What is Real Estate Wholesaling and is it Legal in New York?

If you are interested in wholesaling, also check out this video:    • How to Wholesale Real Estate Better Using ...  .

If you're wondering whether wholesaling real estate is legal in New York, this is the video for you. Watch the whole video to make sure that you are staying on the right side of the law!

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When people talk about wholesaling, they generally mean one of two things: (1) an assignment of a real estate contract to another buyer prior to closing in exchange for receiving an assignment fee (i.e. the "assignment of contract" method) or (2) closing on the property with the seller and then immediately doing a second closing and selling the same property to another buyer for a higher price and profiting the difference (i.e. the "double close" method).

The assignment method is the more popular method and is generally more preferred by wholesalers. There are several reasons for this. First, the assignment of contract does not require the wholesaler to come up with very much money (if any at all). The typical cash layout for a wholesaler in such a deal might just be the good faith deposit that they give to the seller at the time they sign the purchase contract with them. The deposit can be as low as $100 or nothing at all. And, if a deposit is made, it is usually kept in escrow with the wholesaler's attorney. Second, the wholesaler never has to take title to the property. Taking title is risky because if you cannot resell the property, you are stuck with a liability and that is definitely not something that most wholesalers are looking for when they do a deal. Third, closing on a property, taking title, and then reselling it can be more hassle, have a greater potential for errors, and can generally be more complicated.

Having said that, assignment of contract and the double close are NOT created equal when it comes to the potential for running afoul of the law. Specifically, there is no prohibition at all on double closing method. You can do this as many times and with as many properties as you want to. Assignments of contract, on the other hand, are a different story.

New York Real Property Law prohibits anyone who does not hold a real estate broker's license (or who does not hold a real estate salesperson's license working under a licensed broker) to conduct the business of a real estate broker. Section 440 of the New York Real Property Law defines the term “real estate broker” to mean "any person, firm, limited liability company or corporation, who, for another and for a fee, commission or other valuable consideration" engages in a variety of different real estate activities, which encompasses assignments of contract.

The key language in this provision which makes assignment of contract legal or not is "for another." In simple terms, what the law is saying here is that if the wholesaler acts solely for him or herself and does not purport to act on behalf of either the seller or the buyer, assignment of contract and wholesaling in this way is legal.

For most wholesalers, the problems arise from the blurring of the line between them being an arms-length purchaser of the seller's property and a representative of the seller (or the buyer). You should never tell the seller that you are going to help them find a buyer or that you will market their property for them to a list of buyers you have and you should never tell a buyer that you are going to go hunting for a property for them through your wholesale marketing (that is unless you have a real estate license, in which case you should be doing that through a formal representation agreement and following the separate rules that come with that).

Penalties for violating the prohibition on acting as a de facto agent without a license are pretty serious. Even a single violation of this provision can result in a misdemeanor criminal conviction. Additionally, you can get sued civilly and be liable to repay not only the assignment fee that you earned, but also up to four times that amount in penalties. This is definitely something you want to make sure you do right!

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