Is Wholesaling Real Estate Legal?
The residential real estate industry and wholesaling regulations are rapidly changing across the United States with many court cases being settled like the NAR commission case and new heavy handed regulations against wholesaling being implemented in states like South Carolina, Oklahoma, Nebraska, Illinois, and others.
So, that would leave many wondering, “Is wholesaling real estate legal in Texas?” The short answer is yes, wholesaling is legal in Texas under Senate Bill 2212 passed in 2017, but under specific guideline and regulations. The Texas statutes are far less onerous than other states and still allows wholesalers to work.
In the state of Texas, a wholesaler can enter a wholesale real estate contract with a property owner and seller. Under this contract, the Texas wholesaler and homeowner agree that the wholesaler will transfer the purchase agreement to an end buyer. However, for anyone involved in wholesaling in Texas, understanding state laws like the Texas Property Code and Texas Occupations Code is highly important as these laws govern the practices of wholesaling in Texas.
What Is Wholesaling Real Estate?
Real estate wholesaling consists of a seller and a wholesaler entering a contract. The wholesaler then assigns or sells the contract of a property, rather than the property itself, to a potential buyer. As a result of this transaction, the wholesaler is paid a fee for the contract rather than for the property.
At Wholesale Real Estate Texas, we have completed over 2700 real estate transactions in Texas including over 400 wholesale deals. We have been on both the acquisition and disposition side of the transactions so we know the full cycle of how to get wholesaling deals done. We are ready, willing and able to help you find that next great wholesale property for sale.
Understanding the Texas Wholesaling Business Model
The Wholesaling Process
The wholesaling process begins with a wholesaler looking for distressed properties and undervalued homes for sale. Properties such as these often need a lot of repair and renovation and are owned by individuals who do not have the money, time, or desire to do the work themselves in order to sell their home for a higher price.
This is the wholesaler’s prime opportunity to profit. The wholesaler will then enter a wholesale real estate contract with the homeowner. Next, the wholesaler will seek to assign the contract to an end buyer who is active in real estate investing like a fix n flip investment group, who often invests significant amount of capital to update the property and does significant remodeling to the home before putting it back on the retail housing market for sale. After the contract is assigned, an “assignment fee” is paid to the wholesaler at closing, thereby completing the real estate business transaction and earning a profit for the wholesaler.
Key terms and definitions
The wholesaling industry has its own vocabulary and many definition to consider and know well in the full sales cycle and process. These include: motivated sellers, distressed properties, a wholesale deal, and the end buyer (usually a cash buyer).
A real estate wholesaler is essentially always researching, networking and on the lookout for motivated sellers that need fast cash for the houses they own. These home sellers may not want to work the traditional way with a real estate agent, and are willing to negotiate to sell at discounts to market, and want to move quickly.
Often, these Texas wholesale properties are deemed financially distressed or physically distressed meaning the property might be in the early stages of foreclosure, late on tax payments, or maybe the house is condemned or unlivable in its current state. A distressed property can come in many forms from a house, apartment, condo, duplex, triplex, quadplex that requires renovation and repair work and is often priced below market value.
At this point, the wholesaler negotiates and strikes a deal with the owner to sell. A wholesale property deal is when the seller and wholesaler enter into a contractual agreement that allows the wholesaler to assign the rights of the contract to an end buyer. The end buyer is the real estate investor. The end buyer may be someone who wants to fix and flip the home to resell it to a future buyer or one who is looking for a property at a reduced rate for personal use, or a large institutional fund looking to build an SFR portfolio to capture rental property cash flow and also long-term appreciation from the asset in the residential housing market.
Real estate investors and potential cash buyers play a major role in the wholesaling process. Since the wholesaler never intends to buy the property for themselves, the wholesaler may seek a real estate investor to renovate the home before selling it. This is often referred to as flipping. On the other hand, there are many homebuyers who seek discounted homes, either because of a lack of finances, a desire for reduced mortgage payments, or a Do-It-Yourself know-how that allows them to renovate homes themselves.
Key Contracts: Purchase Contract and Assignment Contract
In Texas wholesaling, an assignment contract occurs between the wholesaler and end buyer. The assignment contract stipulates the terms by which the rights to purchase the property are transferred from the wholesaler to the end buyer.
It is important to understand the difference between a purchase agreement and an assignment contract in wholesaling real estate. In the initial contract between the wholesaler and seller, there is a purchase agreement. However, the agreement is for the wholesaler to facilitate the transfer of the purchase agreement. When an assignment contract is signed between the wholesaler and end buyer, the transfer of the purchase agreement is completed. Also, it is important for wholesalers to know that the nature of the equitable interest plays a significant role in assigning contracts to end buyers. This is because of strict Texas laws, such as the Texas Occupations Code Section 1101.0045, which set boundaries for wholesale real estate transactions.
Common Tools Used by Wholesalers
To attract motivated sellers and potential buyers, wholesalers often use bandit signs, social media, direct mailing campaigns, real estate platforms, and other marketing strategies.
One of the best ways to create a cash buyers list for fast wholesale deals is through networking. Wholesalers must build relationships with potential investors to establish a reliable cash buyers list.
The Legal Landscape: Is Real Estate Wholesaling Legal in Texas?
Texas Real Estate Law and Wholesaling
There are many relevant Texas laws governing wholesaling throughout the state. It is irrelevant if you are trying wholesale properties in Dallas, Houston, or Austin TX, the same set of guidelines are enforced.
First, the Texas Property Code governs wholesaling practices. Second, the Texas Occupations Code states that wholesalers can acquire an equity interest or option in a property and gives the wholesaler the right to sell or assign the contract or option. Finally, the Texas Real Estate Commission (TREC) has established regulations that pertain to wholesaling practices.
In Texas, it is important that wholesalers are transparent about their intent. Senate Bill 2212 states that wholesalers cannot present themselves as homeowners. Closely connected are Equitable Interest Disclosure requirements that state how wholesalers must disclose their lack of ownership, the assigning of the option or contract, and the name of the property owner in writing. Failing to make this critical information disclosure constitutes engaging in real estate brokerage without a license, which is illegal under Texas law. Texas statutes also states that wholesalers cannot advertise or market the property itself without a real estate license. Instead, wholesalers must focus on the marketing of the contract assignment itself.
For example, instead of advertising “Great Home at 200 Cherry St, Dallas for sale,” they must advertise it as “Contract for sale at 200 Cherry St, Dallas.” This guideline ensures wholesalers stay within legal boundaries and avoid issues that require being a licensed real estate brokerage.
The purpose of SB 2212 was to protect consumers from misleading marketing and practices by unscrupulous market participants. The bill also increases transparency and pushes wholesalers to clearly communicate their role, intent and interest in the deal. While wholesalers do not need a real estate license in Texas, the Real Estate License Act does influence how they must conduct themselves. Wholesalers cannot act as real estate agents or brokers.
Legal Issues and Compliance
o Understanding state laws and working with a real estate attorney to avoid legal issues is a crucial component in navigating the turbulent waters of the real estate wholesaling industry.
o Before entering a contract, a wholesaler must disclose in writing his equitable interests in real property for the deal.
o A legal title is possessed by an owner. The equitable interest is less tangible and thus more contingent.
Unlicensed Wholesalers and Risks
o As previously stated, the major component to consider for wholesalers is that they cannot act as brokers.
o Legal advice is essential for staying compliant and avoiding legal problems because, according to Texas Senate Bill 2212, wholesalers who act as brokers may be fined amounts equivalent to their assignment fees or up to three times the amount of their fees. SB 2212 introduces stiff penalties for noncompliance, starting at class A misdemeanors, which can quickly escalate to felony charges for repeat offenders. Wholesalers must also ensure that their assignment contracts and advertisements clearly state the nature of the transaction as the sale of a contract, not the sale of the property itself.
Legal Requirements and Licensing: Do You Need a License for Wholesaling Properties in Texas?
License Requirements for Wholesalers
o Chapter 1101 of the Texas Occupations Code contains the Texas Real Estate License Act (TRELA). This act contains information regarding how to gain and maintain the Texas real estate license, including a code of conduct for real estate professionals. This Act would potentially have implications for wholesalers who also have a license to wholesale real estate.
o A wholesaler must be licensed as a Real Estate Broker or Real Estate Agent when representing the property owner in a real estate transaction.
o A licensed Real Estate Agent will often require a fee that is commission-based upon the sale price of the property. On the other hand, unlicensed wholesalers do not typically earn commission but establish a fee that is on top of the sale price.
Senate Bill 2212 and Its Impact on Wholesaling in Texas
o With the passing of Senate Bill 2212, wholesalers are allowed to advertise their sale of the contractual agreement but cannot act as the property owner. At the same time, wholesalers must disclose that they are wholesalers.
o Texas real estate wholesaling and assignment contracts have been impacted by the passing of Senate Bill 2212. While wholesalers can advertise their contractual agreement, they will likely be met with concerned and cautious consumers as they attempt to assign contracts without having the title of homeowner, real estate agent, or broker.
How to Wholesale Real Estate in Texas: A Step-by-Step Guide
Finding Motivated Sellers and Distressed Properties
o Finding distressed properties in local markets that are sought after by real estate investors. We recommend these markets currently: Houston, Austin, Dallas, Fort Worth, Arlington, Irving, Plano, Galveston, New Braunfels, Georgetown, San Antonio, Waco, and Corpus Christi are some great places to start your research.
o As previously stated, some common marketing strategies involve driving for dollars, social media, bandit signs, off-market deals, direct mail, real estate mastermind groups, and good old fashioned networking at events like your local REIA.
Conducting Due Diligence and Determining Housing Market Value
o Performing due diligence consists of assessing the market value of properties and analyzing real estate investment opportunities often calling “comps” or “comping” a property.
o Real estate professionals such as real estate brokers and agents often help wholesalers in conducting due diligence and setting accurate comps for the property. Brokers and agents often function like appraisers. They are also quick to hear of leads for both sellers and buyers.
Structuring and Assigning Contracts
o When creating the purchase contract, it will be created as one that will be assigned. After the wholesaler finds an investor, an assignment contract will be signed, and the purchase contract will be passed. All of this must be done while abiding by Texas law and disclosure requirements.
o The wholesaler may also opt for a double closing strategy rather than assigning a contract. When double closing, the wholesaler buys the property and quickly sells it. One of the major advantages of this popular strategy is that he can keep his assignment fee confidential.
o Understanding the assignment fees and how wholesalers profit from wholesale properties is crucial for success. The assignment fee is what the wholesaler is paid for transferring the contract or option. As a result, he will want to calculate their fees accordingly.
Closing the Deal
o In Texas, it is common for closing to occur at a title company. The title company helps to ensure that the title is clear and that the transfer of the title from the seller to the end buyer complies with legal requirements.
o Transactional funding can also be employed when a wholesaler is given a short-term loan to buy and quickly sell the property.
o For a real estate transaction to close, the wholesaler must find a buyer to whom he can transfer the purchase agreement. Then the end buyer and wholesaler must sign an assignment contract. Upon signing the contract, the right to buy the property is passed from the wholesaler to the end buyer.
Common Challenges and Legal Risks in Wholesaling Real Estate in Texas
o Some of the common legal challenges wholesalers encounter when wholesaling houses include inadequate disclosures, issues with the equitable interest, and improper contract assignment.
o As a result, it is important to seek legal advice from a real estate attorney to avoid violating wholesaling laws.
Avoiding Bad Deals
o Real estate wholesalers can avoid making bad investment deals through conducting proper due diligence, performing market research, setting the right comps and working with experienced real estate investors.
o Wholesalers can stay out of legal trouble by working with real estate professionals to assess market properties and ensure compliance with state laws.
Tips for Wholesaling Properties in Texas
Choosing the Right Texas Markets
o An analysis of local real estate markets, such as Dallas, Fort Worth, Houston, Austin, San Antonio, and Corpus Christi, is another crucial component of the wholesaler’s success.
o When analyzing the market, the real estate wholesaler will want to consider factors such as job market trends, property demands, and investment opportunities in each city. For example, is a large corporation moving their headquarters and staff to a specific city? We have seen a major migration of corporations led by Elon Musk for his companies like Space X, Tesla, and X moves to the Texas, Toyota to the Plano area, and Charles Schwab is building their new headquarters in the DFW metroplex. These are all strong signs of underlying demand for housing not just for a quick flip but for the long-term buy and hold rental property investors.
Building Relationships with Real Estate Professionals
o Still, it is highly important to build a strong network of real estate professionals within the real estate industry, such as real estate agents, real estate brokers, investors, title companies, and attorneys.
o Leveraging years of experience from industry experts to be able to streamline real estate deals and find good deals in the market is one of the many benefits of building a solid network.
Special Considerations: Commercial Real Estate and Mobile Homes in Texas
Wholesaling Commercial Real Estate
o Selling commercial real estate often comes with a greater profit margin. Therefore, it can be a highly attractive business venture for ambitious wholesalers. At the same time, there are much fewer opportunities, which make the industry a risky one.
o With a high profit margin for the taking, there is greater competition for commercial real estate wholesalers. There are also unique Texas real estate wholesaling laws for commercial transactions that must be carefully obeyed.
Wholesaling Mobile Homes
o Wholesalers of manufactured homes must analyze the specific legal requirements for wholesaling mobile homes governed by the Texas Department of Housing and Community Affairs (TDHCA) division.
o Mobile homes differ from other investment properties in terms of market value, real property classification, and local real estate laws. For instance, mobile homes are not typically worth as much as single-family homes. At the same time, they depreciate faster than a single-family home.
Last Word: Is Wholesaling Real Estate a Viable Investment Strategy in Texas?
Real estate wholesaling in Texas is cluttered with regulations and laws, and compliance with these state laws is highly important. Therefore, if you are in the wholesaling industry or thinking about entering soon, you will want to make use of the proper legal channels, such as consulting a real estate attorney and staying informed on Texas real estate law.
There are many opportunities and challenges in the Texas real estate market for wholesalers. To navigate these opportunities and challenges, it is essential that the wholesaler performs due diligence and understands the local market.
***Disclaimer. This article offers an overview of Texas real estate investing, wholesaling laws and practices, but it is not a substitute for professional legal advice. Due to the complexities of state-specific regulations, it is advised that you seek counsel from a qualified real estate attorney before engaging in any wholesaling activities