Licenses for Wholesalers? Let's Nip This in the Bud!

Recently, some states, most notably Ohio, have begun a "crackdown" on wholesalers for purportedly acting as unlicensed real estate brokers. This has caused some writers to recommend that wholesalers obtain licenses. While this may be a necessary "CYA" measure, it's ultimately nonsensical. Here's why:

Though they sometimes appear similar, wholesalers and licensed agents play radically different roles in the real estate marketplace.

Wholesalers approach homeowners with a value proposition of "I will buy your house quickly and for cash." While homeowners may or may not be aware of wholesalers' intention to quickly resell the property (often without taking title to it themselves), the homeowner does understand that the wholesaler, like any other buyer, is trying to get the best, i.e. lowest, price he can. The homeowner, of course, wants the highest possible price. Since everyone is aware of this inherent conflict between buyer and seller, there's nothing unethical about it.

Real estate agents, by contrast, approach the homeowner with a value proposition of "I will find a buyer for you and get you the best deal possible, for which I will be compensated by a commission." Precisely because homeowners entrust agents with the purchase or sale of valuable property, they are required to be licensed. The license is intended to guarantee a certain level of knowledge, professionalism, and integrity. A real estate agent who, for her own gain, tries to persuade a homeowner to sell far below market value is acting unethically and probably illegally. To put it another way: a license entitles you to act as an agent on behalf of buyers and sellers, but you can't behave like a wholesaler while you're doing it.

I am aware of only two ways in which one could be a wholesaler, and licensed real estate agent, at the same time.

The first would be to approach the homeowner as the buyer's agent, not the sellers. That solves the problem of pretending to be acting in the homeowner's best interest. But here, too, there are problems. A wholesaler who doesn't know which investor he's going to sell to isn't anybody's "agent," since there's no agency contract. Even if the wholesaler does know, if he tries to become the investor's agent, the same problem as with the homeowner happens in reverse. The wholesaler doesn't have the investor's best interest in mind; rather, the wholesaler wants the highest price while the investor wants the lowest. So this isn't a viable solution.

The only other solution is for the wholesaler to either hide, or downplay, the fact that he holds a license. Rather than calling himself a "broker" or "agent," the licensee can represent himself as a buyer to the homeowner and a seller to the investor, which, in fact, reflects the reality of the situation.

This solution, however, begs the question of why the wholesaler should hold a license in the first place. The easy answer is that some states, most notably Ohio, are cracking down on "unlicensed wholesaling" because their regulators mistakenly lump what wholesalers do together with what Realtors do. If this approach becomes a national trend, then wholesalers may in fact be forced to obtain brokers' licenses.

Let's hope it doesn't come to that. Apparently, the impetus for Ohio's and other states' sudden interest in wholesalers is coming from homeowners' complaints. These complaints almost always revolve around one or both of two major issues. The first, and most common, is wholesalers tying up properties for weeks or months by putting them under contract without actually getting them sold, thus costing distressed homeowners precious time. The second involves wholesalers pretending, either expressly, or by implication, to be agents whose job is to help the homeowner when in fact they are simply businesspersons trying to earn a maximum profit. The solution to the former problem is educating homeowners in the principle of "seller beware": don't tie your house up in a contract unless you're sure the deal will go through, or you've got plenty of earnest money. The solution to the latter is not to force wholesalers to obtain real estate licenses, which only muddies the water even more, but rather to draw a bright line between licensed agents, who act on behalf of buyers and sellers and facilitate interaction between them, and wholesalers, who act on their own behalf and buy and sell on their own account--even if they combine the two transactions in one closing, and walk away with a check.

The bottom line: it may be prudent in some states for wholesalers to obtain licenses as a safeguard against prosecution. But if you're involved in a transaction as a wholesaler, don't pretend to be acting as a Realtor. It's absurd - and unethical.