Many wonder whether wholesaling real estate is ethical or not. Wholesaling has to do with getting a property under contract (at a low price), then re-selling the property without making any changes the house cosmetically or internally.
Or, you may just be assigning your interest in the equity. Is this ethical? Well, many people wonder. In most cases, wholesaling is not illegal. And yet, legal and ethical are two different things. Just because something is illegal does not mean it should be, and just because something is legal does not mean it is morally right. Let’s discuss if wholesaling property is ethical.
Where do wholesale properties come from?
Most wholesale properties often come from foreclosures and REOs. Either homeowners desperately need to sell before the bank takes away their home and leaves them nothing, or the bank already has the property which needs to be liquidated. Wholesalers help individual homeowners by providing an alternative. They help everyone by buying bank properties. If they didn’t, banks would need further bailouts and neighborhoods would keep declining due to ugly and neglected vacant homes.
The fact is that wholesaling is essential and beneficial for everyone. Some of these benefits include:
• Helping struggling homeowners to find a graceful exit
• Helping banks unload non-performing assets and become profitable again
• Helping to generate more jobs and cash flow in the economy
• Helping to recycle property and revitalize neighborhoods
• Helping to protect and boost home values
Not all real estate attorneys and title companies like working with investors. However, there are those that love and specialize in working with wholesalers. Truth be told, there are attorneys and title companies that make a very good living working with wholesalers. If you have invested in your real estate education, and seek companies that are openly advertising that they want to help investors, you won’t have a problem.
One of the toughest things about getting started investing in real estate is saving enough money to invest. There are ways to invest without any money down, but you still need some money to buy properties. Wholesaling may be a way to get started investing in real estate without much money. Wholesaling may not make you rich, but it will teach you a lot about real estate investing.
What’s the ethical issue with wholesaling real estate?
Many times, an investor intentionally gets a property under contract at a low enough price in order to wholesale it. He does this because either the owner doesn’t realize how much the property is worth, or they simply have miscalculated how much it is worth. So, is it ethical to purchase a property from a seller for a very low amount when you know it is worth far more, but they don’t?
This is something that any investor should think about when considering wholesaling a property. This ethical issue almost always exists when wholesaling a house, or some other property. Many people rationalize by saying it’s not their fault if the persons agent didn’t properly appraise the value of the property. Maybe they didn’t list it on the MLS correctly. Either way, it’s not hard for a seller to find out the general market value for their property. Therefore, many wholesaling investors have the mentality that why should they spend more when the seller should have known what their property was actually worth? Of course, a seller will almost always have to drop their price below market, and they still have to pay six-percent or something in that nature to their real estate agent. At the end of it all, the seller is usually still going to make what they would on the property that a wholesaler would give to them. Therefore, is it really unethical?
There is undoubtedly a reason that banks make their REOs be listed on the Multiple Listing Service (MLS) by an agent. Why would a bank want a home listed on the MLS if they were so wanting to unload their REOs? If wholesalers would give the bank such a great deal, why wouldn’t they just sell the properties to local wholesalers? This is because banks want to get as much money as they can for their foreclosures. They know that the MLS gets the property maximum exposure. This is why banks want their REOs to be marketed on the MLS. A lot of the confusion about the ethics and legality of flipping houses comes from lack of education and not being aware of the right and wrong way to do it. There are two schools of thought on the wholesaling real estate ethics:
There are generally two different “rationales”
A. “A deal is a deal”
This investor has the mindset of, “If the seller is OK with what I’ve offered them, then why should I tell them their house is worth more? A deal is a deal.” This is a very rational point of view. If you’re wholesaling real estate, it’s a fact that the wholesale-retail model is one of the largest ones. Think about it. All of the furniture in your house; this got there through a process. The company that made the product sold it to a wholesaler. The manufacturer made a huge profit by charging more than what it cost them to make it. Then, the wholesaler sold that same product to a retail-store for more than what he got it for from the company that made it.
The wholesaler is a middleman. They buy low from the company, and sell higher to the end-seller. As such, is it really unethical to buy a property from a seller for less than the property is worth?
If it truly unethical if the seller is happy with the price you have offered him or her? Does it really matter if you sell the house at more than it’s worth, because they were satisfied with the number?
B. Giving a seller their options
This type of investor thinks, “If I’m perfectly aware that the seller could put the house on the MLS and make an extra $20,000 than he would selling it to me…then I should at minimum let the seller know his or her options so that they can make a real decision.”
These two outlooks are both valid, and can be argued either way. For example, one con to not letting the seller know all of their options is that after the deal is done, they’ll start asking the people closest to them what they think about their decision.
The owner may then realize (before closing) that they’re selling it for less than they should. If this happens, they’ll do anything they can in their power to get out of the contract with you. People don’t like to be taken advantage of. Yet, if you let the seller know how much more they could get for the property, they may decide to not sell the house to you. If you give sellers options, they’re likely to not sell to you, but to someone else who will give them more. Or, they’ll sell to you for what the house is worth, and you won’t make a profit.
Those who are for educating the owners of a property of all of their options also make a point that some sellers really appreciate their thoughtfulness and ethics, and therefore will still agree to sell to you. That they also are less likely to want to get out of the deal. Or, they’ll also argue the theory of “karma” to you, and say that being honest and letting them know the true value of their property will get them business in the future when the word spreads about how ethical they are. They believe this will get them referrals for business.
For the most part, it’s a good idea to let a seller know what the property is actually worth. Let them weigh their options out and then decide (for themselves) what the best thing to do is. You then can decide if you want to give them what they want for the property, or let them know of someone who would be better suited to buy it.
Does wholesaling mean practicing real estate without a license?
As a wholesaler, you must take the title to the home or sell your interest in the home. You cannot bring a buyer and seller together and take a commission or any other type of fee. This would be considered brokering a real estate deal and you must have a license to do this. It is against the law to practice real estate without a license. It is also illegal in most states for a real estate agent to pay a referral fee to someone who does not have a license. You can send a lead to a real estate agent who then lists and sells the house, but you cannot be paid a percentage of the sale on that lead. There are some possibilities for being paid on a per lead basis.
How to get a contract on a house to wholesale
As a wholesaler, you have two options, get under contract on a house or buy the house and sell it right away. Many MLS listings require proof of funds or a pre-qualification letter, another reason it may be tough for wholesalers to buy off MLS. Most REO and HUD listings do not allow you to assign the contract, which means you will have to buy the home. If you are wholesaling because you do not have money to buy an investment property, it may be tough to buy a home to wholesale off MLS. If you are buying properties from off-market sellers, it will be easier to get a home under contract. The seller of an off-market property will not require a pre-qualification letter or proof of funds before signing a contract. Once you get a contract on the off-market property, you can assign the contract to another investor for a fee.
Wholesaling is one of those real estate concepts that people tend to have strong feelings about whether they are all for, totally against it, or feel it should be done a certain way. At the end of the day, doing the right thing should always be the focus. If you have a good deal, there is no need for any type of misrepresentation. If you are serious about moving into wholesaling, look for a mentor and learn the market. Nothing will sink you faster than sending out bad deals or failing to close.
Always do the right thing
It is better to have someone walk away from the deal in the beginning than at the closing table. You will always protect yourself best by being honest and up front. Real and serious investors will be okay with you making money on an assignment, as long as you are fair and leave something on the table.
Just remember to always try to do the right thing, not to take advantage of other people and to truly understand and appreciate the value of long term, ethical business relationships. You will not retire on one deal, but on the efforts of hard work and perseverance.
It is always better to disclose to your potential buyers so that you don’t run into these situations. It is better to have someone walk away from the deal in the beginning than at the closing table. You will always protect yourself best by being honest and up front. Real and serious investors will be okay with you making money on an assignment, as long as you are fair and leave something on the table.
The best tactics to get the best deals as a wholesaler are not easy to implement. It takes time and a lot of effort to buy homes off-market. If it were easy, all investors would use these tactics. It is difficult and very few investors try to market to off-market sellers. If you are serious about investing in real estate and have little money, wholesaling may be your way in. Market to sellers in order to get the best deals to wholesale. When you get enough money to start buying properties to hold or flip, you can market to sellers to get the best deals for yourself as well.