Is Wholesaling Legal?

Today I want to address a question that after many years in real estate investing, I still hear people asking the question: Is Wholesaling Legal? Recently I heard from a Realtor (I am not going to mention names nor agency, due to professional courtesy) that to make wholesaling legal you need to keep the houses for three to four months before selling them AND that investors cannot put it under contract and assign it anymore because this is “illegal”. I cannot believe we are in 2009 and still addressing this issue, but I found it necessary for my friends on this blog to be clear about this issue once at for all.

I would start by saying the following:

1. Wholesaling is NOT illegal and the assignment of contracts is NOT illegal either.
2. I like Realtors.
3. Many Realtors have not heard of wholesaling and many do not understand a “Sandwhich Lease Options”.
4. Many times when I make an attempt to explain to Realtors the only thing they say is "Your not a licensed Realtor, how can you do that?"
5. A lot of Realtors adhere to the following policy: “When in doubt, say it's illegal”.
6. Realtors are not the only professionals allowed to transact with Real Estate.
7. I think some Realtors look at Investors as either competition or crooks, the good ones see a potential customer.
8. I have Realtors tell me all the time that what I'm doing is illegal. Now I don't even argue anymore. I do not think you should waste your energy in arguing with them either.
9. You can sell things you own. If you buy the right to purchase something you can sell your rights.
10. Realtors are not attorneys. If you have questions about the legality of what you are trying to accomplish- ask an attorney.

Let’s address the two points that this Realtor mentioned in the conversation:

1. Legality of the transaction – Once again after 18 years in real estate investing, I have not found one attorney that has told me that the assignment of contracts is illegal. The only time I know flipping is illegal is when you are defrauding a lender. Therefore, make sure your buyers are cash, and if they are not cash then make sure they are using bank funds not regulated by fannie mae or freddie mac. e.g. a portfolio loan. Full disclosure.
2. Holding period – We do need to understand that FHA has a 90 days seasoning policy in any state. I do know that banks are exempt, but private owners must hold property for at least 90 days before a new buyer may enter the loan process with FHA.

Another point I wanted to mentioned to those that are interested in wholesaling REOs, is that banks do not allow assignments of contracts on short sales or REO's but that is their own rules, there is nothing illegal about it. Wholesaling of REO cannot be done using the traditional methods; therefore you need to go around it if you want to wholesale REO (Double close, LLC, etc).

I think that the Realtor may have overheard a conversation about seasoning requirements and felt compelled to share with everybody his/her new knowledge. The good news is that Realtors like the one above won’t last long in the industry. The same way ill informed investors won’t last either. There is a lot of good information available to all of you out there, training courses, ebooks, etc. Educate yourself about your profession, ask questions to those that have been in the industry long enough that can share some wisdom with you, ask question to the proper person, for example ask legal questions to your attorneys, property structural questions to property inspectors or engineers, etc.

Finally, do not waste time arguing with Realtors about the legality of Wholesaling. It is not your role to educate them, especially if they are closed minded people. Educate yourself and consult with professional that can keep you from trouble. Promoters of their “get rich quick schemes” will always tell you that what they are selling is legal; after all if it was illegal they won’t be selling it to you. Just be certain that you as an investor is performing a legal transaction and go to the bank with a smile in your next closing.