Is Wholesaling Real Estate Ethical?

elephant-room11Since 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?

Comments

  1. Delia Peterson says:

    This is wonderful. My heart has always wanted to be a blessing to the seller also. I haven’t started this business yet; but have read from different investors.. Thank you for honesty.Sellers should be able to trust us, Treat people thee way you want to be treated.THANK YOU.. THANK YOU, I WAS BEGINNING TO WONDER DOES ANYBODY REALLY CARE ABOUT HELPING OTHERS ALSO.

  2. In everything we do we should look for the win-win situation. I have to sleep at night and at some point face God with my decisions so I always let people know they have options. I let them explore what that may mean in a dollar amount but I do tell them they may do better by doing x,y, or z. I have only lost one deal that way and all the others trusted me because of my honesty.

  3. Buying foreclosures, then listing with an agent solves the problem for me. Selling without an agent has become more difficult now that the law requires the deed to have printed (on the front) the last closing agent, the compensation, and the tax assessment. It takes a lot less work to find out what a property sold for last.

  4. As long as everything is disclosed it is ethical. It helps the buyer, the investor and mostly the seller. In most cases the seller can’t afford repairs and would be stuck with the house and in worse of a position.

  5. If the seller lists on the MLS he will be competing with 200 other houses and you will probably lose the deal to one of 20 different people. If it is just with you, that’s the only house you want to sell, which is better for the seller.

  6. Neal Kluge says:

    I have been in the seller’s shoes and also the buyer’s shoes. Sometimes when one is trying to sell a property for 3 years with NO offers, any offer even a low one is GREAT.

  7. Ishann Maharaj says:

    I’m of the opinion that the sell should be given all the options available to him.
    I’m from South Africa and by freely giving advice iv found that it has resulted in many referrals.
    Real estate is about people and building relationships as you go along…enjoy the journey

  8. Flipping houses is no different than a store owner finding the best deals he can from a supplier and selling them to someone else for a profit. These houses are your inventory. You take the time to find them and to also find potential buyers. The buyers could take the same amount of time and sell the house to you. this is just your business. Everyone has the same opportunity to put that house under contract. You may even be getting the end buyer a better deal than he would have negotiated himself. Many times a house if flipped for less than the listed price. If someone on your buuers list wants to look for a house they have the same opportunity as you do. If they rely on your expertise than it is very fair. When a store owner ships on consignment isn’t that a flip?

  9. Most serious investors screen out the sellers to only deal with motivated sellers. The motivated ones need something done today, not tomorrow. My screening process lets them know that if they have time to wait out the market, then hire an agent. But if they need something done today, I can probably help. They know I am in this business to make a profit and that I can’t buy every house on the market. I buy houses with problems and solve the problems in order to make that profit. I have systems in place that a regular person doesn’t. Now that screening is done when sellers contact me first.

    Some investors may make the first contact with sellers and I would think most investors would use some sort of way to weed out the unmotivated ones. FSBOs have already made the decision to sell by owner instead of hiring an agent so, who are we to question their decision? The agents need to be working the FSBOs to get listings more than investors trying to convert FSBOs into listings for agents.

    I think the main thing for brand new investors is to NOT act like an agent. Sellers are not hiring you to help them and some people don’t know the difference. So if a seller is thinking you are an agent, then make sure and let them know you are NOT an agent that can help them sell their house. You are a professional buyer who buys houses for profit by solving problems. If you flip or assign the contract for a profit, then you have the contacts and “know how” to do that. Its no different from agents who get listings and sell them in one day because they know of buyers who will take it immediately. That happens alot with “cream of the crop” REOs in big cities. Realtors don’t tell the banks “This particular property will go fast, you don’t need to list this one with me, just call the investors yourself so you can save a commission”

    Now some investors are also agents but at that point, those investors/agents know they need special disclosures and how to disclose and handle the situation properly.

    I guess the main thing is to make sure sellers know that you are not helping them other than that you are an investor who buys properties for a profit. If you don’t hide that, then your profit is ethical no mater how much or how fast you make it.

  10. Brian Carter says:

    I split the middle. I truly believe you have to create a win/win situation or you will ultimately have a lose/lose deal. I believe in given the seller their options, however, I also let them know that just by listing a property on the MLS with an agent doesn’t mean you’ll get asking price or even the price the buyer pays after the agent’s commission.

    What we’re really talking about here is wholesaling, not flipping. Traditional flipping is just as described above, – “If you define flipping as buying a dilapidated property, completely renovating it, and then reselling it, then such a noble act as turning a neighborhood eyesore into a beautiful home is hardly an ethical question.” – however, wholesaling on the other hand is where the ethical questions come in.

    I try to think of things in the positive light of the seller. My job as a wholesaler is to match a buyer with a seller… period. While doing this, you have to create the win/win deal. It helps if you know what your buyers are looking for and why your sellers are selling. I don’t ever suggest you mislead a seller. Tell them what your plans are and tell them what their options are. The value you’re really creating is time.

    The seller may want or even need a quick sale in exchange for a lower price depending on their motives. The buyer (cash investor) doesn’t have the time to follow every lead. Your job as a successful wholesaler is to be the match maker and there is absolutely nothing wrong (IMO) with getting paid for not only your time but also your ability to create that win/win deal.

  11. I believe flipping is and should be considered ethical as long as the proper disclosures are included and you are doing a service to the Seller by ensuring they do understand all their options. They will appreciate that from you and build credibility. On the other hand, in the state that I live in (Oregon), the regs and agents see it different. To them it is more about putting properties under contract and selling properties you do not actually own as well as selling real estate without a license. It is a huge problem here. Read the ORS laws for Oregon, they are brutal!

  12. If you are a wholesaler and have found a motivated seller, and you know that you have a super deal for your investor. Why not make your offer a little higher if you know the seller has no idea of the value of their house. That way the seller wins, your investor wins, and you win as well.

  13. There are two terms that we use and it sounds like they are being used inter-changably here. Wholesaling is when you buy a house and before taking possession or closing, sell it to someone else. You did no work to the house, just found it, put it under contract, and found a new Ca$h buyer. I think of flipping a house as buying a house that needs work, buying it for less than the asking price (to allow for the repairs that need to be made and a little profit), then fixing the house up and “flipping” it. I think the “unethical” part comes when the “flipper” does NOT do a good job repairing the house for resale, and leaves lots of additional work for the new (end) buyer to handle. We purchased a home from a “flipper” and found after the fact that he had not done many things that “should have been done” to the house before putting someone new into the home. I agree with the folks who say they have to be able to sleep at night and answer to the higher power for their actions. Definitely do unto others as you would have done to you. Stay ethical!!

  14. Susan Lloyd says:

    I am reminded of what Dan Doran said when responding to claims that real estate flippers are vultures: If it weren’t for vultures, we’d be up to our eyeballs in rotting, stinking carcasses. Vultures don’t kill anything; they just clean up the messes created by others [like the housing market crisis created by politicians forcing banks to loosen up on lending requirements], and perform a very important function. The bald eagle, the symbol of our country, spends about 60% of its time as a vulture, eating carrion. We should be proud to be called vultures. The unethical parasites are the politicians and bureaucrats who need to see themselves as “helping” people, no matter how much damage they do. As H.L. Mencken said, from the man who wants/needs to help you, run like hell. Thank you for the opportunity to rant!

  15. There is a value added in finding, valuation and negotiation and marketing of an ownership interest. I don’t know what is fair value ? Having the seller commit to selling on the MLS for 6 months through a realtor can sometime cause more harm than allowing a fast cash close. I Rehabbers and distressed owners need deals as solution and some don’t mind seeing you do well. Unlike the gurus, there is never a great margin available that is involved. If there was I can see how your conscience would tend to bother you. Good people appreciate your work as a “wholesaler”

  16. Great article. Thanks for writing it. I really enjoyed it.

    Personally, I think that in the abstract, all profits in a capitalist system rely on information asymmetry (which always implies price asymmetry). We are all, in some way, performing an arbitrage. If information (and price) signaling was perfect, there wouldn’t be any profits. So we’re essentially all looking for larger and larger arbitrage opportunities, where there is scant information. Markets that are truly developed are, by definition, commoditized, and profit margins in those businesses are very small.

    When talking about what is and isn’t ethical, I’m always reminded of Potter Stewart’s (Supreme Court Justice) saying on identifying what is and isn’t porn: “It might be hard to define, but I’ll know it when I see it.”

    Ergo, we might know intellectually that information asymmetry causes two different valuations of a thing (one of them more beneficial to us), but we might have a more nuanced view in a real situation with real people.

  17. Flipping houses is as ethical as the person doing the flipping, just like selling cars, donuts, or anything else. It can be done honestly, or not. I like to think most investors or flippers are doing it honestly. Most people I know doing it are solving problems for people for a living. It’s a great feeling.

  18. Denise Violetta says:

    I think Jason said it best, “You are a professional buyer who buys houses for profit by solving problems.” It is a business, and when fully disclosed, there is no shame in making a profit. Investors work as hard or harder as anyone else in their businesses.

  19. Maybe “give the seller their options” is the grown up version of a “deal is a deal”. Beginners like me need every deal they can lock down. Inside I feel “give the seller their options” is more in line with who I am inside, but I think to start my business it’s “a deal is a deal”. I’ll give back when I can. Thanks for the video Phil.

    • Hi Phil,

      Thanks for the video. I’m changing my philosophy from a “A Deal Is A Deal” to “Giving Options”. Leading a seller down a one-way street makes me feel uncomfortable. The “A Deal Is A Deal” approach puts me in a position of wanting the property too much. By thinking of the seller first… and not myself… will build a better relationship. So I lose a few deals here and there. That’s going to happen anyway. I look at it this way, I’ll get better referrals which makes up for the lost deals.

    • Phil Pustejovsky says:

      Jason,
      The interesting thing about this debate is that both sides lose deals…the ones that have sealed lips about the seller’s options and the ones who are very open about the seller’s options.
      As a beginner, the more intense approach is to keep your mouth shut. Just wait until a seller is threatening a massive lawsuit on you. Usually, it is the most advanced investors who have thick enough skin to be able to deal with what can happen when a seller tries to back out of a deal and wage war against you because they think you are getting it too cheap.
      Thanks for commenting!
      Phil

  20. Rolando E. Díaz Olivo, M.D. says:

    It is not ethical.

  21. Kip Armstrong says:

    I met a guy in Florida who went to Jail for flipping houses and now the FHA is cracking down

  22. Mark Whittlesey says:

    Of course it is ethical to wholesale real estate! In this market, in order to wholesale, you pretty much MUST add value in order to be able to wholesale real estate. You are taking a distressed sale and making it conventional. You are taking a non-finance-able property and allowing it to qualify for conventional/FHA/VA financing. You are taking a dated house/kitchen/bathroom and making them modern and then allowing the end buyer to pay for these remodels with their loan money. All of these and more add value which is your profit.

  23. Amber Reynolds says:

    I always want to do things in a moral and ethical fashion. Like some have said, I want to be able to sleep at night. Giving sellers options is the way to go, but it doesn’t hurt to tell them how your services can benefit them. Honestly, if you have one seller that is trying to get out of a house, would this person not be a potential end-user for another house of yours? So yeah, I’m getting you out of a bad situation but putting you into a house that better suits you, AND having instant equity in the house. WIN-WIN.

  24. Russell Salinas says:

    This is a very interesting topic. One that I hope to shed light on, as finite as my mind is. Let’s talk about auto mechanics for a minute. I have a Toyota Sienna that has three misfires in it. The gave me some options. He can fix it completely for $3400; he can fix only the upper engine (and HOPEFULLY that will fix it); he can swap the motor for either a new one or used one; I can take it to someone else and hope for a better price; I can fix it myself or junk it and buy another one. (I bought another vehicle and my brother-in-law said he’d swap out the motor for free. I just need to buy another motor.) However, let’s go over all this. Is it ethical for the mechanic to charge me all because I’m not knowledgeable enough? Shouldn’t he just teach me so I can be along my way! In times Past, blacksmiths made things. They learned the trade, worked hard and got gain from it. In this life, this is how it is. However, at times , can be like my brother-in-law and do a kind act. .. Do something for free! But if he did that everyday, he wouldn’t be able to provide for his household. The system of this world puts a price on things, but when Jesus comes all that will change. He says in the Bible about His future Kingdom that Everybody can come and buy with no money. Until that time, we have to follow to some extent the system of this world. Just don’t forget to do kind things for people along the way. Give them options like that mechanic gave me, but help them if you can. All strategies have their selfish goals, for lack of a better term. But that’s part of the system we find ourselves in in this life time. I like what Jason, Brian Carter, and Juke said. So what do we do? Give options, work for free and starve? What? Me??? I can’t teach people my trade cause that’s how I make my living. But I’ll try my best to create a win/win for everybody as best I know how. As my education in real estate grows I’ll find new and better strategies to help people. Til then, I can be fair and make money in the process.

  25. I felt so squirmy about this I spent all the (little) extra cash I had “learning” about real estate investing for four months instead of going out there and getting a property under contract. Then I got news that it would take $2000 for me to repair the transmission on my car, which I didn’t really love, only relatively needed, and was worth about $4500.

    I DID NOT have $2000 (or $1000, or $500) to fix a car that I barely could afford to drive. I sold that sucker to a friend of the transmission repair guy, $1000 cash, (to someone who could do the repairs for less) and felt lucky I’d found him so quick.

    I found out what it was like to be a MOTIVATED SELLER and I also have not regretted the sale for one minute. (I did regret that a year earlier I had sold my junky but reliable ’98 minivan to put tires on the sedan, instead of selling the sedan to repair the minivan…)

    It’s not actually irrational if it’s the best thing for everyone. The main difference is that my options with the car were already obvious to me and this may not be true for real estate property, so a little honest option education is nice and keeps your deal above board.

    Like someone said above–if you can weed out the truly motivated seller at the initial contact, there’s much less risk they’ll even care about their “other options.”

  26. William Tewelow says:

    I am glad I still get the open and free videos you send out. I like them all, both the professional training ones and these.

    Your Options Approach I believe is far better. It is always good to show them options. I was taught once that if you don’t show them options they will become curious later, after you leave and explore it on their own not under your supervision and maybe with a competitor, so always give them options.

    I might even show them their options in black and white:

    These are the options…

    Real Estate Agent Lease to Own Me, the investor
    6% + closing split Property management company You get the price you want and I sell it for what I can and get the difference.
    Can take months A few months to find a renter/buyer 45 to 60 days, sometimes less.
    Motivated by 3% commission The motivation is on you Motivated by profit
    Market it on the MLS The marketing is up to you I market through a network of buyers, investors, and other outlets

    You get the idea

    But, I think when they see the options and realize that it could get stuck on the MLS and stuck in a contract with a real estate company they will probably get scared from that one, and when they realize that they are the ones who are going to have to market it to renters and be in charge of maintaining the place they will see a no risk offer with you as the best solution and if it doesn’t work out they can always go the real estate agent route.

    Thank s Phil,You have given another insightful presentation.

  27. dick (HOF) hofmann says:

    hi phil… i just watched your u-tube video on ETHICS… and you did not cover the one area that i get hit with when telling friends about wholesaling houses. you get a property under contract from a distressed seller… already in trouble… and you put in a contingency for a 14 or 21 day inspection period. then you go out and hustle your buns off to find another investor to buy the property from you…but you can’t… so just before the inspection period ends… you contact the ‘now joyful seller because he sold his house and is out from underneath his problem’… and tell him the property did not meet yoour requirements and you are going to back out of the deal and cancel the offer. you have played the seller and he is now in the same position he was in before meeting you and your breaking his heart, is that ETHICAL AND FAIR?… or is it cruel and slimmy. how would you like it done to you? i guess everyone has to come to his own choice of what is right in their own mind,,, right?

    • Phil Pustejovsky says:

      Great addition to this discussion. Definitely shorten your inspection period and only commit to deals that you have enough room to find a buyer or else don’t do the deal. Stringing out a seller certainly isn’t cool. Thanks for bringing that up.

  28. 100% – tell the potential seller about MLS. Your videos give a potential apprentice a lot of confidence in your integrity because you are free with the information you share in these videos. I would be disappointed if you weren’t being candid with sellers. Also, in keeping with the spirit of the real estate laws – you are protecting the vulnerable seller.

    Therefore, 100% School of Thought #2

  29. David P. Larsen says:

    If and when an investor is legitimately helping a seller, of course it is ethical. Some might have circumstances that require a quick sale or to take a loss. Love your videos Phil!!!

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