Many real estate investors regard wholesaling as a way to learn how to evaluate deals and develop your real estate network. It is also a method to profit from investing in real estate without requiring significant up front capital. Wholesaling is a strategy whereby the wholesaler enters into a purchase contract with a seller of real estate and then assigns the purchase contract to another third party who will typically rehab the property and flip it for a profit (at least that is the goal).
Although most investors regard wholesaling as involving less risk than, for example, the flipper who is rehabbing and selling the property, there are always risks in any transaction, and so the purpose of this article is to identify some of the common legal issues to look out for in your wholesale deals. This article is not designed to teach you the strategies for being a successful wholesaler, such as how to find properties, how to approaching homeowners, etc., but instead, focuses on some of the legal aspects of wholesaling that investors should be aware.
Licensing Issues: Be aware of potential licensing requirements for your state: Different states define the scope of activities that require a license differently and so you should be aware of what activities are regulated by your particular state and act accordingly. For example, California generally defines a real estate broker as someone who sells, buys or negotiates for another with the expectation of compensation. If your activities in California meet these elements, then be advised that you may need to be licensed as real estate agent. Any questions regarding state licensing requirements should be directed to an attorney with knowledge of the requirements of that state.
LICENSING ISSUES
Understand the Rules & Procedures Governing Real Estate Transactions in your State: Many states have unique laws, forms or disclosure requirements for real estate purchase transactions. For example, in California, a seller is required to provide a transfer disclosure statement and if the property is in foreclosure, there are additional required disclosure requirements. Failure to abide by the rules that are required in your state could cause legal issues down the line in your transaction. You don’t want to have a seller or your end buyer come back later raising an issue with the transaction that could have been avoided had you followed the proper procedures for real estate transactions in your state.
DISCLOSURE & TRANSPARENCY
Be Transparent as to your Role in the Deal: If your intent is to wholesale the property during escrow, the homeowner should be well aware in writing that your intent is to assign the deal to a third party for profit, and the contract language should give you a unilateral right to assign without requiring the consent of the homeowner. Most standard form purchase agreements you get from realtors do not have this language and so an amendment or specially prepared form may be necessary. On the buyer’s side, you should be very clear in your written agreement with the end buyer as to what you will be responsible for and what will be the responsibility of the end buyer. For example, are you going to do an analysis of after repair value (e.g. running comps and estimating repair costs)? Run title? Do an inspection? What happens to your earnest money deposit once you assign the contract to the end buyer? Your agreement should clearly specify in detail what your specific obligations are in the deal, where your obligations in the deal ends, and what the end buyer is expected to do to close the deal. It is better to have these details on who does what expressed clearly in writing rather than rely on assumption. Most importantly, you should include language that fully releases you from any further obligations or liabilities in the deal to ALL parties once you complete the assignment to end buyer.
CONTINGENCY CLAUSES
Make Sure Your Contingencies are Clear. This should go without saying, but depending on the specifics of the particular deal, it is important to properly set the expectations early for all the parties involved. I typically advise clients who wholesale properties to have a good understanding of what their potential end buyers want in a deal in terms of location, spread, contract language, due diligence items, etc. I also encourage individuals wanting to pursue wholesaling to develop relationships with rehabbers as early as possible, preferably before getting a property under contract, so that they have a good idea of whether they will be able to successfully complete the assignment as intended. It is highly recommended to have your team of professionals such as realtors, contractors, appraisers, etc. in place to provide accurate feedback as you analyze the merits of your deal. Finally, have an attorney’s fees clause in your agreements so if you have to pursue legal action to enforce the agreement or your contingency clause, you preserve the right to seek your attorney’s fees.
Of course, making sure you are covering yourself legally is just one detail for successful wholesaling. Finding the right properties, learning to negotiate with homeowners, and developing a network of professionals to assist you during the wholesaling process are all necessary aspects for successful wholesaling, but making sure that you are covering your bases legally will help ensure that your wholesale deals proceed smoothly with minimal possibility for conflict.