William Bronchick | Is Wholesaling Properties Legal Without a License?
William Bronchick: You buy a property, you wholesale it, you
profit. Do you need a license to wholesale Property? In most cases, the
answer is “no”.
Real estate brokerage
is an activity regulated by states on their own terms, thus each state defines
which activities require a license. There is a lot of vagueness and ambiguity
in some of the state licensing codes, as well as “gray areas”, which complicate
the matter. Furthermore, if you vary the techniques and your business practices
beyond the scope of what I teach in my courses, it is not always clear how the
state authorities might view your practices.
Therefore, this discussion is limited to the simple act of buying and flipping as follows:
1. Sign a contract with a seller, assign it to
another investor
2. Sign a contract with a seller, sign another one
with a third party, then double close
“FOR ANOTHER”
The large majority of
states use the “for another” language in their state licensing statutes. The
“for another” language means the law provides a laundry list of activities that
require a license if you do it “for another.”
A good example is the Ohio Statute:
§
4735.01 Definitions. As used in this chapter:
(A) “Real estate broker” includes any person, partnership,
association, limited liability company, limited liability partnership, or
corporation, foreign or domestic, who for another, whether pursuant to a power
of attorney or otherwise, and who for a fee, commission, or other valuable
consideration, or with the intention, or in the expectation, or upon the
promise of receiving or collecting a fee, commission, or other valuable
consideration does any of the following:
The Ohio code then goes
on to list all types of activity, such as buying, selling, offerings, leasing,
negotiating, etc. This type of statute would clearly exempt you from doing any
of the listed activity so long as you were doing it on your own behalf. The
following court case clearly delineates the difference between acting on your own
behalf and acting as a broker.
In Xarin Real Estate v. Gamboa, 715 S.W. 80 (TX 1986), an
investor named Xarin entered into a purchase contract with the owner, Gamboa,
then assigned his purchase contract to a third party, Baker. When the deal blew
up, Baker sued Xarin claiming, among other things, that Xarin was illegally
acting as a real estate broker without a license.
The court ruled that
“No evidence exists to show that Xarin was acting for anyone but itself when it
sold its interest to Baker. Xarin was shown on the sales contract to be only
the purchaser and was not shown in any agency capacity… There is also no
evidence that Xarin acted for Baker when Xarin acquired its interest in the
property from the Gamboa’s. Generally, to establish that one person has acted
for another in a normal agency relationship, there must be an agreement between
two persons and one must exercise some control over the other.”
Two important points
are worth noting here. First, the court acknowledged that Xarin had “an
interest in the property” when it signed a purchase contract with Gamboa. As we
will discuss later, having “an interest” in real estate allows you to sell your
interest, which is specifically exempt from many state licensing laws. Second,
the court made an important point that the Xarin did not have a deal with Baker
in place when it made the deal with the owner of the property. This is
important because the reverse can also be true; if you make a deal with a buyer
first, then find him a property, a good argument can be made that activity is
brokering on behalf of the buyer said by William Bronchick.
CLEAR EXEMPTIONS
Other states that do
not use the “for another” language clearly identify specific exemptions in
their licensing statutes. A good example is the South Carolina statute, which
reads:
“This
chapter does not apply to:
The sale, lease, or rental of real estate by an unlicensed owner
of real estate who owns any interest in the real estate if the interest being
sold, leased, or rented is identical to the owner’s legal interest”
However, you must have
an interest in the property before you sell it. In general, a contract to
purchase property gives the buyer an equitable interest in the land. 27A Am. Jur. 2d Equitable Conversion § 10. Thus, if
you have an interest in the property, you are basically exempt from the
licensing regulations in these states.
TRYING TO SKIRT THE LICENSING RULES
While the basic types
of activity I have described is generally exempt from licensing regulations,
there are cases in which a license would be required. For example, if you
are finding buyers first, then shopping around for properties you can wholesale
to them, this could be essentially acting as a buyer’s broker. The
premises of my discussion assumes that when you go under contract with the
seller you do not have a buyer to assign or flip to, thus you are “at risk”.
REGULATION FOR ALL
A few states limit the
real estate activity of any persons, even if you are acting on your own behalf.
SD, MN, WI, MI, MD & MN all have limitations on the number and frequency of
real estate transactions you can do before you will need a real estate license.
For example, Michigan law limits you to 4 transactions per year, although it is
not clear whether using multiple corporate entities will be a workaround.
There’s few, if any,
reported cases of people being prosecuted anywhere in the country for not
having a real estate license. The issue of licensing is more relevant to the
enforcement of your profit. For example, if you assign your contract prior to
closing and expect the buyer to pay you at closing, he may stiff you and argue
“you don’t have a license”.
The bottom line is that
if you don’t act like a real estate broker, the state agencies that license
brokers will leave you alone. If you use the licensing exemptions to skirt the
licensing laws, you will likely hear from the state licensing agencies. It is
important that you make it very clear to all parties in the transaction that
you are not a broker and are acting on your own behalf. Sometimes having
a trusted advisor, attorney or mentor can
truly keep you out of trouble
Comments
Post a Comment