A wholesaler is a real estate investor that puts a property under contract and sells it at a discount to another investor for a wholesale fee. Here are 5 things investors should know about wholesaling from a legal perspective.
1) Tenant’s Right of First of First Refusal
In some jurisdictions, if you are wholesaling a property with tenant occupant(s), the tenant occupants (2) must be given an opportunity to match the selling price and buy the property. Tenant’s Right of First Refusal jurisdictions each has their own set of rules that must be complied with before a wholesaler can sell the property to another investor. An attorney can help make sure that you are compliant with the rules.
2) Have Forms Found Online Reviewed By a Local Attorney
Or better yet use forms that are drafted by a local real estate attorney for the most protection. Real estate law can vary greatly from Jurisdiction to Jurisdiction. In particular, some jurisdictions may require language for certain contracts.
For example, some wholesalers like to wholesale a lease with the option to buy. In Maryland, a lease option must say “THIS IS NOT A CONTRACT TO BUY.” Click To Tweet . If this language is not included, the contract may be voided by the person who did not draft the contract. There are additional requirements as well. I know this because I am a local Maryland attorney. This is why it is very important to have a local attorney on your team.
3) Actual Consideration Must Be Paid for Earnest Money Deposits and Assignments
When a wholesaler puts a property contract he or she pays an earnest money deposit. An earnest money deposit is used to evidence that there is a real deal between a wholesaler and the seller. A problem arises when a wholesaler uses a nominal fee such as $1 or $10. A Court of equity thinks a contract is not a real deal, it may void it. In the same manner, a wholesalers assignment fee should not be a minimal amount, there needs to enough consideration paid to show that it is a real deal.
4) You Need a Title Attorney or Title Company That Works With Wholesalers
You need a Title Attorney or a Title Company that is experienced in working with wholesalers. As a wholesaler, you are going after going after distressed properties, and each distressed property comes with its own unique set of distressed people circumstances. The owner may not be the real owner. There may be liens on the property you don’t know about. There may be random missing heirs with a claim to the property. These issues are compounded when buying and selling distressed properties. A local investor friendly title company or title attorney can help you navigate these issues.
5) Is Wholesaling Even Legal?
Yes. But it can become illegal depending on how the wholesalers market in the jurisdiction, if their contract contains 999 escape clauses, or if they violate specific local laws.
For example, some jurisdictions frown upon wholesalers marketing a property and contend that only licensed real estate professionals can market a property, and by marketing a property that they do not own, they are acting as an unlicensed broker. Wholesalers can possibly get around this by getting a real estate license, double closing, or only marketing their contract.
A contract with 999 escape clauses may be perceived as not a real deal, and in a worse case scenario trying to take advantage of distressed homeowners.
For a local example, Maryland’s Protection for Homeowners in Foreclosure Act (PHIFA) prevents wholesalers from representing that they are “assisting the homeowner in preventing a foreclosure if the result of the transaction is that the homeowner will no longer own the property.” That pretty much stops traditional wholesaling. Don’t do this unless you want to jail. Some jurisdictions are just fine with this activity though.
Every Wholesaler Needs an Attorney
If you’re a wholesaler in Maryland or DC and need an investor friendly Real Estate Attorney on your team that can help with all of the above feel free to contact me.