How to wholesale ethically and honestly

[Michael Yates]

Hello, i am new to real estate looking to get into wholesaling. My biggest hangup with this model is that it seems almost all the “gurus” teach to lie to homeowners and say that I am going to buy the property which is simply not true and I wouldn’t tell them something which is not truthful.

However, I know there are plenty of amazing wholesalers who do things with integrity and transparency, so I’m here to get some advice from you awesome wholesalers!

How do you position yourself to property owners so that you can get a deal done? I’d appreciate advice from the perspective of not actually having any capital to close the deal myself. How do I turn “Hey, I don’t have any money to buy your property but I have connections with people who do. I’d like one of those people to buy your property while I get a cut of the profits for having found the property” into something that actually sounds good and closes deals?

[Charlie MacPherson]

@Michael Yates It's good that you're asking these questions.  Sadly, the answer is that you can't.

For the record, I no longer sell real estate.  I've migrated into business brokering, so I have no dog in this hunt.  I just hate seeing people getting screwed.

Start with the law.  In every state that I know of, an unlicensed person cannot market a property that he doesn't already own - meaning that your name is already on the title.

Real estate license law is put into place to protect the public from unethical practices, whether that's from a wholesaler or a real estate agent.

Wholesalers and guru courses will tell you that by putting a property under contract gives them equitable interest.  I have personally run this by a real estate attorney and by the real estate commissions in the two states where I still hold a real estate license - Massachusetts and Maine.  They all agree that even discussing a property like this being available for sale or assignment is a license-required activity.

Look at how wholesalers operate. Typically, they put a property under contract with a vanishingly small EMD so that they have nearly zero skin in the game. While the homeowner thinks their property is about to be sold, the wholesaler tries to find a buyer. When he fails, he walks away and shatters whatever plans the homeowner had. But hey, they get to keep that $10.00 EMD, right?

Wholesalers make their profit by stealing equity from homeowners who are either not aware of the fair market value of their home or are in such a desperate circumstance that they have to take a bad deal (well below fair market value) so that they can get out of a jam.  The fact that these things are making you question the ethics of wholesaling is encouraging.  It means that your conscience isn't completely dead.

Here's a little icing on the cake. Entering into a contract like a P&S without both the intent and ability to fulfill the obligations therein is a tort known as "fraud in the inducement". https://dictionary.law.com/Def...

Wholesalers like to yell and scream "but the contract says it's assignable and that makes it legal!"  That's true if it's a contract to buy a truckload of apples, but state governments make an exception for real estate transactions.  Again, they do that to prevent unsavvy (and desperate) people from being taken advantage of - which is the wholesaler's stock in trade.

The weird thing is that wholesalers do a lot of the same things that Realtors do.  Find someone who wants to sell.  Market the property.  Find buyers.  Show the property.  Get the deal across the finish line - which involves a LOT of work.

The difference is that the Realtor works within the law and more important, the Realtor is a fiduciary to the seller.  That means that as a matter of law and ethics, the Realtor puts the seller's interests first and foremost.  The wholesaler puts his own interests first to the detriment of the homeowner.

If you want to wholesale ethically, close on the property and then resell it after you own it.  That's known as "wholetailing".  Better yet, buy dilapidated properties, rehab them and then sell them for a profit.  You improve the neighborhood, the seller gets out of a bad property, the town sees improved tax revenues, the buyer gets a nice home.  Everybody wins.

Rehabbers add value.  Wholesalers steal value.

Of course, the best solution is to get your real estate license and subject yourself to all the regulations that are in place to protect consumers. There is literally nothing that a wholesaler can do that a Realtor can't. Realtors will list a home on the MLS and expose the property to probably 100,000 times the number of potential buyers that a wholesaler can. By definition, that means more money in the seller's pocket and more protection during the process.