For years, wholesaling real estate has been a popular form of investing. Wholesaling offers the potential for quick returns with less risk than fix-and-flips because wholesalers don’t take on repairs or reselling.
In a nutshell, wholesalers sign up to be real estate brokers for the first house buyer they sell on assignment. They then make their profit by making an upfront payment from that first client/homebuyer and dividing it among themselves as commissions. But now, some states and municipalities are imposing stricter regulations on the practice.
Regulation in the real estate industry is changing, and wholesalers need to be aware of new changes that can affect them. If you are not prepared, then there is a chance that the consequences could be major fines or other risks. However, if you have an existing real estate license and disclose information about why your offer was so low to them beforehand – it will reduce these chances of repercussions occurring.
You can ensure that you are wholesaling ethically by self-regulating your practice. Even though there haven’t been formal regulations introduced, it would be helpful if they were ready for when or if the laws enter the scene.
You want to be aware of regulations and stay in compliance while you are investing your money, protecting yourself along the way. Here’s some information on how to invest safely, legally, and ethically.
Research Regulations and Abide by Them
When seeking to start a career in wholesaling real estate, it is essential that you consult with an experienced legal professional who has experience within your local area’s laws and regulations. Wholesaling real estate laws and regulations will vary by state. While wholesaling is legal in all 50 states, it’s important to understand what regulations block certain exit strategies. In general, it’s wise to avoid these three activities, regardless of which state you’re wholesaling real estate in:
- Inability to prove intent of purchase.
- Using inaccurate and/or misleading comps to determine a sales price.
- Making promises to buyers without having a contract with the seller yet.
Real estate investing is a people business. The relationships you form and the reputation that you build for yourself are directly connected to your financial success. Making a decision without considering the long-term ramifications can cause you to lose out on future opportunities. Follow these tips to act ethically:
- Seek win-win scenarios between you and your seller.
- Be transparent and open with your sellers and buyers.
- Prove your ability to purchase through proof of funds documentation.
- Walk your sellers through your process of determining a suitable cash offer.
- Only find a buyer after the seller signs your contract
Required Licensing
If you want to be a successful real estate investor, it’s vital to know the rules and procedures that govern transactions. Start by finding out what licensing requirements your city or state has for working professionals in this industry. Each state has its own set of regulations that outline who can sell what and to whom they are allowed. In many cases, this may mean you have a license for wholesale real estate.
For instance, if you are acting as a real estate wholesaler in California and your activities involve purchasing or selling for someone else with the expectation of being compensated, you will likely need to be licensed.
Before you start your career in wholesaling real estate, be sure to consult with the state board or governing authority that oversees this industry. You’ll need their input on licensure requirements and fees before you can get started.
Even if your state does not require a license in order to wholesale properties, having one can help boost credibility and avoid shady dealings.
Follow Disclosure Laws
As with any business deal, ethical conduct includes following disclosure laws. However, this requires you to put in the time and research your state’s regulations before engaging in a transaction. When the official regulations don’t exist, you still have to be transparent when conducting business. For instance, if you’re wholesaling a property while in escrow, then provide that information in writing to the homeowner.
If you need to assign your contract, remember that many standard forms won’t work for wholesale deals. Be prepared to create amendments or customize forms in the event of an extension of contract. When striking a deal, make sure responsibilities for each part are clearly outlined. If you’re not 100% certain about what exactly is supposed to be done, have a lawyer look over the details before signing anything!
Despite increased regulatory scrutiny wholesaling real estate, you can still make legitimate transactions that are both safe and ethical.