Wholesaling real estate has become increasingly popular over the past few years in Chicago, particularly the south side and around Cook, Kane and Dupage County in general. In this potentially profitable endeavor, wholesalers sell their properties to buyers who are looking to pick up multiple real estate investments at once. Wholesaling real estate has become a useful way for real estate investors to capitalize on niche markets. However, while wholesaling can be used as a strategic approach for real estate investors with large portfolios, it’s a process that must be carried out very carefully. The legality of wholesaling in real estate is not nearly cut-and-dried, so it’s critical to have the assistance of a good real estate lawyer before attempting this complex transaction.
What Does a Real Estate Wholesale Entail?
Before digging into the legalities of wholesaling real estate, it is important to understand what wholesaling actually entails. A real estate wholesale generally occurs when a wholesaler enters into a contract with a property seller, who more often than not is looking to sell a property in a short period of time. Wholesalers commonly enter into a purchase contract with the intention of reselling the property. In fact, sometimes the wholesaler re-sells his or her contractual interest in the property to another party for a profit before the deed is ever transferred.
Wholesalers often seek out homes that are in disrepair or are under foreclosure. This is because distressed real estate assets can often be purchased for significantly less than market value, which offers a good opportunity for profit. After finding a distressed property, investors will then make an offer. After negotiations, the buyer and the wholesaler execute a contract. A legal agreement usually must be in place before the wholesaler can begin to advertise his or her property interest.
Legal Risks Associated with Wholesaling Real Estate
Wholesaling property can be profitable, but legal pitfalls abound. For example, if you enter into a purchase contract with a seller, you must enter into it with the intent to close on the property. This is part of the general land use policy against property being tied up in legal limbo instead of being used for beneficial purposes. So, if a real estate wholesaler signs a purchase agreement with a seller with no intention to see the sale through closing, legal liability may arise. As a result, real estate investors wholesaling property need to be prepared to close on any property they put under contract, or else suffer potential legal consequences.
A good real estate lawyer can help wholesalers avoid liability. For example, a good real estate attorney can add escape clauses to their clients’ real estate purchase contracts to make it possible for them to walk away from a real estate transaction with no liability. However, those clauses are often stricken by courts for fairness and noncompliance issues, so expert draftsmanship is key.
Likewise, one factor courts look at when determining a wholesaler’s intent to purchase a piece of real estate is how much earnest or good faith money an investor initially puts down on the property. The amount of earnest money put down on a piece of real estate should reflect your true intent to attempt to purchase that property. The down payment must be meaningful, and a good real estate lawyer can help investors find the number that works for both the investors’ bottom line and local real estate rules.
In addition to establishing intent to purchase, real estate investors must also establish the ability to purchase the piece of property they put under contract. As any good real estate lawyer will tell you, it is imperative that you have to have the ability and capital to go through with buying contracted property. After all, in the event that you are unable to find someone to purchase your contractual interest, you’re on the hook for closing. Once intent and ability is established – if you transfer your contractual interests to someone else before or after closing, you are operating within your legal rights.
Marketing Wholesale Properties: A Whole Different Legal Ball Game
When done correctly, wholesaling real estate can be a strategic move for real estate investors looking to buy or sell off a number of properties. But when real estate wholesaling is conducted without care, it can result in legal missteps that could result in the imposition of substantial penalties and fees.
Regulators and state legislators have taken an unfavorable stance against wholesaling in real-estate. The hostile stance state officials have taken against wholesaling is primarily due to the countless law violations that real estate investors have unknowingly – and sometimes knowingly – perpetrated when attempting to wholesale real estate. One very easy way to trip up during a real estate wholesale is through unintentional unlawful marketing.
Even accidentally misleading ads can land real estate investors in serious hot water. For example. wholesalers marketing properties before it has undergone closing, must advertise the real estate transaction as a transfer of contract. If the wholesaler makes representations reflecting that he or she owns the property, legal liability may arise.
Real estate wholesalers rely on quick sales, and marketing is a key component to wholesaling real estate. However, the methods used for marketing real estate often land investors outside the bounds of Federal Trade Commission rules regarding truth and fairness in advertising. Legal compliance is simply a matter of understanding how advertising rules affect you as a real estate wholesaler.
Advertising contractual interests in real estate transactions that have not yet closed is a complicated matter, but it’s a common practice in real estate wholesaling. Thus, for many real estate wholesalers, the question of compliance revolves around effective marketing. Wholesalers cannot market the sale of a piece of property that they do not legally own. However, investors can lawfully market the legal interests in said property. Thus, real estate investors planning to wholesale property without closing on the underlying real estate transactions can market only their legal interest – that is, their purchase contract and not the property itself – to prospective buyers.
State and local laws closely regulate who can advertise properties in order to protect local housing markets. Only a licensed real estate professional may market properties that he or she does not personally own. Thus, a wholesaler who actively markets a property that is not yet theirs may unintentionally be acting as an unlicensed broker.
Further, when marketing a wholesale property, wholesalers are typically prohibited from showing pictures of the home, or participate in any other marketing strategies that would target the property itself. However, the rules that apply to a particular real estate wholesaling transaction depend upon local rules and regulations. Altogether, wholesalers will find that there are many other legal pitfalls to avoid when participating in wholesaling real estate. This makes the assistance of a good real estate lawyer truly invaluable throughout the wholesaling process.
Wholesaling can be quite lucrative if done correctly. However, having a good real estate lawyer on your team will help you to stay in compliance with the laws and regulations that apply to wholesale transactions. A good real estate attorney can help real estate wholesalers ensure that they are within their legal rights when wholesaling properties and ensure they are marketed properly. Likewise, your attorney can connect you with a good appraiser, general contractor and lender that will help ensure that wholesalers do not over pay on a property and help wholesalers realize how much wiggle room they have to resell the contract – or property, after closing – and still make a profit. All in all, wholesaling real estate can be complicated. But, with the right legal advice it can also be both successful and lucrative.