Ethical Questions Regarding Wholesaling Real Estate

Ethical Questions Regarding Wholesaling Real Estate


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As in any field of business, real estate professionals sometimes ponder the ethical ramifications of various practices. Indeed, there are specific, ethical questions regarding wholesaling real estate.

So, what are the key factors of the ethical dilemma that faces real estate wholesalers?

 

Buying Very Low, and Selling High

As opposed to “flipping,” the practice of real estate wholesaling involves acquiring property at very depressed price levels and then selling it without having made any upgrades. A case of being a “pure middleman” is the way some people view wholesalers. So, are these transactions akin to what typical retail wholesalers do, or are they more like taking advantage of uninformed sellers? Any time a middleman is present a wholesale deal is likely taking place.  This encompasses everyday retail deals such as clothing stores that sell merchandise at retail prices which was purchased from a distributor at a lower rate as well as scalpers who buy tickets from sellers and then resell them at a higher price to buyers.  The wholesale-retail model explains this process as taking place any time a product is purchased at one price then resold at a higher price without having altered the product in any way.

What’s So Different About Real Estate?

One might wonder why there are any ethical questions regarding wholesaling real estate. When a real estate wholesaler buys from a highly motivated, and sometimes misinformed seller, there is the potential for this ethical question to arise. If you, as the wholesaler, know that the selling price is way below market value, is it your obligation to inform the seller?

The legal answer is, “No, you don’t have an obligation, as long as you’re not the seller’s agent.” If you disclose to the seller what your actual role is, then you’ve fully met your legal obligation in most cases. Depending on your moral beliefs, this type of business transaction might present a problem for you. Or, it might not. Legally, there’s really not much of a question as long as you let the seller know that you are an investor who buys properties and sells them for a profit.

 

There are Two Sides to the Question

Even though wholesaling, a legal practice in every state, is not against the law, many people involved in the real estate business view it as either unethical or totally okay. Here are the basics of the two positions:

  • Side one: It’s 100% okay. In other words, there are no ethical questions regarding wholesaling real estate. As some people word this argument, “A real estate deal is a real estate deal. That’s that.” If a seller offers a property for an amazingly low price, who knows what the reason might be? Perhaps the seller is in desperate need of fast cash for a pressing medical bill, or just wants to make sure of a hassle-free, fast sale. That’s the seller’s business, not the wholesaler’s. People sell cars like this all the time. A quick glance at local Internet sales sites reveal all sorts of ultra-low-priced retail goods: cars, trucks, appliances, and jewelry sometimes listed at less than half the going market price. “Divorce” sales, the need for vacation cash, the desire to execute an instantaneous sale, and other reasons are often behind these “fire sale” prices. It’s the same in the world of real estate.
  • Side two: Wholesaling is unethical because the seller often is uninformed, under mental stress, or doesn’t understand all the options. Ethical business professionals should, at the very least, explain the pricing environment to the seller, even if that means possibly losing the deal.

 

The Final Verdict

It’s up to each person to make a decision about how to handle the ethical questions regarding wholesaling real estate.  It is ultimately the seller’s responsibility to research their own property and know it’s market value or to seek professional assistance with establishing what is a fair price for the home.  It is also the responsibility of a morally sound investor to inform the seller of his role in real estate, which is to make a profit.

 

While most real estate investment companies are morally upstanding companies, there are a few that are not.  If you are considering selling your house to a real estate investment company it is wise to research the company and know what they stand for and how they do business.  Emmaus Property Investments, LLC for example, has a strong moral and ethical foundation and pride themselves on conducting business honestly and honorably.  While they do participate in wholesale deals, it is always at the benefit of all three parties: seller, investor and buyer.

 

For more detailed information on how wholesale deals work in Georgia click here.

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