Rebecca, This isn't an easy topic to explain via email. But I'll give it a shot...
Before I give my answer, I'm not trying to scare you off. I just want to make sure you understand it so that you can do it right.
The Guru's are out there telling everyone that you can be a wholesaler without any of your own money. And, that you don;t need anyone else's money either. They claim it's super simple and the easiest way to get into real estate. They also tell you that if you don't find a buyer, you just walk away from the contract (great way to build a good reputation).
Here's what the guru's aren't telling you because it's not sexy and doesn't sell courses...
There are two requirements when making an offer... You must have the intent to close and the capacity to close. In other words, the laws expect you to be able to close.
When you are missing one or both of these requirements, you fall into the category of brokering without a license. Brokering without a license is illegal in all 50 states.
There are many guru's and improperly trained people out there that will tell you I'm wrong. They will argue that having a contract against the property gives you equitable interest in the property. I challenge every single one of them to show me where that law exists. Unfortunately, it doesn't. They were just told that and they believe it because if they're wrong, they're out of business. It doesn't fit what they want to believe. However, there are court cases around the country that back up my side.
What you have when you put a house under contract is just a contract (not a house). The contract is the only thing you can sell. Many will tell you that that that is exactly what they are selling. However, if you mention the address, show pictures or any other details about the house, you have now crossed the line of illegal. As soon as you talk about the house, you are now marketing the house and not the contract. You can only mention the details of the contract itself. You cannot mention details about the property. The address to the property is in the contract. The buyer needs to figure that out on their own. They need to then take the address and look up the property to get photos and other details. The buyer of the contract has to do all the work. Only licensed realtors and property owners are allowed to market the actual property itself.
What is going to come as a surprise to many improperly trained investors is that they are doing it wrong and being told wrong. Because there is a flood of new investors in the markets, the states are taking notice and adjusting the laws to make it extremely clear that wholesaling is illegal as it is taught. Take a look at the recent law changes in Ohio & Illinois for a clear example of what the other 48 states are working towards.
Illinois is the worst to date as far as the new laws go. In Illinois, you need to be a licensed real estate broker in order to even assign the contract. Many will now be running out to get licensed. Unfortunately, that's not going to fix the problem. As a licensed broker, you are held to a higher standard and that creates an ethics problem. A broker is required to get their client the highest price possible. When you put it under contract and then sell it to someone else for more, you fail the ethics test because you didn't give them the best price. you took it for yourself. I have had a few people argue with me that as long as you disclose what you're doing, it's fine. Unfortunately not. Laws trump disclosure. The new laws do not provide any exceptions to the rule. Disclosure doesn't apply. If you violate your ethics, you get your license taken away.
As it is, most will continue to do it wrong and not get caught (for a while). But, the states have every intention of going after the biggest offenders and making giant examples of them. When they do this, it will likely make national news. Most wholesalers will be out of business as soon as that happens. Why, because they were never taught how to do it right. And, because they don't understand how things are supposed to work, they don't know how to work within the laws.
I for one am sort of excited by the new law changes. The new laws are going to start weeding out the get rich quick guys and only leave the professionals in the game (you can be new and still be a professional, you just need proper training). It will require a whole new education for most. For those of us that have been doing it right from the beginning, this is not a big deal. These changes are creating whole new opportunities that didn't exist before.
For more information about what I'm talking about, check out http://www.watsoninvested.com/wholesaling-real-estate/. Jeff Watson (the attorney for the National REIA) has some videos that he put together where he sat down with the regulators to discuss the topic. It's very enlightening. While the videos are specific to Ohio, they apply in all 50 states. Ohio is leading the charge to shut wholesalers down.
I'm not sure that my answer completely explains everything that's going on with the topic, but hopefully I shed at least some light on it.
Wholesaling is a great business when done right. Again, I'm not trying to scare you off. I just want to make sure you understand it so that you can do it right.
