Is Wholesaling Legal?

Does this type of sign look familiar?

If you’ve ever seen one of these online or in person before, you most likely stumbled upon a wholesaler’s marketing. I could probably write an entire separate blog on how hideously designed these advertisements tend to be but let’s not go down that path.

Here’s another one just for fun:

Let me start off by saying that I do believe wholesalers can provide a helpful service to sellers and buyers. An honest wholesaler can save a homeowner’s credit and/or financial situation if they need to sell their property quickly and don’t have the ability to list it on the MLS. The reason I’m writing this blog is because I can never find a straight answer to the question that is often asked: is wholesaling legal?

Let’s dive into it.

There are a few different ways a wholesaler can wholesale a property. This blog focuses on contract assignment: a wholesaler will find a person that wants to sell their property, put the property under contract, find a third person that wants to buy it, and assign the contract to that third party buyer. In exchange for this service, the wholesaler is paid an assignment fee.

Contract assignment in it of itself is not illegal. It is within one’s right to want to buy someone’s house, put it under contract, and assign your interest in the contract to another buyer for a fee.

So all good right? We can all go about our day and start crafting hideous “We Buy Hou$e$” signs right?

God I love these:

Not so fast.

There are a few key items in my previous statement that can make contract assignment illegal.

It mostly comes down to your intent when putting a house under contract and whether or not you are a licensed real estate person.

The legality of wholesaling via contract assignment is largely determined by the wholesaler’s intent when putting a property under contract, and whether or not they are licensed.

Let’s start with intent.

As I alluded to before, a non-licensed person is allowed to assign a contract if their intention is to actually buy the property that they put under contract. That may sound confusing but the basic principle behind it is the following.

If you put a property under contract it needs to be because you actually want to follow through in buying the property. However, if something unexpected comes up like an unanticipated rehab cost or anything that would change your mind in wanting to purchase the property, it is in your right to assign your legal interest in the real estate purchase contract.

The bottom line is:

If you put a property under contract, your intent should be to perform under the contract and buy the real estate.

This begs the question: how will anyone ever know that my intent is not to purchase the property but to assign it? Can’t I just say that my intent was to perform under contract?

And the answer is: actions speak louder than words.

If you get under contract and assign it to another buyer one time, chances are nothing will happen even if your intent was to assign from the get go.

If you put 10 properties under contract in the same month and don’t perform on any of them by trying to assign your interest, you’re going to start attracting unwanted attention from the agencies that monitor real estate transactions. Especially if you don’t end up actually finding an end buyer and you abandon the transaction.

If you get a bunch of properties under contract but don’t have the financial resources to perform on any of them, you’re going to start attracting unwanted attention.

If you are consistently getting under contract and your purchase contract includes language specifically stating that your intent is not to close but to assign your legal interest, you’re going to start attracting unwanted attention.

I think you get the point.

Now let’s talk about having a real estate license.

If you’re going to be advertising a property for sale, unless you own the property, you are acting as a real estate salesperson which requires a license.

If you are receiving a fee, commission, or other form of payment for facilitating the sale of the property, you are acting as a real estate salesperson which requires a license.

However, all hope is not lost! Remember what we talked about previously. It is legal to assign your interest in a real estate purchase contract without a license.

In other words, if you’re not advertising the sale of the property itself but just the sale of the contract, you’re ok.

Let’s sum it all up.

The act of wholesaling by contract assignment is legal if you are not acting as an unlicensed salesperson and if your intent is to actually perform on real estate purchase contracts.

The reasoning behind this is that governing bodies that monitor real estate transactions are trying to protect consumers from people that may try to take advantage of them which creates situations of financial distress.

If a wholesaler misleads an owner that needs to sell their home in order to avoid foreclosure by a certain date and the wholesaler doesn’t perform on the contract and doesn’t find an end buyer, that owner’s financial situation is destroyed.

If a wholesaler misrepresents a property that they have under contract and leads a buyer to believe they are buying something they aren’t, that could also be devastating to the buyer. That’s why we have licensed real estate salespeople.

I hope this was helpful in clearing up some of the confusion that often comes up on the topic of wholesaling.

Wholesaling is legal, you just have to be careful how you do it.

*Disclaimer: although the general ideas in this blog apply to every state, the research I did specifically concerns Ohio real estate law.