What wholesaling is
Wholesaling the legal way · 1 study hours
Bottom line: Wholesaling means getting a house under contract and then either passing your contract rights to a cash buyer (an assignment) or buying and reselling it yourself (a double close); in both cases you profit only if the buyer pays more than your contract price, and the license question is real and depends on facts.
Bottom line first. A wholesaler does not fix up or hold a house. A wholesaler signs a contract to buy a house, then finds a cash buyer who takes over that deal. The wholesaler is paid the difference. This lesson explains the two ways that works and walks one deal in dollars. The next lessons cover the legal lines, because the money part is the easy part.
The basic idea
A wholesaler is a person who puts a house under contract at one price and sells the deal to another buyer at a higher price. The other buyer is usually an investor: someone who buys houses to repair, rent or resell. Investors who pay without a bank loan are called cash buyers. They can close fast, which is why a seller who needs speed may accept a lower price.
The wholesaler's income is the gap between what the seller will accept and what the end buyer will pay. That gap is often called the assignment fee (when the contract is passed along) or the spread (the difference between the two prices). Nobody is paid unless a buyer actually closes.
What you really hold: an equitable interest
When a seller and buyer sign a purchase contract, the buyer does not own the house yet. The seller still holds the title, which is legal ownership. But in general, a signed contract gives the buyer a right to receive title if the buyer does what the contract requires. Lawyers call that right an equitable interest: a right to get ownership in the future, enforceable in court, before the deed moves.
That right is the thing a wholesaler tries to sell. It matters for two reasons. First, you are selling a right, not the house itself. Second, the law defines a broker as someone who sells or offers to sell real estate “or interest therein” (C.R.S. 12-10-201(6)(a)(I) and (II)), so the word “interest” is exactly where the license question starts. Lesson 2 takes that up.
Path 1: assign the contract
An assignment means you hand your rights under the contract to someone else. The new buyer steps into your shoes and closes with the seller. You are paid an assignment fee, usually at the closing table by the title company.
- You sign a contract with the seller, with a clause that lets you assign (lesson 3).
- You find an end buyer who agrees to pay the contract price plus your fee.
- You and the end buyer sign an assignment paper.
- The end buyer closes with the seller. One deed is recorded: seller to end buyer.
- The title company pays you the fee from the buyer's money.
You never take title and you never need the purchase money. That is the appeal.
Path 2: double close
A double close (also called a back-to-back closing) means you actually buy the house, then sell it right away. There are two sales and two deeds: seller to you, then you to the end buyer. Often both close the same day. You need the money for the first purchase at that moment, so wholesalers who double close commonly borrow it for a few hours from a lender who offers that service (a transactional funding lender). The upside: the end buyer and the seller do not see each other's price. The cost: more fees, because each sale has its own closing and its own recording charges.
Colorado charges a documentary fee when a deed is recorded: one cent for each $100 of the consideration, which is the price paid (C.R.S. 39-13-102(2)(b)). Two deeds can mean two fees. Lesson 5 covers costs in detail.
Example with real numbers
All numbers here are made up for teaching. Jordan finds a three-bedroom house, about 1,400 square feet, that needs work. The seller will accept $230,000 for a quick closing.
- Jordan studies sales of similar fixed-up houses nearby (same bedrooms, size and neighborhood). The fixed-up value comes out to $340,000.
- Repairs for this house are estimated at $50,000.
- An investor needs about $40,000 for buying costs, holding costs and profit.
- The most an investor can pay: $340,000 minus $50,000 minus $40,000 = $250,000.
- Jordan leaves the investor some cushion and offers the deal at $245,000.
- Jordan's fee: $245,000 minus $230,000 = $15,000.
If Jordan assigns, one deed is recorded for the seller's $230,000. At one cent per $100, that fee is 2,300 hundreds x $0.01 = $23.00 (C.R.S. 39-13-102(2)(b)); the title company decides what amount counts, so ask it. If Jordan double closes, the first deed shows $230,000 ($23.00) and the second shows $245,000 (2,450 x $0.01 = $24.50), and Jordan must have $230,000 in hand for the first closing.
Notice the pricing was built from this one house: its bedrooms, size, repairs and neighborhood. A rule of thumb such as “pay 70 percent of fixed-up value” is only a first screen to decide whether to look closer. It cannot tell you what one specific house is worth to one specific buyer.
What can go wrong
- You are the buyer. Until you assign, you are bound to the seller. If no end buyer shows up, you may have to close or lose your deposit (lesson 3).
- The license line. Colorado makes it unlawful to act as a real estate broker without a license (C.R.S. 12-10-202), and the definition of broker includes option dealers and dealing in options (C.R.S. 12-10-201(4) and (6)(a)(VII)). Whether a particular wholesale deal crosses that line depends on facts. Nobody can honestly tell you “just assign it and it is fine.” A Colorado real estate lawyer should check your plan before you market a contract (lesson 2).
- Honesty. The seller must not be misled about who you are, that you plan to resell, or the value of the house (lesson 4).
This course is general education from public law, not legal advice.
Law cited
- C.R.S. 12-10-201
- C.R.S. 12-10-202
- C.R.S. 39-13-102
Key terms
- Wholesaler
- A person who puts a house under contract and then sells the deal to another buyer for a higher price.
- Cash buyer
- An investor who pays for a house without a bank loan, so can close quickly.
- Title
- Legal ownership of a property; it moves from seller to buyer by a recorded deed.
- Equitable interest
- A right to receive ownership in the future that a signed purchase contract generally gives the buyer, before the deed moves.
- Assignment
- Handing your rights under a purchase contract to another person, who then closes in your place.
- Assignment fee
- The money the wholesaler is paid when the end buyer takes over the contract.
- Spread
- The gap between the price the seller accepts and the price the end buyer pays.
- Double close
- Buying the house yourself and reselling it right away, so there are two sales and two deeds.
- Transactional funding
- A very short loan, often a few hours, that supplies the money for the first purchase in a double close.
- Documentary fee
- A Colorado fee charged when a deed is recorded, one cent for each $100 of the price paid.
- Option dealer
- Anyone who takes an option to buy real property with the intent to sell or transfer it to others; the broker license law names this role.
Flashcards
What does a wholesaler sell?
A deal: either the right to buy a house under contract (assignment) or the house itself right after buying it (double close).
Where does the wholesaler's income come from?
The gap between the seller's contract price and the price the end buyer pays.
What is an equitable interest?
A right to get ownership in the future, which a signed purchase contract generally gives the buyer.
How many deeds are recorded in an assignment?
One: seller to the end buyer.
How many deeds are recorded in a double close?
Two: seller to you, then you to the end buyer.
Why do double closers need transactional funding?
They must have the money for the first purchase at closing, even if only for a few hours.
How is Colorado's documentary fee figured?
One cent for each $100 of the price paid (C.R.S. 39-13-102(2)(b)).
Is a percent-of-value rule the way to price a house?
No. It is only a first screen; price from that house's bedrooms, size, condition and neighborhood.
Who is bound to the seller until the contract is assigned?
You, the wholesaler.
Is it safe to say 'just assign it and it is fine' about the license law?
No. Where the line sits depends on facts; ask a Colorado real estate lawyer.
Quiz: 10 questions
Tap an answer. It shows right or wrong and opens the reason. Your score is saved in this browser and counts in the study app.
In general, what does a buyer hold after signing a purchase contract but before the deed is recorded?
- A Legal title to the house
- B A right to receive title if the buyer performs (an equitable interest)
- C Nothing, because the contract is only a promise to talk
- D A license to market the house
Show answer and why
Answer: B. A right to receive title if the buyer performs (an equitable interest)
A signed contract generally gives the buyer an enforceable right to future ownership, called an equitable interest. Title is still with the seller until the deed is recorded, which is why 'legal title' is the tempting wrong answer.
This lesson (general contract principle)
In an assignment, how many deeds are recorded for the sale of the house?
- A Two: seller to wholesaler and wholesaler to buyer
- B None, because assignments skip the deed
- C Three, counting the assignment paper
- D One: seller to the end buyer
Show answer and why
Answer: D. One: seller to the end buyer
In an assignment the end buyer steps into the contract and closes with the seller, so a single deed is recorded. Two deeds describes a double close.
This lesson
Which of these is NOT part of a typical assignment deal?
- A The wholesaler takes title and records a deed in the wholesaler's own name
- B The wholesaler and end buyer sign an assignment paper
- C The end buyer closes with the seller
- D The wholesaler is paid a fee at closing
Show answer and why
Answer: A. The wholesaler takes title and records a deed in the wholesaler's own name
Taking title first is what a double close does. In an assignment the wholesaler never holds title, which is the whole point of assigning.
This lesson
Jordan has a house under contract for $230,000, and the end buyer will pay $245,000 in total. What is the assignment fee?
- A $245,000
- B $475,000
- C $15,000
- D $1,500
Show answer and why
Answer: C. $15,000
$245,000 minus $230,000 = $15,000. The other numbers add the prices together or drop a zero.
This lesson (made-up numbers)
A deed shows a price of $245,000. Using one cent per $100, what is the documentary fee?
- A $245.00
- B $24.50
- C $2,450.00
- D $2.45
Show answer and why
Answer: B. $24.50
$245,000 divided by 100 is 2,450 hundreds, and 2,450 x $0.01 = $24.50. The fee rate is one cent per $100, not one dollar.
C.R.S. 39-13-102(2)(b)
Why is a rule like 'pay 70 percent of fixed-up value' only a first screen?
- A Colorado law bans percentage pricing
- B Every investor uses exactly the same percentage
- C Percentages are always too high
- D Repairs, size, bedrooms and neighborhood differ house by house, so each house needs its own numbers
Show answer and why
Answer: D. Repairs, size, bedrooms and neighborhood differ house by house, so each house needs its own numbers
The rule can help decide whether to look closer, but a real price comes from that house's facts. The law does not ban percentages; they just do not fit every house.
This lesson
Which is a definition of a double close?
- A Buying the house yourself and reselling it right away, with two deeds
- B Signing two copies of one contract
- C Assigning a contract twice
- D Closing at two different title companies
Show answer and why
Answer: A. Buying the house yourself and reselling it right away, with two deeds
A double close is a back-to-back purchase and resale. Assigning twice or signing two copies does not describe it.
This lesson
A friend says, 'Just assign the contract and the broker license law does not apply.' What is the accurate response?
- A Correct, assignments are always exempt
- B Correct, but only above $10,000 in profit
- C It depends on the facts, so have a Colorado real estate lawyer check your plan
- D Incorrect, a wholesaler must always hold a license
Show answer and why
Answer: C. It depends on the facts, so have a Colorado real estate lawyer check your plan
The statute defines brokers broadly, including selling an interest in real estate and acting as an option dealer, and also contains exemptions. Neither 'always exempt' nor 'always licensed' follows from the text.
C.R.S. 12-10-201; 12-10-202
Using the lesson's numbers, a fixed-up value of $340,000, repairs of $50,000 and $40,000 for costs and profit, what is the most an investor can pay?
- A $290,000
- B $230,000
- C $300,000
- D $250,000
Show answer and why
Answer: D. $250,000
$340,000 minus $50,000 minus $40,000 = $250,000. Subtracting only one of the amounts gives the tempting wrong totals.
This lesson (made-up numbers)
Which statute section makes it unlawful to act as a real estate broker in Colorado without a license?
- A C.R.S. 39-13-102
- B C.R.S. 12-10-202
- C C.R.S. 6-1-1117
- D C.R.S. 12-10-203
Show answer and why
Answer: B. C.R.S. 12-10-202
Section 12-10-202 is titled 'License required.' Section 12-10-203 covers the application for a license, and 39-13-102 is the documentary fee.
C.R.S. 12-10-202