IS WHOLESALING REAL ESTATE LEGAL?
I’m not going to get too far down into the weeds here. As you know, with any post there are a lot of “What ifs”, ways for people to misinterpret, and look for a way to weasel around what is said.
First, people must stop equating “Assigning the Contract” as everything wholesaling. Assigning is a useful tool, but only one of several ways to wholesale a property. I understand people’s attraction, as it’s always promoted as a way to “invest” with little or no money, and make a nice chunk of change doing it.
The following applies specifically to unlicensed people in Ohio. Most, if not all states are probably very similar.
WHOLESALING BY CONTRACT ASSIGNMENT
The first two are absolutely absolute (redundancy intended). Direct from the Ohio Revised Code and the Division of Real Estate attorneys. There is NO wiggle room.
Assigning a contract is perfectly legal. However, what people are doing to get from contract to assignment is frequently not. Driving to the Beach is legal. Driving 90 miles an hour to get there is not. Assigning a contract simply takes a few sentences to accomplish. Of course, a specific contract can prohibit assignment, but the law clearly allows it.
You cannot advertise a property for sale unless you legally own it. Having it under contract is NOT the same as owning it. And for the weasels, “Equitable Interest” does NOT give you ownership and allow you to advertise the property for sale. You must have legal ownership. There are still questions on precisely where the line for “advertising” is drawn. The Division would not take a solid position on where the line was if you were just advertising “The Contract” for the property.
The next one should be absolute, but there may be a loophole somewhere.
Do not put a property under contract unless you are ready, willing, and able to close on it personally. (For me, this is an absolute.) There are all kinds of issues with entering any contract when you have no intent or ability to perform on the contract. And you’re screwing the seller if you don’t perform. Don’t do it. This is one of the key points for the State to determine if you are acting as an agent.
If you assign multiple deals, but never close on one personally, you’re going to have a hard time saying you’re not acting as an agent.
If you’re putting properties under contract, but have no intent or ability to close, you’re violating contract law, and trying to act as an agent. (Imagine the seller suing you for contract fraud and specific performance.)
If you leave behind a trail of purchase agreements you didn’t close on if you couldn’t assign it, then you’re probably acting as an agent.
Now for the licensees:
Being a licensee allows you to advertise a property you don’t own when you have the owner’s written permission. You can have it under contract and be acting for yourself, and not as an agent. However, consider this. I can easily imagine a seller filing a complaint/lawsuit on how they were taken advantage of by the unscrupulous licensed, skilled professional real estate agent. You know the one who put their home under contract, then assigned the contract for a lot more than a commission. The agent clearly took advantage of the unsophisticated seller, and stole their home for less than it was worth for their own personal gain. Guess who wins that?
Being a licensee MAY hinder you. At the very least, it requires extensive disclosures, and the broker’s approval.
Wholesaling and all real estate activities MUST comply with the three rules above.
In case you’re wondering, I primarily focus on rentals and flips. I do wholesale some properties, which may include assigning the contract.
For additional information, here is a link to the video with Attorney Jeff Watson interviewing the attorneys for the Ohio Division of Real Estate on the specifics of wholesaling legally. https://www.youtube.com/watch?v=9fi54S8nwUA
ASSIGNING THE CONTRACT
So you’ve followed the rules, and successfully assigned the contract. Now, time for the closing and get paid. It’ll be a great day right? What could go wrong? Remember these two points:
When you assign a contract, you are giving ALL your rights to the contract to the buyer. You are removing your name on the purchase agreement replacing it with your buyers. You’re out of the picture on the purchase agreement.
Your assignment agreement is ONLY with the buyer. In exchange for replacing your name on the contract, you agreed to receive a fee.
The buyer and seller both have the right to change the purchase agreement. So, the buyer and seller could legally cancel the existing contract and create a new one. (Remember, you’re no longer the buyer) You could be sitting at the closing table, and you wouldn’t be able to legally stop it. The title co also wouldn’t be able to stop those changes, as the buyer and the seller have the right to change their agreement. A newly written agreement could take the assignment out of play from the title co perspective. The title co is simply a facilitator for the written agreement in the transaction, even when the buyer and seller make a last-minute change.
Ok, so most buyers and sellers wouldn’t do that. But some would and do. You could try to sue the buyer for not paying you, but how do you think that would go, and what would it cost?
Call me a control freak if you want, but I almost ALWAYS double close. It eliminates almost every objection as to whether you were wholesaling legally. Use Transactional Funding if you must, build the cost into the deal.
How do you prevent all the questions and problems above? Simple.
- Find a great deal
- Buy the property (use a lender or partner as needed)
- Sell a good deal
Clean, neat, simple. And no argument about whether it’s legal.