grand, but it’s better than getting a penalty from the state for breaking the law! If you are a go getter, serious about selling properties and making money. Come talk to White Brick’s Broker, Alexia Clemens.
Buy the Property and Then Sell the Property: Rather than “assigning” the contract, simply buy the property and then re-sell it; even if you only own it for minutes, through a “double close”.
The truth about wholesaling is this: Whether or not wholesaling is illegal in your state, it definitely flirts with a line.