This topic is always highly debated, and there is a lot of misinformation around, so seeing how this is the wholesaler's toolbox, I feel it's important to address the topic. There are many wholesalers doing business the right way day in and day out, and there are many doing it very wrong.
So let's take a few minutes to clarify what activities are legal and which aren't so you have a clear understanding moving forward.
Now as many of you know, there are two main types of real estate wholesaling, the assignment and the double closing, both of which are perfectly legal if done correctly.
Let's take a quick look at the two of them.
Assignment of Contract is when you put a house or piece of real estate under contract and assign that contract to another buyer, typically a cash investor.
Double Closing is when you put a house or piece of real estate under contract and personally close on the property. Then immediately after the first closing, you have a second closing to sell the property you just bought to another buyer/investor.
Again, both assignments of contract and double closings are legal if done correctly, so let's talk about where the confusion in legality comes into play.
The problem usually arises when a new wholesaler approaches an attorney, real estate broker, realtor, investor, or anyone who feels they are an "expert" in the real estate or legal field and asks them if real estate wholesaling is legal. If these professionals are familiar with wholesaling, everything is fine, but if not, they'll tell you that you can't buy, sell, list, market, negotiate, option, or any other activity without a license.
But what they don't remember in their real estate training or research is the words "For Another" in the state's real estate statute. (Maybe they missed that day of real estate class)
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 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, a few states don't use the "For Another" verbiage, but in those cases, they typically add exemptions to their state real estate law which will say "Except Property You Own." Obviously, in a double closing, you will be closing on the property before you resell it to your investor/buyer so that you will have ownership of the property.
In an assignment, however, we have to look at contract law, which says when you enter into a contract with someone, you have what is called "Equitable Ownership" or " Equitable Interest," which gives you the right to resell or assign the real estate contract.
Although I don't advocate sitting down with your seller and explaining in-depth how you intend to contract the property, then immediately turn around and assign it to someone for a fee. I do suggest having verbiage in your contract that explains that you could assign the contract to protect yourself.
If you're doing a double closing, this verbiage isn't necessary, but you might want to disclose to the buyer that you do not own the property yet, but you will have ownership prior to closing. (they should already understand this, but it's always best to cover your bases)
Another place you need to be cautious is when advertising the property once you have it under contract. Now those of you who know me or have watched my YouTube Channel know I believe having buyers already lined up, so you're not marketing properties online.
But if you do intend to list them online, I urge you to be careful of the wording you're using in your ads. Using phrases such as "Selling A Property I Own" can get you in a lot of trouble.
Your ad should always say something like "Assignment of Contract" or "Selling My Interest In A Real Estate Contract." Although, as I just mentioned, I recommend having a cash buyers list first so your deals never go online in the first place.
I would even suggest adding the "Assignment of Contract" wording to your email marketing to potential buyers/investors just to be on the safe side.
Hopefully, this has answered your legal questions about wholesaling real estate. I strongly encourage you to research your state's real estate licensing laws by looking up the licensing website or trying the link for your state listed below.
Texas - TREC SB 2212
SB 2212 amends Chapter 1101 to codify the clarifying changes to TREC rules regarding the sale of certain equitable interests in real property.
Just like the rule, this statutory change clarifies that a person selling or offering to sell an option or assigning an interest in a contract to purchase real property must accurately disclose to potential buyers the nature of the interest offered. If a person offers a property for sale when the person does not own the property, that person is engaged in brokerage and must be licensed to do so. This is the current law.
If a person offers to sell an option or assign an interest in a contract on a property, the person must accurately describe the interest being offered. The same requirement for accuracy is added in the Property Code. The practice of “wholesaling” remains legal if these “truth in advertising” rules are adhered to.
Illinois - SB 1872 or Real Estate License Act of 2000 - Revised
The Illinois Real Estate License Act of 2000 (RELA or the Act) was due to “sunset” at the end of 2019. This is a regular occurrence for licensing laws, and knowing this was on the horizon Illinois Realtors set to work organizing a task force to study, consider and recommend changes for a rewrite of RELA.
Accordingly, the Illinois Realtors task forces were focused on consumer protection from the start. In addition, IDFPR has a mission of consumer protection together with establishing the standards for professional real estate licensees in Illinois.
With regard to business practices, in Section 1-10, the definition of “broker” has been amended to include the practice of “wholesaling” if done as a business model. Generally, “wholesaling” involves the practice of entering contracts to purchase property, then quickly assigning that contract to another buyer for a profit. When done as a business practice, “wholesaling” will now come under RELA’s enforcement provisions and the wholesaler will need a real estate broker’s license, as well as be subject to consumer protection provisions such as disclosure of self-interest and prohibition against dual agency.