Real Estate Wholesaling, initially published in my October 2022 newsletter
This month I wanted to briefly (well, as briefly as I'm able to) discuss wholesaling, as this is a practice that became all too common during the pandemic real estate "boom", triggering recent legislative action at the State level.
What is Real Estate Wholesaling
Wholesaling is a strategy in which a buyer (wholesaler) enters into a contract for the purchase of real property, and in turn assigns its interest in the contract to an ultimate buyer. The goal of the wholesaler is to assign their interest in the contract (i.e., their right to purchase the house) for a higher price than the price contracted with the property owner, and keep the difference as profit.
As you can imagine, this strategy became very attractive as a quick-money making scheme in 2020 until now, as home prices were going straight up for a long time.
From experience, wholesalers do not disclose their intent to assign the contract. I would sometimes find out about it after getting my sellers under contract and seeing the house listed for sale - using my pictures and description - on third party sites. Keep in mind, these wholesalers are not required to be licensed to sell real estate (or interest therein) and have no qualification to do so.
Wholesalers tend to target distressed properties or other harder-to-sell houses such as estate sales. They offer a very low escrow money deposit (to limit their costs in the event they fail to find a buyer before the scheduled contract close date). They request long due diligence periods and long closes, and tie up properties for as long as they can. Which may not seem so bad in a hot real estate market, but if they cancel after tying up your property for 30+ days, the optics are bad, even though the cancelation had nothing to do with the desirability of the property.
New Arizona Law
Not surprisingly, the practice garnered numerous complaints to the Arizona Department of Real Estate from individuals and real estate professionals, to the point that, as of September 24, a new State law has gone into effect targeting it (HB 2747). The law requires, among other things, that wholesalers (both in their capacities as buyers of the real estate and as "sellers" of their contract rights) disclose they are wholesalers before getting under contract. Failure to do so would allow the other party to cancel the transaction for no penalty.
While this new law will not eliminate the practice of wholesaling, it will provide sellers and buyers a much needed piece of information before getting under contract. As I love to say, knowledge is power.