Episode #5 – How to Legally Wholesale Houses
Welcome to EarlToms podcast. Today we’re going to talk about what’s actually legal when you’re wholesaling houses. We’ve already covered some other topics to kind of get you started. What we’re trying to do with these podcasts is give you an introduction to get you a good foundation to be successful in this business. We’ve already discussed the fever. What to what you do when you originally get in it. You see the money on the table so you start making bad decisions. We’ve talked about how to find the buyers. You know that you need some free and inexpensive ways to do that, how to find sellers also free and inexpensive.
Today we want to go over what the legalities are as far as wholesaling, because a lot of wholesalers out there are making mistakes. What they don’t realize is if you don’t actually have a real estate license, if you’re not a license agent, you don’t actually follow under the commission’s jurisdiction. You fall under the attorney general’s jurisdiction so everything that you do is either legal or it’s criminal. It’s not a slap on the wrist or pay a fine type thing. If the attorney general knocks on your door, your career, you’re basically fixing to have to go defend yourself in a criminal setting, not a meeting with the commission that says you did this wrong. You need to go take continuing education courses, things like that. So let’s go over some some things that are common in the wholesale industry that a lot of people do. Some of them they should and someone they shouldn’t. Whether they are intentional or not is irrelevant. If you know the right way to do it, it’ll save you some grief down the road.
You know a lot of people just getting in the business hear things like get a Google voice number and send it straight to voicemail. There’s a reason a lot of these wholesalers are under the radar. They hide behind certain things so that they can screen what’s coming. You hear a lot of people say I put up bandit signs but I use a different number on the bandit signs. That way it can’t be traced. There’s a reason for that because if the code department for that municipality calls you, you could potentially be fined. You have to pay money because it’s against city ordinances in a lot of places, if not in all places. So a lot of these wholesalers put the signs out. They’ll say, OK, I’m going to use a different number that way no one can trace me. I’ll be able to listen to the voicemail and decide whether or not I want to call them back. You can get some business with these bandits signs. I’m not necessarily telling you not to do it, but you need to know the consequences before you do something. That way you can make your own decision whether it’s something that you want to do and take that risk versus doing something that you know might get you in trouble. It’s just not worth it. So on the bandit sign issue, it is a risk because if a lot of people are doing it and the city starts cracking down on it, you can actually find out who has a Google voice number because you always have to forward it to a certain cell phone provider. So if a city really wants to, they could subpoena Google for the records. The next thing you know, your cell phone is tied to it, and email address is tied to it. They can get your ip address and know exactly where you are. There’s no real way to hide in this day and time with technology. If you do decide to do the bandit signs, just know that you could possibly be be facing a fine for it. So you make your own decision. You know whether or not you want to do that and the other things, which are really the actual criminal type things that could get you in a lot of trouble. That’s what we’re really going to focus on in this episode.
I want to start with the contract. It’s not technically illegal to wholesale anything. Whether it’s houses, dishwashing detergent, you can buy them so all you want but it’s how you do it. It is what makes the difference between being legal and illegal. So when you when you get to the point of knowing how to find buyers and sellers, this is the part where you have to avoid the fever almost at all costs. Because if it ever does come back on you and you don’t have your documents organized, you’re going to get in trouble because you’re going to not have a way of proving that you did it the right way. It’s important to know the process of signing contracts. What order to do it, things like that. So whenever you find a deal, you go out, you meet with the homeowner and everybody’s happy. What you need to do is you need to sign that contract before you tell anyone about it. Whether it’s talking to another buyer or whether it’s sending the pictures with a description and asking price in an email. You want to make sure you have that date on the contract signed on a specific day. Once you leave and go call buyer after you have the contract signed. Now, you are actually marketing the equitable interest that you hear everyone talking about. That’s when it becomes legal. What happens is if you go out and you meet with the homeowner and you don’t get that contract signed and you present it to a buyer what you’re doing is what they call is a licensure activity without the license. What a lot of people don’t realize is if you can manage rental properties, you can collect the rent. You don’t need a license for it. You can hire a contractor to go out there and do maintenance on a rental property. What you can’t do is list a property or show a property without a license or equitable interest. If you do that, that’s when you’re committing the licensure activity without the license. You have to get the seller contract signed before you talk to a buyer. If you get a contract from a buyer to purchase the property before you actually have a contract with the seller to sell you that property, you have now done something that is illegal. You need to avoid that process. So what a good practices is if you go out, let’s say this is February 11th. You go out and meet with the homeowner and you say, OK, I want to buy your property. Great. What a good price? If you signed a contract on dated February 11th you come back, get in front of your computer, you wait until you have a new date. So we’re going to use February 12th as your date that you originally send this out. What, you’re going to wind up doing, a lot of people think – No, I’ve got to get this out as fast as possible. If you’re right looking at a house in two o’clock in the afternoon, by the time you get back, get your pictures uploaded, get the description, get all those things situated, you’re dealing with four or five o’clock in the afternoon. So when you send this out nine times out of 10 you’re actually going to be sending it to someone sitting at home with their family, eating dinner, watching their kids at a sporting event after five o’clock. A lot of people think it’s their own personal time, and it should be. They work during the day, just like everybody else. So you’re really not actually losing any time by waiting until February 12th, the next day to send that out.
They’ve done a lot off research as far as when people are online the most to get the most eyes on something and those times that people are online the most that you get the most attention on it, are 10 o’clock in the morning and two o’clock in the afternoon. Whether that’s because they’ve been at work for two hours and they need a break or they went to lunch at 12 and came back, and now it’s two o’clock, so they need another break and they get online and stop working. I have no idea what it is, but 10 o’clock in the morning and two o’clock in the afternoon is the best time to send so that you have the maximum impact of people online. So if you go out and it’s 11 to get all this information then you turn around that next morning and you call or email your buyer even if it’s your buyer’s list at 10 o’clock in the morning. You really haven’t lost any time. Even if you send it late in that day, no one’s really going to deal with it in the first place. You actually hurt yourself a lot more, because by the time they get to the office in the morning, they have new issues to deal with. So they have forgotten about your deal. So you’re actually hurting yourself if you rush it anyway, One thing that I always try to do is use Docusign with my buyers. That way I actually have a time stamp and location to know it’s not subjective. It can’t be. Okay. Well, I met you with, you know, the diner down the street. We saw in the contract you are a liar based on the dates, but you have no real way of proving that that’s when the contract was signed. If you have an outlook account, and you can actually get Docusign for free in your outlook account. A lot of people don’t know that if you have Microsoft Outlook as far as your email, you don’t have to pay for Docusign. It comes with outlook or Microsoft owns Docusign. If you have an outlook accounts, check into that. It will save you some money going forward in your business. You have to make sure that you’re signing your contracts with your seller before you tell anyone about it or show anyone. Again you’re committing a licensure activity without the actual license.
If anybody ever reports you or you get on anybody’s radar, anything like that, and now you have someone knocking on your door saying, I want you to answer some questions. You’re not going to have good answers, and it’s going to get you what may not be a lot of trouble, but it’s trouble that you could avoid long as you’re doing it in the right way. Another thing about this contract is if you don’t have actual means to purchase the property yourself, you can not put it under contract. What that means is you see a lot of people as an example that go out to homeowners. They’re going to buy a house. That’s why they get pre-approval letters from their lender so they actually have the ability to purchase it. They’re not wasting anyone’s time. It’s a more professional approach to it. So when you go when you put a contract on the house, if you don’t have the cash to buy it yourself and you don’t have a lender, whether being a bank or hard money lender, whoever it may be, if you don’t have that ability to actually buy that property, putting it under contract is illegal. You have to have the means to be able to buy that house before you put it under contract. You’re going to hear countless people tell you otherwise but I can promise you if you don’t have the means to put it under contract and you do, you are committing fraud. You eventually will get in trouble. So line your funding up, have the money. It’s just good business. I doubt very seriously there is less than 90% of people that are wholesaling that when they first started out, they didn’t actually have the means to buy property. So they did an illegal activity or fraudulent activity to get into this business. It is what 90% of this business does. It’s another reason why there is a bad reputation associated with wholesaling real estate, because a lot of people will go out there, put it on the contract and not be able to actually purchase it. It frustrates a lot of people, and it gives this industry a bad reputation. It’s not good business to constantly cancel contracts unless there is a valid reason associated with the house. What I always would suggest that you do when you’re getting in the business. Even if you’re doing this without the actual means to purchase the property you need to actually get to that point where you find somebody that will that will fund your deals. And when I say fund your deals, I mean legitimately, you need to actually have a letter from this person with their own proof of funds. Whether it’s every 90 days, every six months, whatever it is a legitimate proof of funds from this person, this lender, whoever it is that says I’m going to finance this property for this person and you list their name or the name of their company. You list your company or your name as you’re buying and you list the property address. That is basically your pre-approval letter that is keeping you out of potential trouble. You have your documents in order, you need to actually have this before you write the contract to buy the house. Because if you put the contract on it, then you go find the means to purchase it. You have still done an illegal activity. It’s important to get that funding in place prior to writing the contract with that address listed on that letter. You can send that out and Docusign. Create a word document that basically just changes the address and a date for every one of these properties and send it out. It’ll take your finance company less than a minute to sign it, and everybody’s happy. But do not make it a habit. As you get in this business to just go out there and willy nilly put things under contract, be reckless with your business because you will get that reputation of somebody that constantly backs out of contracts and you will eventually come across, whether it be a competitor in the business or someone that you were trying to buy the house from that says, You know what? This guy just didn’t do right by me. I’m going to report him to the commission. What the commission is going to do is contact you with their investigators, and they’re going to ask you questions. What they are going to realize is that they don’t have jurisdiction over you, and you’re going to answer questions with the attorney general. You’re going to basically walk in to a big mess. So have your documents in place in the correct order before you do it. Now I know a lot of people out there they go, Where can I find a proof of funds letter? And there are companies out there that will give you a proof of funds letter. You pay them $25 or $50 for a letter. That does not help you because that proof of funds letter is worthless because that company is not actually doing the funding. So basically, you are providing that proof of funds letter that has no funding behind it is again a fraudulent activity. So when you think oh, I’ve got this proof of funds letter from x y z off of the Internet, you just committed fraud again. When you present that to someone, if the questions ever arise, you’re in trouble because all of these things are going to catch up to you in the end. So what I always suggest even though I don’t approve of it. I did it when I first got in the business. I’m not telling you not to do it. I’m telling you to be careful about it. So when you get in this business and granted, you don’t have the money to buy Bobby’s house. You have to get to the point where you’re putting money back in your business so that you’re building your capital. You’re building your cash to where six months down the road after you’ve been in the business you have the ability to go and get the property.
So what that winds up doing is it actually helps you locate the right deals, not put everything under contract. So you go out to a property, you think to yourself. If I wouldn’t spend my own money on this house, would I actually put it under contract because when you start doing it the right way, you start becoming more selective of the properties you’re putting under contract because in the back of your mind, you’re starting to think I’m a professional. Now I do this the right way. My reputation is important to me. Keeping my word to these owners is important to me. Giving my buyers a good product is important to me. When you start changing your mindset as you go through, you’ll start being more productive and more profitable as well. If you go out and you don’t know how to estimate renovations, you don’t know how to value properties. You don’t know your buyers criteria that is going to make them want to purchase this. You start becoming reckless in the way that you’re doing it, and the fastest way to fix that is using your own money to buy houses and then you can’t sell. That’s the fastest way to fix it, but it’s a very costly mistake to do so when you start going out when you actually you have enough money to put a down payment down. If you’re getting financing or you have enough money just to purchase the property outright with cash, when you start dispersing your own money on it, you will make better decisions because in the back of your mind, that’s important to you. It’s just as important to them that you keep you a word instead of oh, I’ll give you $100,000 for this house that’s worth $120,000. You’ll stop doing it, and you’ll realize the importance that everyone has in their own way in every single deal. The owner, you, and the buyer. So when you’re you’re analyzing these deals, you’ll start actually thinking better. You make better decisions so that house instead of paying $100,000 you look at that owner and say, If you can’t sell it to me for $70,000 I’m not going to be able to help you. And then you’ll actually start helping your negotiation because if you can’t get it at that price, you need to walk away from it. Now you may think in your mind you’re losing some deals. You’re actually not because what investor out there, what buyer is going to buy a $120,000 house for $110,000? You’re not going to sell that deal anyway. There’s no point in putting it under contract.
So you have to take the approach of understanding what’s actually legal. And as you start understanding what’s legal, you become more professional about it. The beginning, when you first get into this business, you can call it a trial period. You’re getting in and you’re staying under the radar. You’re trying not to publicize what you’re doing because you’re still testing the waters. You haven’t gotten to the point, Hey, I can call Joe and he’s going finance this deal, I can call this lender and they’re going to finance this deal, or I have the cash to do it. You’re in this trial period for ever how long it takes. Then once you actually start taking down the properties you’re putting under contract is when you actually become a professional wholesaler and you will begin to be successful. If you’re going out there like every guru says and putting every house that you’ve come across under contract just to try, try to get it sold. You’re not a professional. You’re just somebody that is naive that is seeing the sunshine and rainbows with the hope of a lot of money. But you’re never going to get there because you have the fever. Until you can calm that fever back down and become a professional, you’re not going to be successful. I don’t care how much money you throw at real estate. You’re not going to be successful. What you’re doing if you have $100,000 to get in it and you think I’m going to spend all this money on advertising, I’m going to do all this. And then all of a sudden you start getting all these houses under contract and you can’t get him sold, so you start letting them go. Guess what? That $100,000 that you had to start is going to disappear very quickly because when you start advertising mailers, you’re spending $2,000 – $4000 a month mailing. You’re doing AdWords, SEO, you’re doing cold calling. When you start doing everything that these investors start saying you’re going to wind up spending anywhere between $10,000 – $20,000 a month just to advertise. That has nothing to do with actually running your business. So you’re thinking to yourself I could do this and I’m getting all these houses on the contract. Leads are not always deals, and you need to understand that. So you actually have to start in a manner that focuses what’s a deal and be able to tell someone no. You’re going to run across many sellers and many buyers that are going to tell you no as well. You actually have to have the ability to tell someone no if it’s not right for you. The deals that actually close are the deals that are right for the seller. That’s right for you and right for the buyer.
So when you go in all of these deals, you have to only put the ones under contract that are going to be legal in every single aspect of it. Now, when wholesaling originally started, what happened is that you would put the contract on the house and you would go and find a buyer. That buyer would just basically stroke you check and assume your contract and go straight to close it. It’s not done that way anymore. Now you’re actually in front of a new attorney every single time you do a deal. The attorney is not necessarily worried if you got the date right on the contract or if you have money to assign it or double close. There are a lot of them that are not concerned with this. But you have a lot of these states now that are starting to get wise to what wholesalers are doing so they’re cracking down. Illinois is a perfect example trying to force wholesalers to stop doing business in their state. Because in a lot of ways, wholesalers are actually ruining the business. When you think of it in a total package, you have all these companies coming out. Now, whether it be like, say, roofstock, that you can list your property online. We’ll charge you a 2% agents commission. You have more agents reduce their commissions to go after these homeowners to get wholesalers out of the way. There is a concerted effort nationwide to get wholesalers out of the way and get real estate back the way that it that it was 10 – 20 years ago. The only way that you’re going to be successful is if you take the legal approach and do it the right way.
Make sure when you go about your business that you’re putting the contract dates in order and you’re getting a contract with the homeowner that you actually have the means to purchase it before you sign your name on that contract. You don’t send it to a potential buyer until you have it under contract, until you have legal authority to market that property without the license. If you have it under contract, you have the legal authority to try to sell that property. If you don’t have it under contract, you’re doing the licensure activity of an agent without a license. When you get these proof of funds off of the Internet, you’re committing fraud. It’s going to eventually catch up to you. Now what you don’t realize is, let’s say because of social media someone just types in your name on Facebook. It shows you the person, and it shows your name and different groups and what you posted. You commented on things. So all they have to do is sit there and type in your name on Facebook now, and they get to see what it is that you’re actually doing. So when you say Well, I’m doing this and I’m doing that, what they see online versus what they see in person and what you’re telling them are two totally different things. They’re going to want clarification on that and nine times out of 10 the clarification that they’re going to get is you’re doing what you’re saying online instead of what you’re telling them in person. So make sure when you go about your real estate business, you’re doing it in a legal way. You don’t have to hide behind anything if you’re doing it legally. Email or telephone numbers. They come straight to my phone. They do not go to a voicemail. They come straight to me. I have different apps on my phone that will ring straight to my cell phone if I’m not in the office. So it’s not a way of hiding. Someone has asked me countless times do you put out bandit signs? I have legitimately never put a bandit sign out in my life. It clutters areas. It makes them look bad, and you’ll wind up seeing the values in those areas start to decline. A lot of people do it. Whether it’s, sell us your junk cars or come get affordable insurance, or we buy houses. It doesn’t make things look good. Now, is your buyer going to care about that? Probably not. But when you start going through, if you’re not watching market trends and you’re not seeing the decline in the market, your buyer, I can promise you is. So you’re going to wind up going out there and thinking, Well, I can put this house under under contract for $100,000 because six months ago it was $120,000. Well, today it’s $110,000 and you didn’t pay attention to the trend, so always make sure that you’re doing it as legal as possible. Don’t believe what I would call it the hype. Don’t go out there and put everything on the contract. Make sure you have the means as you grow your business to actually purchase the property. If you had to, because it’s an easy analogy to think about it. If you were in that home or their position and you were the one selling and they were the ones showing up to by your house, would you want them to keep their word? Would you want you showing up? If you can do to them as you would want done to yourself if the roles were reversed, you will be fine. If you don’t care, then keep doing what you’re doing. Eventually, the Attorney general or commission’s going to catch up to you. You’re one of those that is going to lead yourself out of this business. If you want to be successful in this business, you treat that homeowner the exact same way that you would want to be treated if the roles were reversed. If you do that, you’re going to be successful. You’re going to miss deals, but you’re going to be able to provide that service to that person when the deal is right. And those are the deals that will give you warm fuzzies instead of giving you all of the stress when the buyers and the sellers are calling asking, why is it taking so long? You’re constantly having to lie constantly having to stretch the time out. It just adds needless stress to you for no reason. If you sit there and do the things the right way, then you won’t have any problems.
A perfect example of that because there is a local investor here that I’ve known for years. We had a new fund show up. They found me online from my SEO marketing and reached out to me in the last month. Now I have a house under contract with them, but even made it to go out to look at this house on Saturday from this other investor that’s here. They have $53,000 in it. They told me that they wanted to get $60,000 out of it to sell it as is without doing the renovations. Just quick money for him. The fund shows up and tells me that they’ll give me $90,000 for this house so now there’s a $30,000 payday sitting there for me because I did my contracts in the right way. I do actually have the means to purchase these houses and I actually have investors provide money when I need it. But when you when you take a professional approach to give pictures and a good explanation, I think they got 50 something pictures of this property. They could make an educated decision and come back and give you what you want. So before that, this past starting February, I’ve already passed on probably 10 deals that just were not the right fit. But I’ve made that up now because the right fit came along. That’s where you avoid that fever. Part of it. You do it the legal way. Contracts in order means to purchase you have the funds in the bank or private lender ready to go. And when you get to that point, you’ll find other actual investors are willing to take a look at this house and get it sold for me. They don’t care because they know you’re a man of your word or a woman of your word, and you’re actually going to do right by them. So it’s all in how you approach this business. Whether you do it in a professional way or if you’re just one of those fly by night, let me put everything on the contract type wholesalers. It’s not going to last long and wind up costing those of us that actually do this business the right way. You’re actually out there costing us deals that we would have gotten because you gave that owner a bad taste and now they don’t trust any of us. So what I’m asking everyone of you to do is do it the legal way and do it the professional way. You will actually make more money, long term, doing it this way. Stay out of trouble and actually be happy with less stress in your life. I typically work two hours a day and typically make over $50,000 a month. That’s just how it is because the reputation is out there. I’m doing the correct marketing and I don’t have to necessarily worry where my leads are going to come from because I’m order filling my buyers. I have a property already sold because I’m filling that buyers order based on their criteria. I’m not sending them 50 houses a month saying please buy. I’m sending them exactly what they want so I don’t I don’t have to work that much. That’s why I have the time to do this podcast.
So when you get in this business, understand that you’re having to do things in a way that you may not otherwise do to get started. Once you get to that point, stop doing it that way and do it to where you’re building a business instead of flipping houses. If you keep the mentality of I’m just out there flipping houses, you’re not going to build a business that is sustainable. So with that, I wanna thank you for listening to this episode. We’ll be back again next week. We hope you listened to this and took it to heart because, honestly, we’re trying to keep you out of trouble and let you build a sustainable business that will give you and your family opportunities that you dreamed of. But there is a cost to do it. And that cost means you have to do it the right way. We’ll see you again next week. Thanks for listening.