With nearly 40 million residents, California is the most populous state in the US. This presents numerous potential opportunities for people who want to build thriving businesses and investment. The same can be said for investors who wish to dive into the California real estate market.
Many people have entered and thrived as real estate agents and brokers in the California market. Others have also become successful in other careers related to real estate, such as attorneys, home inspectors, and real estate tax experts.
Other than these common real estate careers options, one is often overlooked. Real estate wholesaling is one way to make money fast if you don’t want a long-term commitment to any property.
Today, we look at whether wholesaling real estate in California is legal and some tips you can follow if you want to be successful.
Let’s start with the basics first.
What is Wholesaling Real Estate?
Many people know about or may have heard of wholesaling real estate, but don’t know what it means, yet it’s quite a straightforward concept.
When wholesaling real estate, you find a property seller, often in a distressed sale where the home needs repairs or the seller has defaulted on their mortgage. As the wholesaler, you may have to get them to sell the home at a lower price.
Once you’ve signed the contract to buy the property, you market the home in a bid to find a willing buyer. The strategy here is to sell or transfer the contract to a buyer who’s willing to buy the property for a higher price than what the seller accepted.
The difference between what the buyer buys the property for and what the seller is willing to accept is your profit. Remember that there are other costs associated with the sale, so it’s important to consider that as well.
As you can see, a successful wholesaling deal depends on your ability to convince the seller to accept a price lower than the market value. This means that you may have to go out of your way to find properties that may be off the market.
Real estate listings on popular platforms may not make good wholesaling candidates as it’s hard to convince the sellers to accept lower prices. Remember that such platforms enable the buyers to purchase the property straight from the agent. This lowers your chances of closing a deal as the middleman.
Wholesaling may seem like a good idea on paper. Far from the truth.
You need to have some tenacity and exceptionally good real estate marketing skills. You should be able to find a potential buyer before the contract’s expiry date. On the flip side, you can market the property to both real estate investors and homebuyers to fasten the process.
You might have heard that wholesaling real estate is illegal. This is not entirely true. However, there are stringent laws that regulate this business. These regulations differ from state to state.
This begs the question:
Is Wholesaling Legal in California?
Wholesaling in California can be a lucrative business. However, you can get into trouble if you don’t do it the right way.
The California Department of Real Estate has formulated various laws and regulations to protect sellers and buyers as well. You’re subject to follow these laws when practicing wholesaling real estate in California.
As an unlicensed realtor, you can only make a profit from your services by linking the seller and the buyer. The arrangement is for you to transfer the contract rights to a real estate investor.
There are two other strategies you can follow to make money as an unlicensed wholesaler in California:
- Double closing strategy: In this strategy, you buy and sell the home within a short time, say one day or two.
- Buy and sell strategy: Here, you buy the property then wait for a longer period before selling. Keep in mind that your intention here is to be the middleman.
As a licensed wholesaler, you can market the property and pocket the profit once you’ve found a buyer. You can find a seller that allows you to transfer contract rights to a willing buyer.
You should note that you’re not primarily marketing the property itself, but the rights to the contract. Also, you’ll only be marketing to private contacts or a buyers list that you had created beforehand through private conversations.
Wholesaling provides new wholesalers with low barrier entry since you’re only required to transfer contract rights. There are no extra costs, such as earnest money, that are required with other real estate transactions. You may only have to pay for legal fees when closing the deal.
However, if you’re going to follow the double closing or buy and sell strategies, you’ll require capital to purchase the property before finding a willing buyer. You might need a significant amount upfront, but it balances out in the end as you’re not required to disclose the profits you make through the deal.
On the other hand, if you’re assigning a contract, you’ll have to disclose the amount to the buyer during the negotiation process. For this reason and also to avoid breaking any laws, most realtors in California choose to get a real estate license.
Other Wholesaling Laws in California
Other than the basic legal guidelines we’ve explained, there are also other laws you need to know about. They include:
- Section 10016: This section defines a real estate agent as a professional licensed as a salesperson. It further states that a real estate agent is retained by a real estate broker for compensation
- Section 10130: This law states that it’s illegal for someone to advertise or act in the capacity of a real estate broker or agent within California, without first obtaining the required license from the necessary department.
- Section 10139: This section goes deeper into penalties for breaking the law. It states that anyone found practicing as a real estate broker, agent, or mortgage loan originator without the necessary license will be fined an amount not exceeding $20,000, serve imprisonment for a term not exceeding six months in county jail, or both.
These laws stipulate what parties in a real estate transaction should and shouldn’t do. While they may not necessarily address wholesaling, they impact the direction in which wholesaling deals are supposed to follow.
Do You Need a Real Estate License to Wholesale in California?
To answer the question, no, you’re not required to have a real estate license to practice wholesaling in California.
However, due to the limitations that California laws place on real estate transactions, it may be a good idea to get a real estate license. It’s better to not have to worry about the contract transfer limitations or how you’re supposed to market the property.
You’re required to disclose that you’re a licensed agent when getting into a contract. Failure to disclose could lead to civil penalties that could include substantial damage awards.
How to Wholesale Real Estate in California
You’ve already seen that wholesaling real estate requires a lot of patience and hard work. However, the business is rewarding once you get the boat sailing.
To make things clear, wholesaling and fix and flip are not the same. While you find houses that may need repair in both business strategies, you don’t have to fix the house with wholesaling. You just have to be smart and find someone willing to buy the house at a higher price. You can even market to a number of people then transfer the contract rights to the buyer with the highest offer.
We know this can be confusing. That’s why we have compiled this list of steps to help you get in the process of wholesaling real estate in California.
Do Your Due Diligence
The first step for any successful wholesaling business involved tons of research and due diligence. Here’s how you do your due diligence:
- Educate yourself: First, you want to know what steps and strategies you need to follow to do it correctly. Read wholesaling books, find a mentor who’s been in the game for a while, and find credible sources who’ve been successful in wholesaling. Most importantly, remember that your network is your net worth. Attend wholesaling networking events for professionals in California.
- Research on the California market: Successful real estate professional experts in any market make strides because they understand their market in and out. Put yourself in a position to know when properties are listed. Also, establish how you’ll find properties off the market. Compare different properties in your local area.
- Find a marketing strategy: A wholesaling business without a marketing strategy is like a car without wheels. You ought to know how you’ll reach your potential buyers and convince them to buy the properties. Invest in a plan that also stipulates how long you’ll take to close deals.
Before we move to the next tip, we’ll let you in on a little industry secret. Many wholesaling beginners fail to get their businesses off the ground because they skip the due diligence stage. Ensure you do your homework well before you hit the ground running.
Locate Distressed Properties to Buy
For starters, a distressed property is one where the owner doesn’t want to keep any longer. First, you need to find sellers looking to sell. While you may use real estate agents since they tend to know the market better, it’s ideal to do it on yourself to avoid adding other middlemen.
Here are some common ways to find such properties:
- Search online: There are many listing sites where you can find owners trying to sell their property without involving a real estate broker. The only issue with this strategy is that the website may charge you a fee to access the information. They may not entirely serve your needs as you’d want them to, but the data you find will be useful.
- Hire a distressed property finder: You can hire a property finder who’ll go door to door around the neighborhood looking for potential listings. This strategy is suitable when you want to save time and do more for less. You can come up with a payment plan where you only pay them when you make a profit or per lead. Again, check with the California laws to ensure the payment plan you choose is not illegal.
While attending industry events is a great way to network with other professionals in California, it’s also a great way to learn about properties for sale. Some experts will be more than willing to give you access to information in their database.
If you feel stuck on how to start your search for distressed property, you can try Mashvisor real estate investment tools, where you can search for property in your area of desire and also access sellers’ information, such as name, email, and phone number. The Mashboard also gives you access to homeowner data in any housing market in the US. Moreover, you can use the Mashvisor Property Marketplace to gain access to thousands of off-market listings across the country.
Contact the Owner
You can’t wholesale any property without convincing the owner to sell it to you. This might be the hard part of the wholesaling process since the owner may be adamant. Remember other property dealers may have already contacted them or there’s a looming foreclosure bogging them down.
However, you can still convince them to sign a contract with you. Ensure you’re courteous and respectful. Chances are that the owner may have never heard about wholesaling since it’s a non-traditional way to sell a property. Explain what you do in detail and make them understand.
While negotiating with the seller, find some selling points to convince them. For example, if they’re at risk of defaulting on their mortgage, empathize with their situation and assure them that you’ll do the hard work for them. Assure them that selling will help them settle their debt and help them get back on their feet financially.
To ensure that you’re transparent in accordance with the California laws, be upfront that you’re a wholesaler intending to make a profit.
Establish the Property’s Value
If you want to determine how much profit you’re going to make, you should know what the property’s market value is. The reason for this is to avoid wasting time on unmotivated sellers.
For example, if the market value is $200,000, ask the seller what’s the least amount they’re willing to accept. If they quote a figure less by $20,000 or so, that’s a seller worth engaging.
You can also go see the property yourself. While looking around, point out areas that need repairs and use that to lower the price without frustrating the seller.
Find a Buyer
Once you have the property under contract, it’s time to find a willing buyer. Remember you’re racing against time since the contract has a closing date and you want to find a buyer before then.
Essentially, you want to find buyers with the capacity to pay in cash. If the buyer has to qualify for a loan, they may have to jump through hoops that might see the contract expire. The buyer is likely to be an experienced investor who intends to flip the property.
Here are some ways you can use to find a buyer for your property:
- If you have a buyers’ list, call or email them immediately and see if they might be interested in the property
- List the property on listing sites
- Attend networking events and announce you have a property for sale
- Print and distribute flyers containing information about the property
The Mashboard is an instrumental tool for wholesalers marketing their property. You can look up homeowners who bought a small home a long time ago and now have the capacity to move into a bigger and nicer home. You can also search for investors who might be looking to buy more property to expand their investment portfolio.
If you subscribe as a Mashvisor Professional Expert, you can contact investors directly on the platform and see whether they may be interested in buying the property.
Close the Deal
Once you find an interested buyer, you have to negotiate to find your profit. While negotiating, have in mind that you should not use your profit on closing costs and other expenses. Ensure you settle on an amount that will be enough to cover the fees and make you a decent profit.
To ensure that the buyer is serious with the deal, you can ask them to pay earnest money that will be held in escrow until the deal is closed.
Once it’s time to close the deal, you can meet at the title company’s office. Get all the parties involved to finalize the deal and sign off the contract to the buyer. The deal is now complete and it’s payday for you.
Key Takeaways
Wholesaling real estate in California can be a lucrative business. The key is to understand all related laws and regulations to play it safe. Ensure you disclose that you’re a wholesaler to the seller upfront. With the right strategy and hard work, you’ll position yourself as a promising wholesaler in the California market.
If you need help finding off-market properties that you might wholesale and searching for potential buyers, sign up for Mashvisor to access remarkable tools that will help you in your wholesaling journey.
