You’ve heard that wholesaling could be a good way to make money in real estate without investment.
While doing your research, you’ve also heard or read that wholesaling using “assignment contract” might be illegal.
Yes. It can be.
Now you’re confused and trying to understand why that is.
In our previous chapter, we talked about double-closing (a way to spend almost zero capital down) as a legal method of wholesaling real estate.
This post will be about the other method of wholesaling: “assigning contract”.
Because if it’s legal intricacies, this method has created some debates over the years. Here’s why and how to do it legally.
First and foremost, an assignment contract purpose is to hand over contractual rights or responsibilities to another person/entity.
For example, in a wholesale transaction, you will need to assign your contractual rights on a designated property to another investor so he can assume your responsibilities, including the purchase of the property to the agreed upon terms of the purchase and sale agreement.
In other words, as a wholesaler, you buying the right to buy a property and selling it right back to another.
The problem here is that it looks a lot like brokering and therefore an illegal operation if you don’t possess a broker license.
“Legally, the act of brokering is when you “broke” the interest “for another” in exchange for a commission.”
In the case of the wholesaler, he is not brokering the interest “for another” but selling “his” interest in the property in exchange for a commission.
You’re basically selling a contract saying you have the right to purchase a piece of property.
“Note: You can only market your contract and not the property as a wholesaler since you don’t own it. Meaning, no ads containing a picture of the property or misleading people that you own the property.”
The fact that a wholesaler is transacting for it sole interest is crucial and is the major difference with a real estate broker who doesn’t own any right in the transaction but effectively doing it for “another”.
That said, you might be wholesaling without any “legal” interest or “right” on the property if not done properly.
In that case, you’re putting you at risk of being fined by regulators (which yes, they do).
In most of the case, regulators will know about this from the seller himself.
Sellers might complain because either you didn’t inform them properly about your operation or because you never get back at them after putting their property under contract.
Communication is key.
Now, how can you be sure you’re doing it legally?
To be legal, wholesaling needs to be about buying an “interest” to a seller in order to “resell” it to another buyer (usually an investor).
Now, buying an interest in a property can’t be free.
Lots of people think once they convince a vendor to sign a purchase and sale agreement they ultimately own an interest in the property and can now proceed to find a willing investor to finalize the transaction.
To be valid, the interest needs to be bought at a price other than a nominal amount and needs to be reflective of your intent to eventually buy the property.
This is what we called: earnest money.
It can’t be $1 or even $10.
It needs to reflect the economic value of the property. At best, $100 dollars can be adequate earnest money if the property is over-leveraged and 3 weeks out of foreclosure.
But in most cases, it’s more. The whole situation needs to be examined and this is what regulators will do if they think the transaction was illegal.
It’s all about protecting sellers. If you pay a nominal amount in exchange for them signing a purchase and sale agreement and then never buy the property they’re losing.
First, they’ll have a lien on the property to get rid of.
Second, they could have sold the property or maybe they arranged their affaire because they thought you would sell the property.
Bottom line, this doesn’t help the sellers nor that it shows your true intention of buying it.
Finally, you also risk being sued for breach of contract. That also happens.
This is why earnest money exist. It acts as a good faith deposit showing that you’re taking the transaction seriously. (which buying/selling real estate is)
Do it legally and you’re on your way of making good money. And helping people sell their house at the same time.