If you're itching to get into the real estate market but don't quite have the financing to purchase your first investment property, real estate wholesaling may be great for you.
A wholesaler's job is to identify a home, acquire the rights to sell the home, put the home under contract at a below-market rate, and then assign the contract to an investor at a rate that's above the original contract price. Once the transaction is complete, the wholesaler gets paid, and the job is pretty much done!
If this sounds interesting to you, then it's time to learn more about real estate wholesaling. Before you dive in, here are the five things wholesalers should know in 2021.
In general, real estate wholesalers do not need a license to put a house under contract, but this general rule is starting to change. In late 2020, Philadelphia passed a unanimous bill that requires real estate wholesalers to pay a $200 licensing fee annually and to disclose all companies in which they hold an ownership interest to potential clients.
Note: Wholesalers who are subject to the annual licensing fee can claim a deduction for fees paid as a business expense. The IRS allows a deduction for licenses and regulatory fees for an individual's trade or business paid each year to their state or local government.
The bill also strictly prohibits wholesalers from making any misrepresentations, making any false promises, untruthfully advertising, or engaging in any conduct which demonstrates bad faith, dishonesty, untrustworthiness, or incompetency.
This is a major change for the real estate industry, as the wholesaling industry has been pretty much unregulated up until now. Moving forward, wholesalers should be cognizant of the new law in Philadelphia and also keep an eye out for any changes in their local jurisdiction.
One set of jurisdictional rules wholesalers should also stay abreast of in 2021 are the rules in Texas. In Texas, real estate wholesalers are required to make several disclosures to potential clients:
- Any advertisement should state that the wholesaler does not hold legal title to the property in question but only equitable title as buyer under a contract.
- Any contract should state that the wholesaler is only assigning the contract and not selling the property to an investor.
- Any contracts entered into should state that the wholesaler is only assigning the contract for a set fee and not selling the property for a set fee.
While many wholesalers may already be familiar with this Texas rule, those who are new to the market should do their due diligence and review the statute.
In addition to local rules and regulations, wholesalers should also monitor the housing inventory in their local city or town. Many cities, like Baltimore, have a very low inventory of homes on the market. The changes in inventory are the result of low interest rates that are currently being offered. As a result, houses are flying off the market at extremely high rates and bidding wars are erupting everywhere. This means that more and more sellers are aware of the value of their home, and it may become tougher to get a home under contract at a below market price.
The national moratorium on foreclosures is set to end on June 30, 2021. This means you may be able to put a property under contract for a really great price before the property is foreclosed on. If the foreclosure market is of interest to you there are several ways to find foreclosure in your area. Here are a few:
- Enlisting a real estate agent.
- Checking your county's court records and search for notice of default, "lis pendens," or notice of sale.
- Reviewing your state’s Public Notice website.
These are just a few of the ways you can find pre-foreclosures if you think the foreclosure market is for you.
As the country begins to recover from the pandemic, business has started to return to normal. While reopening is underway, the real estate industry still has some CDC guidelines to adhere to. Presently, only ten people can view a property at a time. This guideline may pose some challenges to both the seller and the wholesaler. To work around this rule, the National Association of Realtors suggests that practitioners continue to explore virtual options when marketing property to a potential buyer. One marketing tool NAR suggests is software like Immoviewer to give buyers 3D tours of the property. This would be a great tool for wholesalers to show properties to potential buyers.
Additionally, wholesalers should be aware that any expense incurred while marking their business, like purchasing a subscription service to give virtual tours, is tax deductible. Who doesn't love a good tax break?
Millionacres bottom line
The landscape for wholesalers is beginning to change. Not only are some jurisdictions imposing guidelines on the wholesaling industry, but also the industry is experiencing a shrinking market of homes to sell to potential buyers. No matter the number of changes the industry experiences, the general rule of thumb is still the same: It's essential to do your due diligence before throwing your hat in the game!