Is wholesaling illegal?

Have you heard the word on the street that wholesaling without a real estate license is illegal brokering?

This is a pretty hot—and even scary—topic…

What is true is that in some areas, real estate commissions (typically made up of Realtors) are cracking down on those who broker deals without a license.

What’s also true is that wholesaling can be done legally without a real estate licensewhen done the right waylike I do and countless other investors.

Full Disclosure: I am a licensed Realtor. While I am an investor first, I actually recommend that investors get their real estate license because I think the benefits outway the costs.

But I digress…

Look, there’s no sense in being a moving target, right?

So I’ve got several tips and ideas about how you can protect yourself from some unwanted and unwarranted attentionto stay out of hot water with the commission.

Here’s my biggest tip for avoiding this kind of trouble:

ABSOLUTELY: Start with a rock-solid buyers list.

This way, you already have people to sell your contracts to. Having a buyers list will save you from sooo many headaches—not only with the real estate commission, but all around.

Check out the rest of my helpful tips…

TIP #1: Go into deals with INTENT of buying the property.

When wholesalers try to broker deals, that’s when the commission gets fussy. Brokering would be when you’re trying to put sellers and buyers together in a deal.

As wholesalers, that’s NOT what we do.

When we’re wholesaling (not brokering!), WE ARE the buyer.

I go into deals thinking:

I’m going to buy this property… and as I get in, if I decide I don’t want to buy it, I can simply sell or assign the contract.

Of course, many times we do buy it, fix it up and then sell it…

And sometimes we buy it, don’t fix it up and turn around to sell it a second later and make a profit.

Here’s an example of how brokering without a license can happen…

Don’t. Do. This.

Don’t include something like this in your contract:

“This offer is contingent on me, Mr. Wholesaler, finding another buyer.”

Well, that’s not good. Not good at all. It obviously looks like brokering.  

Or, here’s another good example… if you only put down $10 for the earnest money deposit.

Also not good. Why? It doesn’t look like you have any intent to buy the property.

And know this: If you are called out by the commission, you would have to prove that you had the intent and the means (read: $) to buy the property.

Always, always, always go into deals with the intent to buy, and also…

TIP #2: You need the MEANS to buy the property.

Said another way, you need access to cash.

And that can come from several places:

  • Transactional funding
  • Private lenders
  • Your own cash
  • Business lines of credit

Again, you must have the means (aka accessible funding) to buy the property.

If you change your mind and decide not to buy it in the end, that’s fine. But you need funds at the ready.

TIP #3: Advertise the CONTRACT for sale not the house.

You can’t advertise a house you don’t own. Don’t do that.

That’s the big thing that gets the commission fired up.

Remember, you are selling the contract, NOT the property. So anytime you’re offering the deal to another investor, advertise it as the contract that’s for sale, not the property (unless you’ve already closed on it).

TIP #4: PARTNER with a local rehabber.

If you partner with a rehabber, you can change the name on the contract to an LLC.

You’d write something like this into the contract with both you and your rehabber ‘partner’ as the buyers:

“Mr. Investor and Rehabber LLC to be formed.”

Then after the deal closes, you’d work it out with your rehabber.

TIP #5: DOUBLE close on the property.

If you actually close on the property, you can turn around and sell it. Duh. 🙂

So again, you need that access to funds (#2 from above) if you do choose to close on it.

TIP #6: Hire a REALTOR

This is totally doable—simply hire a Realtor to market your contract.

Just ask around, get referrals, network…

Find an agent—who thinks creatively and understands investing—who’s willing to market your contracts for you.

And that doesn’t mean they have put it on the MLS. There are other places they can advertise, of course.

TIP #7: Get LICENSED.

You should consider getting your real estate license and list the house with a listing agreement. That’s what I did, making this a non-issue for me.

Let me illustrate this with some numbers…

Your purchase price: $20k

Your assignment fee goal: $6k

Set the sale price at: $26k

Your commission with the seller could be $6k. (Remember to also account for the buyer’s agent’s commission too.)

With those numbers, that’s about a 23% listing commission.

I bring this up to say that there is no law that says the most you can make on a listing commission is 6%. It just doesn’t exist. It’s just a traditional norm, not a rule or law.

Tip #8: Get the house under contract with a new LLC.

I haven’t personally done this, but I know investors who have successfully…

Put the house under contract in the name of a new LLC.

If you’re going to bid on 123 Main Street, put the contract in the name of “123 Main Street LLC.”

Then, sell the LLC to your end buyer. You don’t need a license to sell an LLC.

Here in Missouri, we can create our own LLCs online for about $100 bucks. You can likely do the same inexpensively in your state.

Bottom line…

Don’t walk around with a target on your back.

Wholesale the right way by following these tips, and you should be able to avoid getting on the radar of real estate commissions.

Happy wholesaling!

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