Since wholesaling real estate involves getting a property under contract at a very low price and then, without ever making any improvements whatsoever, re-selling the property (or assigning your equitable interest) to another buyer for a higher price, then an ethical issue may exist that is rarely talked about or mentioned. It's the elephant in the room when the topic of wholesaling real estate is discussed but no one is talking about it! Usually, the more common question investors ask is, Is Flipping Real Estate Illegal?. As you learn from that article, in most cases, it is legal. However, law and ethics can be two very different things. So is wholesaling real estate ethical? Let's talk about it.
What's the potential ethical issue with wholesaling real estate?
Sometimes, the only reason why an investor is able to get a property under contract for a low enough price to be able to wholesale it, is because the owner doesn’t know any better or has an inaccurate understanding of the value of their property. Are you operating at the highest ethical level if you are getting a seller to agree to a very cheap price for their property when you know in your heart that they are unaware or misinformed as to the actual market value?
This is the potential ethical issue that exists below the surface of wholesaling real estate that investors should evaluate when embarking on this investing technique. Central to this question is the fact that most property owners can simply call up a real estate agent and if that agent markets the property on the MLS correctly, most sellers can get in the ballpark of the market value for their property. Yes, they will have to pay 6% or so in real estate commissions and yes, they may need to drop their price below full market price, but in the end, the amount the seller will net in their pocket will usually be substantially more than what a wholesaler would give them. There is a reason why banks require that their REOs be listed on the MLS by a real estate agent. If banks were really so desperate to unload their REOs and wholesalers gave them such a great deal, why would they list them on the MLS? Why wouldn't they just dump them off to local wholesalers? Because banks want to get top dollar for their foreclosures and they are smart enough to know that the MLS is where the biggest pool of potential buyers are located. Therefore, the MLS is where banks want their REOs to be marketed.
There are two schools of thought on the wholesaling real estate ethics:
- Side # 1 - A Deal is a Deal: These investors take the stance that, “if the seller is happy with what I’ve offered, then a deal is a deal.” Certainly that is a valid point. When you're wholesaling real estate, you're following one of the most tried and true business models in economic history; the wholesale-retail model. For example, look around your home. How did most of that stuff get there? The majority of those items wound up in your home from the following process. First, the manufacturer created the item and sold it to a wholesaler. The manufacturer made a profit by charging more for the item than it cost to manufacture it. Second, the wholesaler sold that exact same household good to a retail store for more than what he paid for it from the manufacturer. The wholesaler made its profit by being the middleman; buying low and selling higher. Third, the retail store sold you the exact same item that they bought from the wholesaler for more than what they paid for it from the wholesaler. The retail store made their profit by being the middleman and buying high and selling higher. Except for the manufacturer, everyone else in the chain made their money by buying and then re-selling the exact same item for more money to the next customer down the line. That is the wholesale-retail model in action and it has been used throughout business history. Therefore, how is it unethical if the seller is satisfied with the sales price you have negotiated with them? What does it matter if you sell it for more, they got what they wanted? You're simply following in the business model footsteps of most businesses.
- Side # 2 - Give the Seller Their Options: These investors think, “If I know that this seller could simply put this property on the MLS and make an extra $10,000 more than selling it to me, then I need to at least share the options the seller has available to them so that they can make an informed decision.”
These two opposing viewpoints also carry with them practical issues to wholesaling that can be argued on both sides as well.
The drawback of not educating the seller of all of their options, such as putting the property on the MLS with an agent, is that after the contract is signed, they may begin asking friends and family about their decision. Soon, the owner may realize, even before you’ve closed, that they are selling their property for far less than they should. Their next move will be to try to get out of their contract with you by any means necessary (legal or otherwise). When a person thinks they are being taken advantage of (or not getting their "fair share"), they will go to great lengths to get things straightened out.
However, by educating a seller on how they can possibly get more for their property than what you are offering, they may opt to not sell to you. So by providing a seller with their options, you may lose deals.
Proponents of educating property owners of their options would also argue that some sellers will actually appreciate the information and then still end up agreeing to sell to you to avoid any future hassles with real estate agents or other people viewing the property. Then, they would be far less likely to back out of the deal. Or, even if they decided to work with someone else, they might so appreciate your helpful advice that they may refer other business to you.
Where do I stand on this debate, you ask? In all transparency, I used to subscribe to the "Deal is a Deal" mentality. Although I am not judging those who think that way, I now personally err on the side of providing property owners with all of their options and then allowing the sellers to make the choice that is best for them. I like being a consultative business person anyway. I try to understand the person's situation fully, then weigh out their options, then let them come to their own conclusion as to the best approach for them, and then give them what they want (or refer the deal to someone who can help that person better than me).
Which side of the argument do you stand? Please add your comments at the bottom. What’s your stance on the wholesaling real estate ethical issue?