Wholesaling Business Structure
As a reminder, I’m not an attorney. I suggest you seek the advice of a competent attorney when you decide to set up any particular entity. There are two basic strategies. If you have a real estate license, you have the possibility in some states and provinces to do what’s called a net listing. We’ll talk about that shortly. For most of us, whether we’re a licensed real estate agent or simply an investor, setting up an LLC is typically the best thing to do. It’s the easiest; it’s straightforward, and very inexpensive. It’s readily recognized in all the court systems now, with plenty of case studies. It’s a great way to get into this business legally, ethically, and also reduce liability for you. The bottom line is there are lots of rules and regulations regarding the transfer of real estate. You need to be aware of this. The courts are not too keen on wholesaling. Let’s just put it that way.
Before we get into LLCs, let’s talk about net listings. If you’re a licensee (or if you’re not a licensee you can hire one), you can do what’s called a net listing. Here’s how it works. In states like Pennsylvania (there are other states and provinces, too), if a seller of a property only wants to get say, $100,000 for the property, but you think you can sell it for $120,000, you can write the listing such that the net bottom line to the seller would be $100,000 but any income or sales price you get over and above the $100,000, you keep yourself as a commission. We’re going to discuss this and diagram in a little bit. The bottom line, I’ll just call this out to you here. Assuming you’re a licensed real estate agent and you’re an investor, you can approach the seller with the concept to list the property for sale under the following conditions:
Number one, the seller determines what final sale price they would like to see. You don’t ever infringe upon that. The second thing is you enter into a listing contract for that specific price. The example we give here is $100,000. The third thing is you agree that your commission compensation will be any amount of money that is over and above the final sales price the seller receives for the property. You list the house for a price you believe it could actually sell for. In this example, the seller wants $100,000 for the sale of his house. You the agent enter into a listing agreement with this seller that will net the seller $100,000. You get this in the listing agreement. You draw up an addendum that explains your commission structure, which is anything over and above $100,000, and also you put it in there that this gives you the right to advertise the house for any price you want. Then you advertise. In this case, let’s say you advertise the property for $125,000 because you believe it might sell for $120,000. The seller would get $100,000 and you would get $20,000 as your commission for selling the house. If you’re a savvy agent and investor, and the buyer of the property is going to remodel and sell it for profit (in other words, flip the property), obviously you would want to get the listing agreement on that sale, too. So you can propose that when the buyer purchases the house from the seller, that he also agrees to re-list it with you as his agent when the remodeling is complete and the house is ready for resale.
You can actually write that into your buyer’s agency agreement. I’m sure you can see the value in doing this. Some states recognize this net listing. Others don’t. You can simply Google your state, and search for that phrase “net listing” and see what a realtor says about it. If you are not a real estate agent, you’re going to have to set up LLCs. If you are an agent in a state that doesn’t recognize net listings and you’re going to wholesale, you should likewise set up an LLC.
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