It is now becoming a vastly acceptable reality that within a few years the ‘wholesaling’ industry like we know it is going to stop.
In a nutshell – the big government is coming after Real Estate wholesalers. No this is not a scare gimmick, legislation against wholesaling has been passed already in states such as Illinois & more states are following suit.
Here is the good news, There are some simple steps you can employ to stay compliant & get ahead of the game:
Open an LLC brokerage & get an ‘LLC Sponsored brokerage license.
Most states allow you to hire a ‘sponsoring’ broker as an LLC/Corporation. This a very quick way to be a part of the Agent community and rid of the distrust that most agents/brokers view the Real investors with. Many investors don’t get a license since they believe they may be held to a ‘higher’ standard or could be accused of ‘taking advantage’ of un-represented sellers – but all these concerns can be handled by proper disclosures. (See point 3 below). A brokerage gets you on the right team without changing your operations much.
Get your Assignment contracts reviewed by a Real Estate attorney & you’re (new) broker
Many investors are using one-page assignment contracts with minimal explanation of what they are attempting to do. Remember one thing – Sellers don’t sue, BUYERS do. By having the right verbiage reviewed by a RE lawyer, a wholesaler can stay complaint with law as well as explain to the buyer the nature of the assignment and what exactly they are doing.
Double Close Versus assignments
Simply put, double close to protect the wholesalers & all related parties much better than assignments. No doubt you will have to work with a competent title company & escrow officer who knows how to efficiently manage two closings. Higher closing costs can be passed to the buyer. Further, if you’re worried about ‘transaction funding’ costs – there are many title companies that now allow table funding (essentially you can use the funds from the second close to fund your first close)
Add disclosures to your Assignment (for buyers) and purchase contracts (for sellers)
The myth that buyers will freak out when they see the large assignment fee that you’re making is misplaced. As more and more buy & hold landlords are pouring in RE, no one really cares about how much of the assignment fee you’re making, as long the deal makes sense for the buyer. If it still bothers you, follow this simple rule: assign contracts where assignment fee is below $10k; else double close (see point 3). Simple disclosures to sellers indicate that you reserve the right to market and assigning the contract to another party for a fee. For buyers, two important disclosures in the assignment should be that the buyer has had the real estate contact being assigned by a Real Estate professional AND secondly, the property condition is AS-IS with wholesaler not making disclosures about property condition
Update your marketing with key compliance phrases.
One way the state legislature will try to get you is with ‘pocket-listings’. Add to your marketing that you’re NOT marketing a pocket listing and the subject property is NOT owned by you the wholesaler.
List your deals on reliable NON-MLS marketplaces
By finding good sources of alternate marketing you’re reducing your dependency on the MLS (local association of realtors). Many reputable marketplaces have the right educated buyers who understand the nature of assignments and the risks involved.
NO NON-REFUNDABLE deposits
Here are the deal guys – you’re not an escrow officer – so you can’t really collect a ‘Deposit’ related to a real estate transaction – so how do you get around it? Re-word to ‘Non-refundable Finder’s fee’. This keeps the confusion away and hence any compliance issues