Wholesaling real estate is a popular investment strategy that allows individuals to profit from properties without ever having to buy them directly. Instead, wholesalers find distressed properties, put them under contract, and then sell the rights to that contract to another investor for a fee. It’s a low-barrier entry into the world of real estate investing, but one common question that arises is. Do you need a real estate license to wholesale real estate? There are many misconceptions that one would need a real estate license to do wholesaling.
The short answer is: not necessarily. In most states, a real estate license is not required to wholesale properties. However, the specifics can vary depending on local laws, so it’s essential to understand the requirements of the state you’re operating in. Let’s dive deeper into the reasons why a license is not needed in most states—and why you may need one in certain places like Oklahoma and Illinois.
Why You Don’t Need a Real Estate License in Most States
In most states, wholesaling doesn’t require a real estate license because you’re not actually engaging in activities that are legally considered to be real estate “brokerage” activities. Here’s why:
- Assignment of Contract: Wholesalers typically enter into a contract with a seller, securing the right to purchase the property, and then assign that contract to another buyer. This practice is generally not considered to be the act of buying or selling the property directly. Instead, it’s seen as an assignment of rights, which doesn’t trigger the need for a license.
- No Involvement in Negotiating Deals: When wholesaling, you typically aren’t negotiating the sale of the property itself. You’re simply acting as a middleman between the seller and the buyer. Since you’re not representing either party in the traditional sense of a broker or agent, you usually don’t need a license.
- Owner-Occupancy Exception: Many states have an exception for individuals who are selling properties they own or are under contract to purchase. As long as you’re not repeatedly acting as a real estate broker by facilitating transactions on behalf of others, you may not need a license.
That being said, while you might not need a license, it’s still important to follow other legal guidelines and practices, such as disclosing your intent to wholesale and ensuring that your contracts are valid.
When Do You Need a Real Estate License?
In certain states, the laws around wholesaling are stricter, and you will need a real estate license. The reasoning often has to do with the frequency of transactions or the specific activities you’re conducting. Let’s take a closer look at two states where you need a real estate license to wholesale:
Oklahoma: A Real Estate License is Required for Wholesaling
Oklahoma is one of the few states where you need a real estate license to wholesale properties. This requirement stems from the state’s definition of “brokerage activities.” According to Oklahoma law, if you’re engaging in regular real estate transactions—such as putting multiple properties under contract and assigning them to other buyers—you may be considered a “broker” and required to hold a license.
In essence, the state views wholesaling as a form of real estate brokerage because it involves facilitating the transfer of real property to a third party. If you are regularly wholesaling, even if you are not technically buying and selling properties, the state may determine that you are engaging in activities that require licensure.
Illinois: Wholesaling Requires a Real Estate License
Illinois has similar regulations, and it’s a state where a real estate license is required to wholesale properties, especially if you plan to wholesale frequently. In Illinois, if you are acting as a “real estate broker” by facilitating the sale of properties or contracts in exchange for compensation, you must be licensed.
Wholesaling in Illinois requires that the person doing the transaction either holds a real estate license or works under the supervision of someone who does. This is because the state does not allow individuals to engage in real estate activities for compensation unless they are properly licensed. Like Oklahoma, Illinois classifies the act of entering into contracts to assign or sell real estate as a brokerage service, making a real estate license necessary.
Is There A Way Around The Laws While Still Staying Compliant Without A License?
YES! Our students do deals in both of these states without breaking the laws! The method used to do this is not very hard but does require a little more leg work.
In states like Oklahoma and Illinois, wholesaling without a real estate license can be tricky, as laws often require you to have one if you engage in frequent wholesale deals. The strategy that some investors use to navigate these rules legally: putting the wholesale deal into an LLC and then selling the LLC to the end buyer.
How Does This Work?
Instead of wholesaling a property directly by assigning a purchase contract or selling the property itself, you sell the LLC that holds the rights to the property, as well as the contract to purchase it. This method works because you are not directly selling the property or assigning a contract in the traditional sense. Instead, you are selling the ownership of an LLC that is under contract to buy the property, which changes the nature of the transaction and may allow you to bypass the need for a real estate license.
Here’s how the process works in detail:
1. Create an LLC
First, you establish an LLC (Limited Liability Company) and have it sign the contract to purchase the property from the seller. This is typically done in the following steps:
- You find a distressed property seller willing to sell, and instead of entering the purchase agreement yourself, you form an LLC and have the LLC sign the purchase agreement with the seller.
- The LLC is now legally under contract to buy the property.
2. Put the Wholesale Deal Into the LLC
Once the LLC has the property under contract, it holds the rights to purchase the property. The next step is to assign the LLC (not the property) to the end buyer.
- You sell the LLC to the end buyer (usually another investor) who will take control of the LLC and, by extension, the rights to the property.
- The buyer essentially “inherits” the contract through the LLC, and they can close the deal on the property.
This process allows you to transfer ownership of the contract without needing to directly assign the purchase agreement or sell the property itself.
3. Sell the LLC to the End Buyer
Instead of assigning the contract to the end buyer, you sell the LLC to them. The key difference is that you’re selling the LLC as an operating business, which is a different transaction than selling the property directly or assigning the purchase contract.
- When the buyer purchases the LLC, they take control of all assets, including the right to purchase the property.
- At this point, the buyer has full control over the LLC, and they can close on the property directly with the seller.
By selling the LLC, you are essentially transferring the rights to the property and the contractual agreement through a different legal mechanism—one that does not fall under the traditional real estate licensing requirements.
Why Does This Work?
- LLC as a Separate Entity: The LLC is considered a separate legal entity, and the sale of an LLC is viewed differently from selling real property or assigning a purchase contract. The transaction is not classified as “wholesaling” or as engaging in real estate brokerage, which would normally trigger licensing requirements.
- Business Sale vs. Property Sale: In Oklahoma and Illinois, real estate laws are typically aimed at preventing individuals from acting as unlicensed brokers in real estate transactions. By structuring the deal as a sale of an LLC, you are technically not selling the property directly, but rather transferring ownership of a business entity. This reduces the likelihood of the transaction being treated as wholesaling, which would normally require a real estate license.
- LLC Sale Exemption: The sale of an LLC is usually governed by business law, not real estate law. In many states, there are no licensing requirements to buy or sell LLCs, making it a viable alternative to directly wholesaling real estate.
The Steps to Execute This Strategy
- Set Up an LLC: Form an LLC in the state where you are operating. This will require some legal paperwork and a filing fee.
- Put the Property Under Contract: Have the LLC sign the purchase agreement with the property seller.
- Find an End Buyer: Locate a buyer (often another real estate investor) who is willing to purchase the LLC.
- Sell the LLC: Structure the deal to sell the LLC to the buyer, transferring ownership of the business entity, along with the contract to purchase the property.
- Close the Deal: The end buyer will now have full rights to the property and can complete the transaction.
Potential Legal Considerations
While this strategy can help you avoid the need for a real estate license in some cases, it is important to recognize that there are legal complexities to consider:
- State-specific Laws: Even though selling an LLC may not trigger real estate licensing laws, you must ensure that you comply with all state and local regulations governing LLCs and property transactions. Some states might interpret the transaction differently and still require a license if they believe the LLC sale is just a disguised assignment of the contract.
- Structure the Deal Properly: Make sure the transaction is structured as a sale of the LLC and not a direct transfer of property rights. The buyer must be purchasing the business (the LLC) itself, not simply acquiring control of the real estate contract.
- Tax and Reporting Requirements: You may need to deal with taxes related to the sale of an LLC, including any capital gains taxes or income from the sale of the business. Be sure to consult with an accountant to understand the tax implications of this strategy.
- Consult Legal Counsel: Always work with an attorney familiar with real estate and business law to ensure the LLC sale is structured properly and complies with all local regulations. An experienced attorney can help you avoid inadvertently violating any laws.
Conclusion: Is This Strategy Worth It?
While wholesaling is a great business to get into you must protect yourself! Be sure to learn your local states rules and regulations. If you are going to wholesale in a state where there are laws against wholesaling and you plan on setting up shop there, be sure to know how to do this the correct way to stay legal! You can make BIG money with wholesaling! Just take the appropriate steps.
We are not real estate attorneys and do not give legal advice. This article is just what we do and should be discussed with your attorney first.