Is Real Estate Wholesaling Legal? What You Need to Know

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

If you’re thinking about getting into real estate investing, you might have heard of wholesaling houses. This popular strategy involves finding properties that are being sold below market value and then selling them to another investor for a higher price. But is real estate wholesaling legal?

Here’s what you need to know about this controversial topic. Real estate wholesaling is often seen as a gray area, but it can be perfectly legal if done correctly. The key is to find properties that are not yet listed on the MLS (Multiple Listing Service). Once you’ve found these types of deals, you can then sell them to another investor before they hit the market.

However, there are some risks involved with this type of investment, so it’s important to do your research before getting started. You also need to make sure that you have a solid contract in place between yourself and the seller of the property. Otherwise, things could get very messy down the road!

Let’s try to answer the question, is real estate wholesaling legal, and find out if this strategy is for you.

Is Real Estate Wholesaling Legal?

Wholesaling is legal, but you have to do it correctly.

Before you can start wholesaling your properties, make sure you understand the laws in your state. Understanding these laws will help you avoid getting in trouble with the law.

What is Real Estate Wholesaling?

A wholesale deal is when a real estate investor finds a property that is below market value and enters into a contract with the seller. The investor will either purchase or assign the contract for that property and then resell it at a higher price.

The goal of wholesaling in commercial real estate is to collect a finder’s fee. This can take the shape of apartments, condos, raw land, mobile home parks, or any commercial properties.

Sellers who want to sell their property quickly often agree to a lower price than the property’s actual value. This is because they are usually in urgent need of money, such as for medical expenses.

Sometimes, wholesalers will buy homes at a lower price, improve them, and then resell them at a much higher price.

Wholesaling real estate doesn’t require you to have many years of experience. In fact, beginners can get started with little money and make quick cash.

However, having a wealth of experience is still necessary to find success in any business venture.

Wholesaling in itself is not an illegal practice, but if you’re just getting started, you need to understand its legal implications.

It’s important to know what’s legal and what isn’t when it comes to your real estate business. Each U.S. state has its own laws about what constitutes unethical behavior.

As an investor in the business of wholesaling real estate, it is important to always maintain transparency and act ethically. This means that if you are considering venturing into wholesaling, you should first familiarize yourself with the laws and regulations that protect both investors and customers.

By adhering to these rules, you can help ensure that your business is successful and lucrative.

3 Common Myths About Real Estate Wholesaling … Debunked!

Wholesaling is a process whereby the wholesaler contracts to buy a property and then assigns the contract to another buyer for a higher price. The wholesaler makes money on the spread between the contract price with the seller and the purchase price of the assignment.

There are many misconceptions about wholesaling, which lead people to believe that it is not a viable option for making money in real estate. However, these myths are simply not true.

I’m about to debunk three of the biggest real estate wholesaling misconceptions.

Myth #1: Wholesaling is illegal

This is perhaps the most common myth about wholesaling. People believe that because you are not the end buyer, you must be doing something illegal. This could not be further from the truth. Wholesaling is perfectly legal as long as you follow all the proper steps and do not misrepresent yourself as the end buyer.

Myth #2: You need a lot of money to get started in wholesaling

Another common myth is that you need a lot of money to get started in wholesaling. This simply is not true. You can start with very little money if you have access to creative financing options such as private lenders or hard money loans. You can also find deeply discounted properties that require little to no repairs.

Myth #3: You Need to Own the Property to Wholesale It

This is another myth that just isn’t true. You do not need to own the property to wholesale it. In fact, most wholesalers never even see the property they’re selling! They simply find a motivated seller, negotiate a great deal, and then sell that contract to an investor who closes on the property and owns it.

Many people believe that wholesalers are just middlemen who don’t add any value to a deal. This could not be further from the truth! A good wholesaler will bring added value to a deal by negotiating with sellers, performing due diligence, and adding value through repairs or renovations.

There is a legal way to buy and sell real estate, and an illegal one.

Co-wholesaling is a great way for investors to work together to do a joint-venture wholesale deal. While some people may try to do an illegal co-wholesale deal, it’s important to remember that both investors need to have their real estate licenses for it to be legal.

It is against the law to buy and sell a property without the proper license.

It is a shame that so many people engage in illegal wholesaling activities, as this often leads to my apprentices having to justify their actions to the real estate commission.

I have had to spend a great deal of money proving that our wholesaling activities are not illegal to protect my apprentices from potential penalties.

To wholesale properties legally, you must establish a contract with a seller that stipulates you are purchasing an equitable interest in the property.

You’ll need to show proof of funds to the seller to demonstrate your intent to purchase. I provide my apprentices with a letter that includes a screenshot of my bank account.

Then once you have your house under contract, you can go out to find more buyers.

Wholesaling is not illegal. There are many ways to wholesale, and as long as you are following the law, you can wholesale properties.

Wholesaling vs. Flipping

Flipping and wholesaling are two different things. Flipping is when you buy a property, fix it up, and then sell it for a profit.

Wholesaling is when you find a property, get it under contract, and then sell the contract to another investor.

You don’t need money or credit to start a real estate wholesaling business. You just need to find a motivated seller and get the property under contract. Then you can find an investor to buy the contract from you.

Wholesaling is illegal if you brought a buyer first, do not have a signed contract with that seller, or cannot prove that you intend to purchase the property.

Wholesaling is a great way to make money in real estate, and you don’t need a buyer’s list to be successful. My team and I have done numerous wholesale deals, totaling over $250,000, without ever building a buyer’s list.

The key is to know the business well and to follow all the rules and laws. With that knowledge, you can be successful in wholesaling without a buyer’s list.

The issue with using a list of buyers is that in wholesale, you are working directly with the sellers, and then selling their properties to another party.

Most buyers’ lists are made up of investors who are doing many deals and are not the individuals you want to sell to.

The less experienced the investor is, the more they will expect to pay for your property, and you don’t want to overprice yourself.

It is important to find a buyer who is willing to pay what your property is worth, and not try to lowball you. There are a few ways to find buyers like this.

The first way is by looking for cash buyers. These are investors who have the money on hand to buy your property outright, and they are usually more interested in getting a good deal than making a quick profit.

Another way to find buyers who are willing to pay what your property is worth is by looking for ones who are already pre-approved for financing. These buyers have already been through the process of getting approved for a loan, so they are more likely to be serious about buying your property.

Finally, look for buyers who have experience with fixer-uppers. These buyers know how much work it takes to fix up a property, so they will be more likely to offer you a fair price for your home.

It’s perfectly ethical to market to buyers once you have a deal under contract.

How to Find the Right Buyer

There are a few ways you can go about finding buyers for your home. You can put up signs around the neighborhood letting people know that the property is for sale. You can also create ads on websites like Craigslist and Zillow. If you are experienced in real estate, you can list the property on the MLS.

As a wholesale investor, you are the go-between for the seller and the buyer.

This means that if these two people feel like they can make more money without you, they will get rid of you.

If the seller agrees to sell the property to you for $100,000 and the buyer is willing to pay $120,000, then the seller might decide to sell directly to the buyer at $110,000 and split the savings.

If both you and your prospect are out to get each other, and you don’t know what you are doing, you can be intimidated by the prospect and lose out on a deal.

If you’re a beginner, it’s best to avoid drama by purchasing property the traditional way. This means considering renovation and finding a buyer after you close on the property.

You can simply visit an auction website like eBay or your local courthouse and bid on a property.

You might run into other issues, but at least you will not have two people out to get you.

How to Wholesale Houses Legally

Now that you understand that wholesaling isn’t an illegal practice, you should also know how to properly do it.

Whether you’re just starting or you’ve been in business for a while, there are still a few things you can do to succeed and protect yourself from problems.

One way to wholesale properties is to present yourself as the principal purchaser. You should show the property owner that you are the one buying their property.

When it’s time to finally resell the property, you should introduce yourself to the buyer as the seller.

Make sure to have solid deals with your real estate listings. You must have valid and binding purchase and sales agreements.

Make sure to adhere to the local real estate laws. Include any relevant contract terms required by your market.

Don’t let these myths discourage you from pursuing wholesaling as a means of making money in real estate!

Conclusion

Is real estate wholesaling legal? Wholesaling houses is a popular strategy for flipping properties, but it’s important to know the risks involved. Make sure you do your research and have a solid contract in place before getting started. And remember, always check with an attorney to make sure that real estate wholesaling is legal in your state!

Justin McGill