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Real Estate Wholesaling Practice Poses Potential Risks

Updated: Mar 28


A new form of selling and buying real estate has emerged, called wholesaling. The practice has many homeowners losing thousands of dollars in sales proceeds. The wholesalers present themselves to a homeowner as a buyer with the condition that they assign the purchase contract to another buyer. The wholesaler guarantees the seller a set amount of proceeds upon selling their property.


“It would appear to me that the ‘wholesaler’ is, in fact, acting as a sales agent for the sale of the property and is doing so without a license. I suspect there is a remedy, civil or criminal, against some acting in that capacity,” an Attorney who wished to stay anonymous said.

Selling real estate is heavily regulated, with agents needing to maintain a license and follow strict federal and state legislation. Every jurisdiction in the United States has an estate commission responsible for implementing real estate state laws. Real estate boards and local associations regulate licensed salespersons, brokers, and firms and enforce Fair Housing Laws. Many laws and regulations exist in the United States to ensure that real estate clients, lenders, agents, and firms conduct business fairly and transparently.


“Wholesalers act like real estate agents, but they really are not,” Realtor Pamela said.


These contracts are assignable, which means, in very simplistic terms, that the wholesalers can assign the term to another buyer with the exception that the wholesaler can increase the selling price. Any price difference goes to the wholesaler after paying closing costs.

Pamela said she had a discussion with a wholesaler who had a transaction in Philadelphia.


“He said she was an old lady. The market price of that house was around $700,000, but this lady was giving [the wholesaler] the home for just $350,000. I asked [the wholesaler], ‘does she know this?’ and he said, ‘Yes, she knows, but she doesn’t care about the money,’” Pamala said. “Once he fixes the [old lady’s] property, he can sell it for a million dollars.”

The wholesaler typically targets unmaintained homes and builds a relationship with the seller. Once they have a property contract, the wholesaler markets the property to another buyer. The wholesaler’s contract has a set timeframe with automatic extensions and an option to void the contract if the seller or wholesaler cannot find a purchaser for the home, leaving the wholesaler with no monetary or contractual risk.


“Purchasers and agents flock to [wholesalers] since they have ratified contracts which tie up the properties at a considerably low price,” Pamela said.


Justin Colby, a real estate wholesaler, offers courses on how wholesalers can deal with structures, make an offer to the seller, build a list of buyers, “choose an exit strategy,” cold call, and compare prices. Essentially, it breaks down the process a licensed real estate agent goes through.


“Yes, wholesaling in Virginia is legal. But a wholesaler must follow state-specific laws to carry out the deal,” according to Houzeo.com. “Yes, wholesaling is profitable.”

Only licensed real estate agents can help people sell or buy properties in the U.S. Unlicensed individuals cannot represent a seller or buyer during the transaction or list the home on the Multiple Listing Service (MLS). According to Houzeo, a wholesaler does not violate any law as long as they work with a wholesale real estate contract or own the property for a short term.


The wholesaling practice is up to interpretation. However, according to Houzeo, the wholesalers must follow state laws and regulations. However, a contradiction exists that real estate wholesalers do not have a board or code controlling practice standards since they are unlicensed. The risk is that someone who is not licensed and does not have to follow legal regulations can easily take advantage of a seller, even if the seller agrees to work with a wholesaler.


By Alex Fernandez




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