Real Estate Wholesalers should be Jailed.

Before I explain why real estate wholesalers should be jailed, let’s first understand the basic idea. 

Real estate wholesaling is a practice that involves an individual or entity contracting a home with a seller, then selling the Purchase Agreement to an end buyer, often under the guise of an “off market property for sale”.  To be clear, a wholesaler isn’t selling the real estate; they are selling the real estate purchase agreement for a fee.

Real Estate Wholesalers are a hot topic of debate among professionals in the industry.  This article will put an end to the debate, and as a result, we hope real estate professionals talk with their local State representatives to make this activity illegal.

There are significant concerns about its impact on both the original seller and the eventual buyer. This article delves deeper into the ethical and legal issues surrounding real estate wholesalers.

Deception is a REQUIREMENT

A recurring theme surrounding real estate wholesaling is the lack of transparency. 

Recently, a question posed by another real estate professional to me was, “but why do wholesalers need to pretend to be buyers or investors.”

The answer is simple yet troubling: If wholesalers are upfront about their intentions, they risk disclosing to the seller that they are likely leaving money on the table. A reasonable seller will never want to leave money on the table.

Alternatively, real estate wholesalers also require a deception of both time and effort. 

Sellers might believe they are saving time by working with what seems like a buyer, after all, the seller is receiving a purchase agreement (technically) but in reality, the wholesaler is just masquerading as a buyer with no actual intention of EVER holding title.  

This leads the seller on with a false perception of time saved through a belief in nothing more than a façade.

Not acting in the seller or end buyers’ interests is a REQUIREMENT

Even IF a wholesaler provides full disclosure, the act of wholesaling requires the seller and the end buyer to act against their best interests.

They might understand a wholesaler’s disclosure and still choose to proceed, but this decision is often based on a lack of information or understanding. Why? Simple,

The wholesaler doesn’t have a fiduciary duty to inform either party of all of their potential options. This means a wholesaler is going say whatever they need to say to provide emotional closure to the parties.

Real estate wholesalers very nature is to maximize profit for ONLY themselves, at the expense of both primary stakeholders of the transaction. They are the ONLY winners.

Undermining Real Estate Licenses is a REQUIREMENT

Wholesaling also challenges the very essence of a government-required real estate license.

The State mandates these licenses to ensure fair practices and to protect both homeowners and homebuyers when someone else (a 3rd party) is going to make money from helping others transact real estate.

Wholesaling, by bypassing this requirement through “conveyance of a contract” undermines the State’s efforts to safeguard the interests of its citizens.

It’s in the State’s interest to prevent such practices, not only to protect homeowners and homebuyers but also to uphold the integrity of a State required real estate license.

This is to implicitly suggest, that if you’re a licensed realtor and have wholesaled real estate or taught others how to wholesale, you broke the trust and authority that the State afforded you by holding a real estate license. As a result of this activity, you should lose your agency license or brokerage license.

If Net Listings are illegal, so should be Wholesalers.

You probably have never heard of the term Net Listings. The reason why is because for a licensed real estate professional they are illegal in all but 3 states: California, Texas, Florida.

So, what is a Net Listing and why is this related to Wholesaling?

A net listing is when a homeowner sets a certain amount of money they want to receive from the sale of their property. The listing agent receives any amount of money that the property sells for that exceeds that amount.

The jurisprudence (the legal philosophy of the law) of why this is illegal is because it come in direct contradiction to the fiduciary responsibility of placing a client’s interests above the agent. 47 States agree.

Despite the illegality of the Net Listing, and despite the National Association of Realtors banning their members from selling a net listing, these are still more ethical than the act of wholesaling, which is legal…

This is a problem and one that requires State intervention to protect consumers.

Regulation of Wholesaling is Problematic

While some states like Pennsylvania and Oklahoma have adopted wholesale licensing, this is not an adequate solution. It’s nothing more than State-sponsored unethical activity.

The real solution lies in addressing the core issue: assignable interest/assignable contracts. These should be considered illegal in the context of real estate Purchase Agreements.

Only an individual or entity holding the title should have the right to transact a sale as the ‘seller’. An assignable contract should not act as a proxy for the actual title, nor should it provide any rights to convey “prospective interests” without first having title in hand.

In other words, if you want to place an offer, you must have the intention to purchase. Once you hold title then you can convey your interest. Again, a Purchase Agreement should NOT be a proxy to the Title.

Conclusion

Real Estate Wholesaling might be lucrative for some, but the same can be said for all scams.

The practice requires deception, no matter the oversight, will always work against the sellers and buyers’ best interests.

We want to encourage you again to reach out to your local representative and request that this issue be brought to your Congress floor. Reach out to your States Licensing and Regulatory bodies and demand protection against this type of parasitic infection within the real estate industry.

If you participate in these activities, be careful and hire a good lawyer because chances are you’re unaware of the legal risks you’re taking (even while it’s still legal).

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Disclaimer: This is not legal advice or real estate advice, and no consumer should rely on this article in the pursuit of either interest.