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Real estate wholesaling: Is it illegal in Iowa?

Real estate wholesaling is often suggested as an easy, low-cost way to make money in real estate. But there are misconceptions about the legalities of wholesaling. Before you jump into wholesaling, you need to know what is legal and what is not.

Much of the information out there leads you to believe that wholesaling is as simple as finding a home and then turning around and selling the contract to someone else for a sweet profit.

But it isn’t that straightforward. Besides, it is risky to wholesale real estate if you aren’t doing it according to the law.

If you wholesale real estate without doing your homework, consulting legal counsel, and/or acquiring a broker’s license, you could be breaking the law.

Disclaimer: This article is not legal advice. To ensure you are within the limits of the law, consult legal counsel, get your real estate license, and ensure you know all federal, state and local laws regarding real estate transactions, particularly those that relate to wholesaling.

Is real estate wholesaling illegal in Iowa?

What is wholesaling?

Wholesaling is when you a find a super deal on a home (below market value), sign a contract to purchase the home from the homeowner, and then turn around and sell that contract to another investor (buyer) for a higher price than you paid. The idea is that you (as the wholesaler) re-assign the contract to an investor before closing. And you get to keep the difference between what you paid for the contract and what the investor pays.

You’re basically finding good deals on properties, getting them under contract and selling the contract to other investors for a profit.

The legal implications of wholesaling

The idea with wholesaling is that the wholesaler isn’t selling the actual home, but only selling the contract to another buyer.

Where it gets muddled and, quite possibly, illegal, is the method by which the wholesaler secures a buyer. Most states require that you have a real estate broker’s license to be able to market and sell another person’s property.

“Here are the facts: the contract is tied to a property, and in order to sell the contract, most buyers will want to underwrite the property. Which means you (as the wholesaler) need to grant a potential buyer access to the property for review and approval…As a wholesaler you jump into a scenario wherein you are now marketing a property you do not own (which requires licensing) and showing a property (which requires licensing) for a seller for a largely undisclosed price (which is illegal)” – Mitch Coluzzi, Broker Owner, Coluzzi Real Estate

There are varying laws and definitions in each state related to wholesaling transactions. But whether or not it’s legal usually comes down to the definition of “broker” in your state. You must know your state law, particularly the definition of “real estate broker.”

When is wholesaling illegal?

It depends on your state laws and their definition of “broker.” If you are engaging in any broker activities and do not have a broker’s license, wholesaling is illegal.

As you can see in the Iowa code (below), a broker is “a person acting for another for a fee, commission, or other compensation or promise, whether it be for all or part of a person’s time…”.

Some might rely on the wording of their contracts in an attempt to get around the brokering issue. For example, putting into the contract that you (as the wholesaler) will receive an “assignment fee” rather than a “commission” probably won’t get you far in a court of law (of course, this depends on your state’s definition of “broker”). Whether it’s a “commission” or an “assignment fee” wouldn’t matter here.

Also, some wholesalers might show the property covertly by having the buyer pose as a contractor or inspector. If you do this, you are not only being dishonest, you are breaking the law.

While the laws around wholesaling aren’t necessarily clear-cut, it’s unwise to push the terms of the law. I don’t know about you, but I don’t like to gamble. And I certainly wouldn’t want to argue with a judge about interpretations of the law.

Wholesale legally

Wholesaling can be legal. It can be profitable and ethical if you do it right. According to BiggerPockets, there are two steps you can take to ensure you are legally wholesaling real estate.1

  1. Get your real estate license. As they say, it might cost you a little upfront time and money, but it would mean not having a penalty on your record. Not to mention the cost of hiring a lawyer to defend you and, possibly, professional ruin.
  2. Close on the property before re-selling it. Rather than just re-assigning the contract, you actually complete the transaction and take possession. At that point, you can turn around and sell the property. If you have a buyer lined up and the attorneys/closers are prepared, you might be able to do both closings on the same day (referred to as a double close).

Bird-dogging

Bird-dogging is the alternative to wholesaling (and is the way to go if you don’t have a broker’s license). It’s a legitimate (and legal) way to make money finding properties for other real-estate investors.

The key difference between bird-dogging and wholesaling is, with bird-dogging, you find a great deal on a home, but you never actually sign a contract with the seller. You only source leads on deals for other real estate investors. The investors pay you directly for the finder’s fee.

Iowa’s Definition of “Broker”

According to Iowa Law2:

“543B.3 Broker — definition. As used in this chapter, “real estate broker” means a person acting for another for a fee, commission, or other compensation or promise, whether it be for all or part of a person’s time, and who engages directly or indirectly in any of the following acts:

  1. Sells, exchanges, purchases, rents, or leases real estate.
  2. Lists, offers, attempts, or agrees to list real estate for sale, exchange, purchase, rent, or lease.
  3. Advertises or holds oneself out as being engaged in the business of selling, exchanging, purchasing, renting, leasing, or managing real estate.
  4. Negotiates, or offers, attempts, or agrees to negotiate, the sale, exchange, purchase, rental, or lease of real estate.
  5. Buys, sells, offers to buy or sell, or otherwise deals in options on real estate or improvements on real estate.
  6. Collects, or offers, attempts, or agrees to collect, rent for the use of real estate.
  7. Assists or directs in the procuring of prospects, intended to result in the sale, exchange, purchase, rental, or leasing of real estate.
  8. Assists or directs in the negotiation of any transaction intended to result in the sale, exchange, purchase, rental, or leasing of real estate.
  9. Prepares offers to purchase or purchase agreements, listing contracts, agency disclosures, real property residential and agricultural rental agreements, real property commercial rental agreements of one year or less, and groundwater hazard statements, including any modifications, amendments, or addendums to these specific documents”.2

Further reading

For further information, see BiggerPockets in-depth guide: The Ultimate Beginner’s Guide to Real Estate Wholesaling.

 

Whether you’re selling, buying, or investing, Coluzzi Real Estate will answer all your questions and simplify the process. We’re here for you every step of the way. Please don’t hesitate to contact us today!

Disclaimer: This article is not legal advice. To ensure you are within the limits of the law, consult legal counsel, get your real estate license, and ensure you know all federal, state and local laws regarding real estate transactions, particularly those that relate to wholesaling.

1 The Ultimate Beginner’s Guide to Real Estate Wholesaling, BiggerPockets.com

Iowa Chapter 543B Real Estate Brokers and Salespersons

photo credit: Pixabay

2018-11-28T12:08:46-06:00

About the Author:

Amanda has lived in the Des Moines area since 1999, where she and her husband have bought and sold a handful of homes over the years, including a recent flip. Amanda enjoys writing, obsesses about personal finance and is fond of looking at houses. She loves sharing useful tips and info to make life easier for anyone wanting to buy or sell a home. In her spare time, Amanda cherishes time with her family, volunteers with IHYC, gardens, hikes, and practices TaeKwonDo. You can read more of her writing at whywemoney.com