What is Wholesaling? Is it legal?
When wholesaling, the wholesaler finds a home and writes a contract to purchase the home. They then try to find a buyer to assign the contract to before the closing date. Wholesalers try to make a profit by selling the contract for more than they are contracted to pay the seller.
Realtors sell properties; Wholesalers sell contracts.
In the State of Ohio, since wholesalers are selling a contract and not a property they are not allowed to post photos or exact addresses of the property that they have under contract. Our brokerage does not allow wholesaling; at Century 21 HomeStar we are insured for selling properties, not contracts. Ensure that you are insured when selling contracts.
Be sure to check with your State, brokerage, or attorney for the rules in your area.
When the buyer is listed as Joe Shmoe LLC or assigns, this is an indication that they are planning on selling the contract. Are they really prepared to close on the property themselves if they don’t find an assignee in time for closing? Tony stated that it is illegal to go under contract without intending to close. Another warning sign that someone may want to assign a property is when they pay little or no earnest money.
As a Realtor you do not know what the wholesaler is disclosing to the end buyer. Another major problem is the seller may not know how much the wholesaler is making when selling the contract. For Realtors, this can leave you open to lawsuits. There is no such thing as “as is” when selling a home; there are many lawsuits when everything is not disclosed. The bottom line is: The liability is huge when you don’t know what the wholesaler is telling the seller or the end buyer.
Real estate agents are held to a higher standard by their code of ethics; a wholesaler does not have this standard. It is unethical for a Realtor to knowingly let a seller sell their some so far below value. Most assigned properties are in lower income areas.
Since most wholesale deals don’t involve banks, they are turning these properties into investment properties based upon the after renovation value (ARV) or the rental potential. By focusing on investors the properties are sold on the value of income, not for people to live in as their primary residence.
On the positive side:
Amidst the complexities and concerns surrounding wholesaling, there are instances where it can be beneficial for all parties involved. Take Mike’s friend, for example, who is both a Realtor and a wholesaler. His story sheds light on the potential advantages of this practice.
Mike’s friend operates a team that actively seeks homeowners looking for cash offers. In one case, they offered a homeowner $40,000 for their property. However, the homeowner had reservations and considered involving a Realtor. Mike, a Realtor himself, assessed the property and believed it could fetch $60,000 on the market. Despite this insight, the homeowner decided to accept the $40,000 offer, preferring to avoid the hassles of showings and prepping the house for sale. In this instance, the homeowner made an informed decision, demonstrating the potential benefits of wholesaling when done transparently.
Everything must be disclosed – the liability is huge when you don’t know what the wholesaler is telling the end buyer.
Transparency is so important – the seller should know how much the wholesaler is selling the contract for to make an informed decision.
Not all title companies will allow assignable contracts; they may want to do a double closing.
For more great Real Estate content –
You can check our our Podcast FREE BEER AND REAL ESTATE or YouTube for Mike’s weekly classes!!!
SCHEDULE AN APPOINTMENT WITH MIKE: 21Mike.com
CHECK OUT OUR TRAINING VIDEOS ON YOUTUBE: https://www.youtube.com/user/21mikec21
TRAINING ON ZOOM, TUESDAYS AT 11:30 EST: https://bit.ly/3r9Lw2c