In retail, a wholesaler is a person or company that purchases products directly from a manufacturer and then sells them to stores who in turn sell the products to the consumer. In other words, the wholesaler is the middleman. A real estate wholesaler is similarly a middle man. A wholesaler contacts home owners directly to determine if they are willing to sell. The wholesaler then puts the property under contract and either assigns the contract to an other investor or closes on the sale and then sells the property to an investor. That investor then rehabs the property and sells it to the end buyer.
Legal Issues Related to Wholesale Transactions
Wholesaling is an excellent way for individuals with limited money to get into a real estate. The wholesaler does the leg work, but it is the next investor who must invest in renovating the property. With that being said, wholesaling is one of the most challenging forms of real estate investment from a legal perspective.
The challenges of wholesaling begin with this quandary. Only a licensed real estate agent can market or sell property he or she doesn’t own. Therefore, if a wholesaler markets a property for sale before he or she has title to the property, he or she is violating the laws related to real estate licensing. On the other hand, if the wholesaler is licensed, many jurisdictions consider the wholesale transaction to be a “net listing” or something else that is banned by the real estate commission. A net listing is when a real estate agent or broker enters into an agreement with a property owner stating that they will list the property for sale and if it sells for anything over a certain amount, the agent keeps the excess. These type transactions have long been prohibited.
How to Legally be a Wholesaler
With this in mind, a person might ask how a person could legally engage in wholesaling. The first and simplest answer is to purchase the property, close on the sale, and then sell it to an investor. Assuming the wholesaler waits to market the property until after closing, the wholesaler can complete this transaction — whether or not licensed — without violating any laws or regulations. There are draw backs to this solution, however. For example, the wholesaler will have to pay capital gains tax on the difference between the price he or she paid to purchase the property and the sale price to the investor.
The other option is to never market the sale of the property, but instead to market the contract. The real estate license rules do not prevent someone from marketing for sale contract rights, even if those rights are for the purchase of real estate. It is not, unfortunately, quite that simply though. For example, in addition to making sure that all marketing materials and communications are clear about what is for sale, the wholesaler must also have the means to close on the transaction once he or she goes under contract. If a wholesaler does not have the means to close on the purchase (without an assignment), there are issues both with misrepresentation and licensing issues. With that being said, that does not mean that a wholesaler needs to close on every transaction. If the inspection reveals defects in the property or there are other contingencies that are not met, the wholsaller may be able to cancel the contract. This is why it is important to have a good contract that allows both for assignment to third parties and contingencies for inspections and other applicable contingencies.
Drafting Wholesale Contracts
If you would like us to assist with creating your appropriate wholesale purchase contract and assignment documents, we would be happy to do so. We charge a flat rate for drafting these documents, and you can learn more about retaining us to draft your contracts on our contract drafting webpage.
Guidance for Wholesale Investors
Additionally, we offer a monthly subscription service that provides unlimited scheduled phone calls with an attorney. These calls can be invaluable for a wholesaler as he or she wades through the legal challenges of this investment strategy. You can learn more about this program by going to our Guarded Pockets™ webpage.
Wholesale Friendly Title Companies
It can be difficult to find title companies that are experienced working with wholesale investors. One way to find title companies to work with is by asking in investor groups or reviewing the company directory for investor groups such as the Midamerica Association of Real Estate Investors (MAREI).
Alternatively, please be advised that part of the Rick Davis Real Estate family is Rick Davis Real Estate Title. Rick Davis Real Estate Title is a title company that has extensive experience working with real estate investors, including wholesalers. To learn more about Rick Davis Real Estate Title, please visit the Wholesale Transactions page in the title company section of this website.