July 15, 2024 | 3 Minute Read Time
Many states are now enacting laws that severely restrict or ban real estate wholesalers from operating. How can you possibly wholesale properties in these states? Are their alternatives that will allow you to still legally assign properties in these states?
First, let’s review a list of states that have passed laws against wholesaling.
- Alabama: Wholesaling is legal with restrictions. Wholesalers must fully disclose their intention to resale for a property to the homeowner at the time an contract is offered.
- Illinois: Wholesaling is only legal for licensed real estate brokers. It’s banned for unlicensed individuals.
- Oklahoma: Wholesalers cannot buy and resell properties without a real estate license.
- Texas: Wholesaling is legal but requires a real estate license or working under a licensed broker.
- Georgia: Wholesalers need a real estate license or must operate under a licensed broker.
- Ohio: Wholesaling requires a valid real estate license.
- Florida: Wholesaling without a state-issued license or not working under a broker is illegal.
- Maryland: Real estate wholesaling is either illegal or heavily regulated.
- New Jersey: Real estate wholesaling is illegal or heavily regulated.
- North Carolina: Real estate wholesaling is illegal or subject to heavy regulations.
- Pennsylvania: Real estate wholesaling is either illegal or heavily regulated.
Here in Alabama, they passed the SB228 law, effective August 1, 2023. Wholesalers must disclose limited interest, marketing, and assignment of equitable interest to the homeowner.
However, disclosing assignment fees can cause issues if the fee is high.
Two Scenarios:
Significant Repairs Needed:
Sellers likely accept lower offers to avoid repairs themselves.
Lower offers mean more equity to cover renovation and the risks of a resale.
Wholesalers disclose challenges upfront to motivated sellers, who might include inherited property, absentee landlords, foreclosure situations, or long-vacant properties.
Minimal Repairs Needed:
Wholesalers may not disclose intentions due to less equity offered by less motivated sellers.
These sellers, wanting higher prices, may be selling free and clear, retiring, downsizing, or relocating.
Motivated sellers might accept lower cash offers depending on their motivation level and how well the wholesaler negotiates.
Once under contract, wholesalers have equitable interest and may assign it to their buyer, adhering to the new disclosure law.
Recommendations by The Guru:
Disclosing:
Consider the seller’s motivation and ease of negotiation.
Use a Wholesale Property Affidavit with your offer if disclosing.
Double Closing:
Close separately with the seller and buyer to avoid disclosure. For most states that outright ban assigning contracts via wholesaling, this is the best option around the law.
You must your own funds for the A to B closing.
Most wholesalers do not have funds for their A to B closing so obtaining private or transactional funds requiring a small fee may be another option. If you need assistance with transactional funding, contact the Guru@rei.school
Agent Commissions:
If licensed as a real estate agent, take the assignment fee as a real estate commission.
Avoid documentation that might suggest a net listing, which is illegal in most states. A net listing is an agreement between a seller and a real estate agent that allows the agent to keep any amount of money over the seller’s asking price.
Novation:
Use a novation agreement to replace the original contract with a new one, with all parties’ consent.
A real estate novation agreement is a contract that replaces an existing contract or obligation with a new one of comparable value. The original contract is voided, and all its benefits, terms, and burdens are transferred to the replacement contract.
All parties must agree to the replacement, or the new contract is not valid.
Partnering:
Partner with investors to fund and close on the property. Thereafter, they help you find a buyer, and either split the fees with you or charge you a set fee minus closing costs.
Leverage their network for quicker buyer acquisition.
It’s important to note that laws and regulations regarding real estate wholesaling can vary widely and are subject to change. Always consult with a knowledgeable real estate attorney or professional in your state to stay informed about current laws and regulations.