For years, real estate wholesaling has been a popular form of investing. Wholesaling offers the potential for a quick return on an investment, with (generally) less risk than a fix-and-flip because the wholesaler doesn’t take on the repairs and resale of the flip
In a nutshell, wholesalers contract with a home seller, market the property, then assign the contract to a buyer. The wholesaler makes a profit on the difference between the contracted price with the seller and the price paid by the buyer.
But in recent years, some municipalities and states have tightened regulations around the practice.
For real estate wholesalers, this means you must keep up with new and forthcoming regulation in areas such as disclosure, licensing, and transparency. You may be required to obtain a real estate license, if you do not have one already, and there may be specific information you are required to disclose to your seller, likely the fact that you are purchasing their home in as-is condition for less than market value. If you’re not prepared, you risk a major fine or other consequences.
Even if your market has yet to introduce formal regulations, self-regulating your practice can help ensure that you are wholesaling ethically and that you are prepared for when or if wholesaling laws and regulations do enter the scene.
Being aware of regulations and remaining in compliance is the best way to protect yourself and your investment activities. Here’s what you should know about how to wholesale real estate legally, safely, and ethically.
Learn (and Follow) the Rules
A working knowledge of the rules is essential to wholesaling, so be sure to seek out the advice of a legal professional who is familiar with the laws and regulations in your area.
Wholesaling laws vary by state and even city. But as a general rule, the following activities are usually either illegal or considered unethical and should be avoided:
- Inability to prove intent to purchase
- Using inaccurate and purposely misleading comps to determine a purchase price
- Making certain promises to a buyer before you have a contract in place with the seller
Real estate investing is a people business and the relationships you form and the reputation you build for yourself is directly connected to your financial success. You don’t want to sacrifice your long-term success for a short-term gain, so it is important to consider the ramifications of your actions before making any decisions.To act ethically, you can:
- Seek to find win-win solutions that never take advantage of a vulnerable seller
- Prove ability to purchase through documentation such as proof of funds letter
- Draw up a contract with the seller that shows you’re acquiring an equitable interest
- Only find a new buyer or assignee once the property is under contract with the seller
- Be transparent with what factors lead you to come up with your offer price
- Practice transparency and explain the process clearly to all parties
All real estate investors should possess a working knowledge of the rules and procedures that govern real estate transactions. Start by studying up on the licensing requirements in your municipality and state.
Each state — and, as we’ve seen, some cities — have a set of regulations that outline who can sell what and to whom they can sell it. In many cases, this may mean you need a license to wholesale real estate.
For instance, in California, anyone who buys, sells, or negotiates for someone else with the expectation that they’ll be compensated for these actions is considered a real estate broker. If your activities fall within these parameters, you likely need a license to be in compliance with the law.
Consult with a legal professional in your state to ensure you have the information you need about potential licensure requirements.
Even if your state or city does not require a license in order to wholesale properties, having one can help boost your credibility to sellers and help you avoid getting into shady dealings.
Transparency and Disclosure
As with any business deal, ethical conduct includes following disclosure laws. Again, this requires you to put in the time and research your state and municipality’s regulations.
When official regulations don’t exist, ethical conduct still demands transparency. For instance, if you plan to wholesale a property while in escrow, you should provide that information to the homeowner in writing.
In such a case, the contract language should also provide you with the right to assign without the need for the homeowner’s consent. Be aware that many standard forms won’t contain the language required by a wholesale deal. Be prepared to create amendments or customize forms.
All contracts and agreements should clearly state, in writing, who is responsible for which pieces of the transaction. Include details of each part of the deal, rather than relying on assumptions. Again, have a legal professional review all documents.
Despite increased regulatory scrutiny of real estate wholesaling, you can still make deals that are legal, safe, and ethical.
One great way to do this is by joining our team at New Western. We’re always looking for investment real estate agents, whether you’re licensed or not… and if you’re not, we can guide you through the process. You’ll work with an experienced real estate broker and a team of professionals who are dedicated to keeping up with local laws and giving agents the support they need to act both ethically and legally.
We’ve always aimed to hold ourselves to the highest industry standard and, as the largest source of off-market properties in the nation, can provide you with unlimited opportunity.