What is Wholesaling?

by  Mike Jacka  on  Thursday, May 11, 2017

There is a lot of confusion out there with newbies and some seasoned investors as to what exactly Wholesaling means.  The easiest way to describe this is to look at the Minnesota State Statue: 82 REAL ESTATE SALES REGULATIONS Sub 55 Definitions. Condensed Version: You cannot sell a property for another for a fee without a real estate license.  So the question is, as a wholesaler, what are you selling?  If you have a property under contract, you can sell your rights to the contract, not the property.  This is done via an assignment agreement which allows the assignee to step into your place as the buyer.  That is the basics of wholesaling. 

Some states actively go after real estate investors for incorrectly wholesaling.  These investors get themselves into trouble because they can’t explain legally what they are doing and therefore say the wrong things, like I am trying to find a buyer for the seller.  That shows intent, and as the previous FBI Director James Comey famously explained, it comes down to intent.

The problem is that your true intentions may not reflect your stated intentions because you don’t understand the legality of what you are doing.  If you just change what you are saying, to reflect your true intentions, then you will avoid a lot of aggravation and harassment from the state.

Just tell the truth.  You have a property under contract and have the intention to buy it because the numbers are so good, but you are willing to sell your interests in the contract for the right price. 

Clause from my assignment agreement:

  Quotaion Mark

Assignor wishes to sell and Assignee wishes to buy all of Assignor's rights, title, interest, use, and benefits in and to the Agreement.

The thing to keep in mind is that you should have the intent to buy the property because the numbers work.  Even if you don’t think you have the capacity to close on a deal, if the numbers work, then you do.  You could find a partner for the down payment or to get the financing.  That should always be your intent, even if you plan on wholesaling every property.

What if you cannot legally assign a contract?  There will be times when an assignment is not an option.  A good example would be if you are making an offer on a bank REO.  The banks usually make you sign a non-assignability agreement.  This would prevent you from assigning the contract.  So now what do you do?

One option is to create an LLC, or other legal entity.  The buyers name on the purchase agreement would be the LLC and you are signing as a member or officer of the entity.  Then you can sell your shares in the LLC to the new buyer.  The sale of the shares would be the same amount as you would have assigned the purchase agreement for as a wholesale fee.  The new buyer now goes to the closing as the managing member of the LLC. The buy is still the same entity, just a different representative of the LLC.  This is business as usual. 

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