Window to the Law: Real Estate Wholesaling
Learn more about the real estate wholesaling business model and some of the potential legal pitfalls related to this practice.
Window to the Law: Real Estate Wholesaling: Transcript
Frequent viewers of late-night television may have seen advertisements about how they can make “millions” in real estate by quickly flipping properties for a higher price – a practice known as wholesaling. In this edition of WTL, we will discuss real estate wholesaling. While this practice is not illegal, there are some legal risks that will be highlighted in this video. I am Finley Maxson, NAR Senior Counsel.
The practice of real estate wholesaling occurs when individuals attempt to sell their interest in a property while they have the property under contract but prior to closing. The wholesaler has no intention of actually purchasing the property and never takes title to the property.
In a typical transaction, the wholesaler first enters into a purchase contract for a property that the wholesaler estimates can be sold for a higher price. For example, a wholesaler estimates that a property listed for $50,000 may be worth $100,000 after $25,000 of repairs. So, the wholesaler will enter into a purchase contract for $50,000 and includes either an option to purchase the property for a certain period of time or inserts a contingency clause into the agreement that will allow the wholesaler to back out of the contract if they are unable to find a buyer. The wholesaler will then begin marketing the property during this period at a higher price, ideally to a group of investors that the wholesaler has already identified. If everything works according to plan, the wholesaler will sell the property at a higher price to an investor during the contingency period, pocketing a profit without ever having purchased the property.
While there is nothing illegal about this practice on its face, it does raise some potential legal issues as well as risks. First, the initial contract should allow the wholesaler to assign the contract to a third party without the consent of the seller. Second, the contract’s contingency clauses should extend to the third-party buyer. The third-party buyer ought to have the right to inspect the property and cancel the agreement if major problems are discovered. Finally, all advertising needs to accurately disclose what you are selling, which is your equitable interest to buy the property and not the property itself.
Real estate wholesaling presents some issues for real estate professionals to consider. Real estate licensees engaging in this practice will need to be clear to the seller that they are acting for their own interests and not on behalf of a client. Conversely, a listing broker will need to make sure that the seller understands the potential delays that this arrangement could cause to the transaction while the wholesaler markets the property during the contingency or option period.
Texas has a statute which regulates the practice of wholesaling. The statute requires wholesalers to disclose in all advertising the nature of the equitable interest that they hold in the property. If an individual fails to accurately disclose this interest and instead gives the appearance that the individual has title in the property, the individual will be considered to be engaged in the activity of real estate brokerage, for which a license is required.
Here are some additional resources to learn more about wholesaling. Thank you for watching this edition of Window to the Law.
- Contract Hand-offs by Mat Sorensen, REALTOR® Magazine, May-June 2019
- What is the Goal of Real Estate Wholesaling? by Troy Segal, Investopedia.com, June 21, 2018
- Occupations Code, Chapter 1101, Real Estate Brokers and Sales Agents