Why Wholesaling Doesn't Exist in Most Other Countries

[Don Konipol]

Wholesaling real estate, as the term is currently used is a phenomena in the United States only.  The reason for wholesaling, wholesalers, and that entire industry is ironically the result of policies put forth by Realtors!

In most countries, especially Europe and South America, earnest money deposits are much larger than in the U.S. - 25 - 50% of purchase price.  Further, these deposits "go hard" immediately, i.e., they are not refundable and the purchase is not "contingent" upon a variety of other events, such as inspections, financing, etc.  In those countries the buyer is expected to have done his due diligence BEFORE making an offer.

Well, up until the late 1940s, that's also how real property was transacted in the U.S.  Financing was done, if at all, by the local banking institution the buyer had an established relationship with.  The bank would sit down with the buyer and discuss if and how much he could borrow before he ever looked at the first property.

After World War II the U.S. policies toward home ownership changed. With lobbying by the National Association of Realtors, the FHA and VA began offering to guarantee loans to otherwise unbankable borrowers. Further, Fannie Mae and Freddie Mac were created to standardize, liberalize, increase and purchase loans originated by lending institutions. So within a short period of time you had all these newly financeable buyers ready to buy; the problem was they had little or no money for an earnest money deposit; weren't sure they were financeable, and were totally inexperienced with property purchase. Additionally, almost all real estate contract were drawn up by attorneys at that time, engaging the services of a lawyer was not something the general public was experienced or comfortable with.

The National Association of Realtors, seeing the gold at the end of the rainbow, inventively came up with a solution.  First, they lobbied state regulatory agencies to created standardized fill in the blanks purchase contracts, and successfully lobbied to have those agencies determine that licensed real estate agents could fill in those blanks for a buyer and not be determined to be practicing law.  Secondly, they had those contracts pre printed with contingency clauses, primarily for property inspection and financing, making it much easier to encourage a buyer to "just make an offer".  Finally, they eventually whittled down the amount of expected earnest money, using the argument with sellers that if the buyer backed out it was refundable anyway.  

When earnest money is "hard" immediately, and a large percentage of total price, there is no "tying up" a property with a low earnest money, contingency contract; hence, no "wholesaling"'. But, because of the way the transaction of real property has changed, due to U.S. governmental policies and the NAR lobbying, wholesalers can appear to the seller as the same as other, terminal buyers, with the same minimal earnest money and same contingency clauses.