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I love ambitious kids. It never fails to impress me when I meet someone who has the whole world ahead of them and is ready to carve out their path. There have been times when youths (yikes, am I already that old?) have come to me for real estate investment advice. While I love to help investors of any age, dealing with investing as a minor has its own special challenges. But why is that? How old do you have to be in order to wholesale real estate?
Legally anyone under the age of 18 in the United States is forbidden from entering into a legally-binding contract. While there are no age stipulations that are directly associated with real estate investing, you won’t be able to find sellers, title companies, or lenders who are willing to enter into a contract with you.
I know it can be frustrating, especially if you’re mature for your age. But not all hope is lost—there might be a way for you to still become a real estate investor by bringing on a partner. We’ll get into that soon. First let’s discuss what I mean by real estate wholesaling and why we have laws to protect minors from being on the hook for predatory contracts.
What is Real Estate Wholesaling?
You source a property, pay for the property either through your own money or with a third-party lender, spend more money to upgrade and repair the property, then list it on the MLS and sell for a profit.
When you wholesale real estate, you never really own the property, you own the contract to buy the property. It starts the same way: source a property and begin the process of securing a contract that would pass ownership of the title from the seller to the buyer. But instead of you being the buyer, you as a wholesaler actually sell the option to close on the contract to someone else.
Wholesaling requires less money than other real estate investing business models as you don’t need to get a mortgage or spend money on costly repairs. Quite often, wholesalers will only be responsible for earnest money deposits (which are usually refundable) and maybe a few inspection or appraisal fees. These fees are often built into the purchase price for your contract, though.
Wholesaling is often appealing to those who have less-than-stellar credit or little capital to invest as you’ll rarely have to deal with the process of getting a mortgage or putting down a significant deposit.
So what’s the downside to wholesaling? Well, it’s not as profitable as other investing business models, as you’re trading money for time. That said, wholesaling can be lucrative for those who get into a groove and create a workflow that quickly moves multiple properties through their business.
In truth, for young potential real estate investors, wholesaling might be the lowest barrier of entry into becoming a young entrepreneur. So why can’t they start a business like this? Part of it has to do with CDs (Compact Discs, not Certificates of Deposit). Time to show everyone my age now…
The Columbia House Record Club Issue
Back in the 1980s and through the early 2000s, many of us were bombarded with mailers and magazine ads from a company called Columbia House Record Club. If you’re old enough, you might remember their too-good-to-be-true offers: Pick ten CDs from a list and pay only a penny to get them.
Before MP3s, wav files, or even midis, CDs were the most transportable way to get high-quality audio. Consequently, having a large cd collection wasn’t cheap; they usually ran anywhere from $15 – $20 a pop. You can imagine how enticing the idea of getting TEN CDs for only $0.01 would be for someone who isn’t used to looking for the catch or reading the fine print.
Since these ads went out to millions of homes, they’d catch the eye of minors who were both cash-poor and ravenous for their favorite music. Teenagers would sign up to get their CDs by giving their information, along with a signature and a penny physically taped to the inside of an envelope off to Columbia House.
While this might sound like a scam to you, in truth Columbia House would hold up their side of the deal and send the CDs their new customer selected. Here’s the catch, though: what these teenagers failed to understand was that by signing up to receive these CDs, they then agreed to become a member of Columbia House, which meant that every month they’d owe a subscription fee that was way more than $0.01. Suddenly, kids were told they were on the hook for monthly subscription fees that were more than their allowances could cover.
The promotional $0.01 was a loss-leader for Columbia House and was used to get people into the door. In all likelihood, it was probably difficult to cancel a subscription, especially if you’re a scared teenager who’s gotten in over their heads.
Columbia House ended up in court over this, saying that these kids entered into legally binding contracts with the company. Thankfully, the courts sided with the kids and said that minors are not beholden to any contracts they sign up for, whether they understand the terms or not.
In truth, the kids had a sweet setup: Columbia House was legally obligated to fulfill their side of the bargain, but the minors had no legal obligation to meet theirs. I’m not sure if Columbia House is around anymore, but if they are, they’re probably more discerning about their marketing tactics.
Granted, this wasn’t the sole reason contract law was written to protect minors. Still, I mention it because it’s a perfect example of why courts feel minors cannot practice the due diligence necessary to enter into a contract.
How to Become a Real Estate Investor as a Minor
So let’s say you’re a go-getting, ambitious minor who sees potential in real estate investing. What can you do to help move your business idea forward?
Unfortunately, until you’re 18, there’s no getting around the law forbidding you from entering into a legally binding contract. That said, just because you cannot sign on the dotted line doesn’t stop an adult from doing it. Consider parents, family members, or other guardians who might be interested in partnering with you.
It could be a tough sell since they would be the ones legally accountable for the contract. If you’re really that dead set on getting into real estate, this is a perfect opportunity to practice your selling ability. Come up with a business plan and pitch deck to show that you’ve done the homework that it takes to get ahead in this business. Offer a percentage of the profits and an exit strategy for them to exercise once you’re legally an adult.
Even if you can’t find an adult to back you, having this work done now will save you a ton of time later on once you’re able to strike out on your own.
In many ways, wholesaling is probably the best way for a young person to get started in real estate investing. It doesn’t require much capital, a high credit score, or even actual property ownership. Unfortunately, if you’re under 18 in the US, any sort of real estate investing is a non-starter due to contract law. But if you’re able to do your research and plan your business strategies now, you’ll be in a much better position once you’re legally an adult.
What aspects of real estate do you think a young potential investor should know about? Leave a comment and let us know.