Wholesaling laws exist for one reason and one reason only: to ensure ethical and transparent practices are utilized when wholesaling real estate.
Unfortunately, the lines have been blurred by convoluted legal language and a disregard for compliance. As a result, there’s a gross misconception that wholesaling is illegal.
The short answer is that wholesaling is not illegal. But there’s more to it.
In fact, wholesaling can prove highly lucrative for those willing to follow the laws put in place by the state they intend to deal in.
That said, given there are 50 states in the US, a single article covering general legality should be supplemented with a specific look at the laws in your state.
Myth Or Fact? Wholesaling Real Estate Is Legal
Wholesaling is legal, but it can also be done in an illegal way, and that's why there is a persistent myth that the practice itself is illegal.
As with almost everything, there's a legal and illegal way to do things.
For example, co-wholesaling is where two investors work together to do a joint-venture wholesale deal.
Imagine you had a license to broker or sell real estate in your state, but you brought another investor into the deal, and he or she did not possess a license in that state. It basically means that is some states, this whole deal is illegal and the contract might be completely void.
But, wholesaling real estate is legal if it is done right.
This means that you have to establish a bilateral contract between you and the seller that stipulates that you are acquiring equitable interest.
When getting paperwork for a deal, you enter into a contract with someone with one of the following two options:
"Equitable Ownership" OR
"Equitable Interest"
... which gives you the right to resell or assign the real estate contract.
Although we don't advocate sitting down with your seller and explaining in-depth how you intend to contract the property and then immediately turn around and assign it to someone for a fee, we do suggest having CLEAR language in your contract that explains that you could assign the contract just to protect yourself.
If you're doing a double closing, this verbiage isn't necessary, but you want to disclose to the buyer that you DO NOT own the property yet, but you WILL have ownership prior to closing.
When double closing, however, you need to prove that you have intent to purchase by providing a proof of funds letter. In most cases, a properly dated screenshot of your bank account might do.
So where do things move into illegal territory?
What’s Illegal About Wholesaling?
Wholesaling houses is illegal if you bring the buyer first, do not have a contract in place with the seller, or cannot prove intent to purchase.
But the true essence of the debate on whether wholesaling is illegal revolves around the term “brokering.”
And here we circle back to the example we first gave. 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.”
Florida Statute Chapter 475 provides a full summary of the laws governing real estate brokers and sales associates. The law clearly states that selling or attempting to sell real property “of another” for compensation requires a license.
That said, when you’re selling your own rights under a contract or a property to which you’ve acquired legal title, there is no issue regarding selling the property “of another.”
You either own the contract rights that may be assigned for a fee, or you literally own it (double close).
Also, let’s look at the fine print for a second. "For Another" in the state's real estate statute.
Now what this means is if you're not doing it for another, you're doing it for yourself, and that makes it entirely legal for you to wholesale real estate.
In addition to the "For Another" verbiage, many states additionally say "For A Fee." Now don't confuse your assignment fee with what the state law is talking about here.
When they say "For A Fee," they're referring to someone (you) charging a fee for your services, and that's not at all what you're doing.
In your transaction, the buyer/investor is paying you a fee to assign your contract to them, not for real estate brokerage or any real estate service you provided.
Now there are a few states that don't use the "For Another" verbiage, but in those cases, they typically add exemptions to their state real estate law's which will say "Except Property You Own."
Now obviously, in a double closing, you will be closing on the property before you resell it to your investor/buyer so you will clearly have ownership in the property.
Here's an example from a different state.
In Washington State, brokering is defined as the:
“listing, selling, purchasing, exchanging, optioning, leasing, renting of real estate, or any real property interest therein…” and “Negotiating or offering to negotiate, either directly or indirectly, the purchase, sale, exchange, lease, or rental of real estate, or any real property interest therein.”
Those who argue that real estate wholesaling is illegal claim it to be illegal because the wholesaler is acting as a “broker” in the deal without being licensed.
Those defending wholesaling without a license claim that wholesaling is not brokering, but simply signing a contract and then assigning that contract to another, and therefore the law doesn’t apply to these sorts of deals.
Basically, they insist they are not selling a property, but simply selling the ownership of a real estate contract.
Legality of Wholesale Advertising
To further complicate the situation, there is the issue of “marketing” a property that you do not currently own.
It is advised to already have a buyer lined up, to avoid this situation altogether, but in case you didn’t, you need to be cautious when advertising the property once you have it under contract.
If you do intend to list the property you wholesale online, know that most states also include “marketing a property” as brokering. Meaning you have to be careful of the wording you're using in your ads.
Using a phrase such as:
"Selling A Property”
“Selling my Home”
“My House Is For Sale”
Or any other type of language that may imply you are the owner without being one, can get you in a lot of trouble.
What your ad should always say is something like:
"Assignment of Contract"
"Selling My Interest In A Real Estate Contract."
“Equitable Interest In a Property for Sale"
We even suggest adding the "Assignment of Contract" wording to your email marketing to potential buyers/investors just to be on the safe side.
Here is where things get tricky, and a bit vaguer.
Say Tom wanted to wholesale a property he purchased from Jacob and then sell it to Archer.
Had Tom put the ad for the house on Craigslist or Facebook, is he marketing the property?
Absolutely.
But what if he wasn’t marketing the property? What exactly defines marketing?
It gets trickier. Even if Tom already knew Archer (the buyer), and had him lined up without advertising, logically speaking, Tom telling Archer about it is some form of advertising or marketing.
If you were to ask ten different lawyers, you might get ten different answers. However, we do believe that some wholesaler’s work could be considered illegal.
You should research the laws of your state, and then ask yourself:
“What is my intent and how comfortable am I to defend that position if I have to?”
You might find the local real estate commission asking questions. In some cases, putting a deal under contract, marketing the deal all over Craigslist, and then assigning that deal is a fast way to get fined by your state government and get a nice misdemeanor on your record.
Scary? A little. But once and for all, is it Illegal?
Is Real Estate Wholesaling Illegal?
Wholesaling is NOT illegal.
Countless investors have made a good living by wholesaling properties. However, as is the case with every other exit strategy, there are laws you must abide by.
As a wholesaler, you are the principal buyer in the transaction and you are selling your contract to another buyer; it’s as simple as that.
As long as you abide by the laws set forth in your particular state, wholesaling is both legal and a lucrative exit strategy.
Do You Need A License To Wholesale Real Estate?
Wholesaling real estate can get confusing, and with so many laws and legalities, comes the question:
Do you need a license to wholesale real estate?
The answer is simple. NO.
It isn't necessary to be a licensed real estate agent to wholesale real estate; you just need to be the principal buyer or seller in the respective transaction.
However, if you are a licensed real estate agent, you need to disclose as much as possible, as most states require licensed agents to disclose their position as a licensed real estate professional when they enter into a contract with a buyer or seller.
If you are selling a contract, you must disclose that you are not the current owner of the property, but rather you hold the right to purchase the property.
In other words, you will need to let buyers know that you aren’t selling the property - and you are ONLY selling the RIGHTS to purchase the property.
If you are purchasing the property with the intention of reselling it (double close), you must disclose that you are not the owner on record, and you must disclose that you have signed a valid purchase agreement and will close escrow sometime in the immediate future.
Do You Need A Buyers List To Wholesale Real Estate?
We mentioned this briefly earlier when trying to avoid illegal advertising when wholesaling.
While having a buyers list will definitely help, it is incorrect to assume you can only wholesale real estate without one. It is by no means necessary to have a buyers list to wholesale real estate.
There are numerous ways to find end buyers without one.
A buyers list is another tool developed to make the life of a wholesaler easier, and as their names suggest, buyers lists are exactly what you’d expect: lists of prospective buyers.
Provided you have a dependable buyers list on hand, it’s safe to assume you'll already have their first idea of who you'll wholesale the property to later on.
That said, having a buyer list doesn't necessarily mean it's a good one.
You see, a good buyers list will consist of investors who have proven they will buy a property from you if you can bring them what they need. In theory, investors should already know what the buyers on their list want.
Therefore, they will already know if the subject property they are looking at will meet the needs of the investors on their buyer’s list.
And here we get to our point.
The true benefit of a good buyers list is in giving you access to buyers before you even begin the wholesale process.
Again, despite the advantages offered by well-vetted buyers lists, however, they are not necessary. It is entirely possible to wholesale real estate without one. And everyone starts wholesaling without one.
Let’s start wrapping this up.
Legally Wholesaling Real Estate: Compliance & Best Practices
Disclaimer: The following compliance and best practices information are just that: for information purposes only. Do not rely upon the following for your own wholesale deal, as laws change, laws vary by state, and each situation is unique. Assume the following information is not tailored to your specific situation, and be sure to seek the counsel of a competent real estate attorney before moving forward with a wholesale deal of your own:
1. Transparency: always, be fully transparent. Disclosures must be sufficient, proper, and timely. There should be no questions on behalf of either party as to what is taking place. Leave no room for guessing and doubt.
2. Disclose Agent Licensing: Most states require licensed agents to disclose their position as a licensed real estate professional when they enter into a contract with a buyer or seller.
So, if you're a licensed real estate agent, you must disclose your status as one. You must also clearly communicate that you are acting as a principal/direct buyer to purchase the home in the transaction.
Position Yourself As The Principal Buyer: In order to abide by today’s wholesaling laws, investors must be a principal participant. In other words, investors’ intent on wholesaling real estate must act as the principal buyer when striking a deal with the original seller.
Additionally, the investor must act as the principal seller when it comes time to part ways with the property. To be perfectly clear, the investor must always act as the principal in each part of the transaction.
Ensure All Agreements Are Valid: It is important to note that wholesale deals are legitimate real estate deals although having differences that separate them from their rehabbing counterparts.
Wholesales are great exit strategies and should be treated as such. Therefore, use valid and binding written purchase and sales agreements that conform to the requirements of their local market. Plan your exit properly.
Include The Required Agreement Language: Wholesale deals can be confusing for those that have never done them, which is why the language chosen in a deal is so important.
In order to make a deal as transparent as possible and abiding by all the rules set forth in your area, be sure to always include relevant agreement language that’s permissible and/or required in your specific market area.
1. Include A Deposit: We highly recommend including a deposit of at least $500 when attempting to acquire a wholesale deal. Otherwise known as earnest money, the deposit will give your impending transaction validity. The money not only proves you are a serious buyer. It gives you something far more important: contractual interest and an equitable ownership interest in the property.
2. Have A Backup Plan: While you may be interested in wholesaling, we recommend having a backup plan. More importantly, purchase a wholesale deal with the intent to rehab it in the event the buyer doesn’t come through. Have the mental and financial capacities to go through such an event if plan A doesn't work.
3. Market & Sell Interest You Own: The aforementioned purchase agreement does not give you title to the property. Instead, a wholesale deal gives you the right to buy the property at the previously agreed-upon terms. As a result, you need to be careful about what you market and sell moving forward.
You can only market and sell the purchase agreement itself, and not the subject property.
More importantly, you will need to disclose that you are a contract holder (not the owner on title) on all marketing material. The disclosure shouldn’t leave any questions as to who you are in the transaction: someone selling a contract or purchasing the property and reselling it.
Each of these points may be applied to both types of wholesaling strategies: assignment of contract and the double-close.
However, as stated, they are strictly for informational purposes only.
Always seek counsel from experienced, licensed, and insured professionals in your specific market area before moving forward with a wholesale deal. It is highly recommended you secure legal representation on every transaction.
Let’s move on to our closing words.
What is The Legal Way to Wholesale?
Meaning, “how the heck do I do this without getting my mugshot on my mom's fridge?”
You can definitely minimize the risk of such a travesty by doing one of these two:
1. Get Your License. Yup. It will cost you around $1,800, but then no one can accuse you of breaking laws. Consider this the cost of ease of mind, and out of jail ticket.
OR
2. Buy the Property and Then Sell the Property. This method has its cons, but rather than “assigning” the contract, simply buy the property and then resell it (even if you only own it for 5 minutes, through a “double close”). This can “bypass” laws in many restrictive states.
Summary & Takeaways
These legislations and laws we discussed were specifically designed to prevent malicious individuals from taking advantage of the system, or even other buyers and sellers. For all intents and purposes, they are a safety net put in place for our own good. You can be a good person, but there are plenty of bad apples out there.
Sometimes it is done with no malice, and with no intent.
Far too many investors are unfamiliar with today’s wholesaling real estate rules. As a result, wholesaling has gotten a “bad rap,” and has been grossly misrepresented.
Yes, if you cut corners, choose to not educate yourself, and don't be transparent while wholesaling - it can turn to be very illegal very fast. However, when carried out in accordance with wholesaling laws, wholesaling real estate can prove to be a great exit strategy.
Depending on your state, your willingness to learn, and how transparent you are in your dealings, wholesaling real estate flirts with being illegal.
But, it is definitely legal when done properly, under the right guidance and with the right consultation.
If you want to be sure that you are operating your wholesaling business in a ‘submersible submarine mode’ (aka no water gets through), get your license or physically close on the property, take the title, and then sell it after.
If you are less risk-averse, know the laws of your state by heart, have a solid buyers list, and have a legal team to advise you, feel free to wholesale without a license, because one is not needed.
Key Takeaways:
Familiarize yourself with up-to-date wholesaling laws and be sure to consult a real estate attorney before you attempt a wholesale deal of your own.
Is wholesaling real estate illegal? Absolutely not, as long as you abide by the laws set forth in your state.
Wholesaling with a real estate license is legal, but you need to disclose your position as a real estate professional.
Next Steps
The key to succeeding in wholesaling is closing deals.
If you can close even one deal per month, you're earning full-time income. 2 deals per month, and you are easily hitting six figures. If you want to learn how Astroflipping closes between 30-50 deals every single month, click below and watch the free case study.
