There has been an ongoing debate about whether selling real estate wholesale is legal. If you ask real estate professionals, you can get many different answers but often never the same answer.
Real Estate Wholesaler’s Niche
First, let’s look at the niche real estate wholesaler fills in the real estate market. A real estate wholesaler is someone who contracts with a seller for the exclusive right to purchase the seller’s equity in a specific property. The real estate wholesaler then finds an end buyer for the property and assigns the contract with the seller to the end buyer. The real estate wholesaler’s fee is the difference between the seller’s price and the buyer’s offer.
A real estate wholesaler is not a real estate broker. A real estate broker has a license that permits the marketing and brokering of real estate.
What is a Real Estate Broker?
According to Florida state law, a real estate broker is anyone who, for the benefit of another and/or compensation or valuable consideration, appraises, lists, auctions, sells, exchanges, buys, or rents real property. Brokers are also defined as people who offer, attempt, or agree to appraise, auction, or negotiate the sale, exchange, purchase, or rental of business enterprises, business opportunities, any real property, or any interest in or related to those things. In terms of payment, real estate brokers can directly or indirectly receive compensation, valuable consideration, or be promised (explicitly or implicitly) such things for their work on behalf of another. Moreover, a person must have a real estate broker’s license if they act on behalf of another with the intent to collect or receive compensation or valuable consideration in a real estate-related transaction.
This may not be the definition used by all states in the USA, but it does encompass all of the activities that real estate brokers do. To remain on the right side of the law, real estate wholesalers must not perform any of the activities that fall under the jurisdiction of a licensed real estate broker.
Is Real Estate Wholesaling Illegal?
Yes, real estate wholesaling is legal in every state in the USA. States’ laws are worded differently, but, one thing is true, it is legal to purchase real estate or the right to exclusively purchase it for yourself and sell it to another person.
In most states, you are not allowed to purchase or sell real estate for another, for a fee, or act in a representative capacity for a buyer, seller, or both in a real estate transaction without a real estate license. If you do this, your actions, not real estate wholesaling, are illegal.
The key here is that you can only represent yourself and your interests. Also, you must be transparent about what you are doing. If you misrepresent yourself, the transaction, or your interest in the transaction, your wholesaling method becomes illegal under state law.
When is Wholesaling Houses Illegal?
Real estate wholesaling is illegal when you offer to represent a buyer, seller, or both for a fee or some form of compensation. Also, if you lie to the buyer and/or seller about your role in the transaction and/or your intent, then your actions are illegal. The buyer must know that you are only buying the seller’s equity in the seller’s property and that you will sell it to another. The buyer must know that you do not own the property but are only selling an assignment contract.
Even if the real estate wholesaler does all of those things, the real estate wholesaler’s actions may become illegal if the real estate wholesaler markets the property, assignment contract, or the transaction incorrectly. The real estate wholesaler should never introduce a potential end buyer to the property if the real estate wholesaler has no purchase agreement with the property seller and/or has not shown that there is an intent to purchase the seller’s equity in the seller’s property.
When is Wholesaling Houses Legal?
Wholesaling houses is legal when the real estate wholesaler does not put a deal together, do a deal for another, or do a deal for a fee; only licensed real estate brokers can do these three things.
The real estate wholesaler must also advertise the assignment contract, advertise for distressed properties, and advertise for buyers using legally compliant language. The real estate wholesaler must clearly notify the public and interested parties of what is being sold and that the real estate wholesaler is merely a middleman in the transaction.
In order to do this when advertising for a buyer or seller, the real estate wholesaler should not use the following language:
- “Selling A Property”
- “Selling my Home”
- “My House Is for Sale”
This language is problematic because it gives the impression that the real estate wholesaler either owns the property (not true) or has a license to sell the property (not true).
Instead, the real estate wholesaler should use the following language:
- “Assignment of Contract”
- “Selling My Interest in A Real Estate Contract.”
- “Equitable Interest in a Property for Sale”
How to Legally Wholesale Real Estate
There are three ways to legally wholesale real estate. You can use assignment contracts, double closings, and basic property flipping with no investment in the property.
You can use an assignment contract to get the exclusive right to purchase the seller’s equity in the property. After you have that, you can assign your purchase agreement with the seller to an end buyer and keep the difference between the buyer’s offer and the seller’s price.
In a double closing, you agree to purchase the property from a seller and sell it to an end buyer during the same closing. You literally close on the seller’s property and then immediately sell the property to your end buyer. Some banks offer 1-day loans for people who want to do this.
Basic Flipping with No Investment
If you don’t want to do a double closing or use assignment contracts, then flip the property but don’t put any money into it before you sell it. You may do this because you are worried that the buyer and seller may cut you out of the real estate deal or that you may be charged with illegal conduct.
In basic flipping with no investment, you first buy the property from the seller. After you close on the property, you sell it to your end buyer. Note the property seller and end buyer never meet or have contact with one another. If you do this, there can be no allegations that you are misrepresenting yourself or breaking the law because you are only selling property that you already own.
Do I Need a License to Wholesale Houses Legally?
No, you don’t need a license to legally wholesale houses. You need to follow the state laws governing real property transactions, contracts, and marketing in your state. If you follow state law to the letter, even if you are dragged in front of a real estate commission board, there won’t be any convictions based on illegal or misleading conduct. The real estate commission board cannot find you guilty of a crime that you did not commit and for which you clearly and undeniably cannot be mistaken for having committed if the property was bought by you and then sold to another after you closed on the property with the seller.
Are There Any Penalties for Wholesaling Real Estate?
There are no penalties for legally wholesaling real estate. However, if you are caught illegally wholesaling real estate, there are penalties. The penalties will vary by state and based on which state laws you have broken.
Best Practices for Wholesaling Real Estate
If you want to steer clear of any problems as a real estate wholesaler, you should follow these best practices for real estate wholesalers:
- Be transparent about your intent and role in the transaction.
- Ensure that you do not imply or say that you are a licensed real estate agent or broker.
- Make yourself the principal buyer.
- Make sure that all your contracts and procedures comply with the governing state laws.
- Have a licensed real estate attorney draft or review your contracts to ensure that they are compliant with the governing state laws.
- Use earnest money to secure your purchase agreement with the property seller.
- If you buy the property before selling it to the end buyer, make sure that you have a backup plan in case the end buyer backs out of the deal.