Birddog legality question :: brokering?

21 Replies

I have found a significant amount of info that leads me to believe that birddogging is not really legal since it brings buyers and sellers together. Doing that is highly regulated, and would be the equivalent of contracting without a license the way I understand it.

Please examine the verbiage below, and tell me what I am missing on this topic. Being a Manhattan real estate agent, I am acutely aware of the law and code of ethics that we have to adhere to, but the REI side of me wants to know what you guys think about whether this could be legal, and/or if it is a function of a loophole I don't know about.

Thanks! Terrence

PS the text below is not my writing.

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License laws
A lot of “real estate investment” techniques I hear about sound suspiciously like brokerage. This is one of them. One guru said he was “just a middleman” when he does flips. That kind of talk would make good evidence against you in an unlicensed-practice-of-brokerage prosecution.

To do a brokerage deal, you must have a brokers license or be a licensed salesman and be affiliated with a licensed broker. Laymen tend to believe that they can finesse that by simply not calling themselves brokers. Not true. The law has a doctrine called “substance over form.” It says that the courts will look at what you do, not what you call it. If what you do looks more like brokerage than investing, they will demand to see your license and hold you to the standards of behavior of brokers—most notably a fiduciary duty to the client. Flipping looks a lot like bringing a buyer and seller together for a commission. That’s brokerage.

Furthermore, it not only looks like unlicensed brokerage. It looks like a “net listing.” A net listing is one where the seller says, “Just get me X dollars. You can keep any amount above that.” Net listings were illegal in New Jersey when I was licensed there. They are ethically questionable everywhere because of the powerful conflict of interest regarding the setting of the asking price. Normally, the broker has a fiduciary duty to recommend no less than market price to the seller. But in a net listing, the broker has a strong temptation to recommend less than market so he can increase his take.

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I refer potential deals to investors, and I charge a referral fee to do so. This is legal in all 50 States. I charge more for any research I do or leg work involved. Your examples above refer to someone "retailing" properties or the confines of such. I'm a wholesaler if I put a property under contract below market or retail, and refer or assign the contract to an end buyer or investor for an assignment fee, this is legal and has been a legal way of doing business for decades involving other types of transactions also. The IRS says you are a Dealer if you flip enough properties, but the law doesn't stipulate you have to be licensed to do so, nor does the IRS. Now if they change laws to stipulate that if you buy or sell such and such a number of properties as a dealer and sell them at market value OR wholesale value, you have to be licensed, then we will get licensed. If I were doing enough referrals or being classified as a dealer by the IRS, i would want a business entity name and structure set up to benefit from tax advantages as well irregardless, but as an individual, I am not required to. Birddogs are simply referring potential deals, it's the substance of what they do, not brokering or acting as an agent for anyone. Now if they say they broker or represent the buyer or seller in the actual transaction, and have not been hired and specifically licensed to do so, they are breaking the licensing laws as you say. Normally, I don't put properties under contract, I just find out if the owner needs or wants to sell, do my diligence on it to be sure things are what they say they are and then refer it to an end buyer who pays me a referral fee at a predetermined amount or rate, again, all below market or retail. I'm a specialist because I do more research and look up comparable sales in the area surrounding the property, sometimes even having a Title company to help me but again I don't have to be licensed to do this either or the companies or homeowners that give me the information would require it. This is why most information on properties and ownership is available from public records, so anyone (FSBO's) can buy or sell their homes without having to have representation or a license to do so. You as a agent or representative, contracted by a retail buyer or seller, and licensed to do so, are subject to the laws and standards required of you as such, I am not. I would suffice to say, if you call yourself a bird dog or referral specialist or jobber or wholesaler, and that is what you actually do by the aforementioned descriptions, you are still operating within the spirit of the law and what it was intended to be and should not have legal problems. If you or someone you know is agonizing over this, consult with an attorney to be more sure if you desire to since my reply here is not intended as legal advice, just common sense. -Thank you.

Both opinions differ from my understanding of the law. That may be because there isn't one set body of laws for real estate. It differs from state to state.

However, in my state, it is illegal to give a referral fee from a sale to anyone who does not have a real estate license.

The original post, however, quoted someone who was talking about "flipping", not bird dogging. To flip a home, you actual put in under contract and have equitable interest in the property. The quoted source missed that fact. Now, agents still have laws governing their behavior when they sell a property they own, but that is a different matter. With the exception of that one point, the equitable interest voids the writer's entire argument.

The posted question was on bird dogging, however, and license law here, and probably where you live, forbids it. This is not an IRS issue. What the second poster wrote was common sense, and common sense rarely has anything to do with law. :wink:
Selling real estate is over-legislated. I don't like it. I wish it weren't true, and if someone can point to their state laws and show me I'm wrong, I will salute him.

EDIT: Looking at the second post, again, I see he references "potential" deals. If that is the case then I believe he is operating within the law--as long as his payment does not hinge upon a deal actually closing.

Most states real estate licensing laws are very similar. Now in reference to Texas' real estate licensing laws, here's the text directly from the Texas Real Estate Licensing Act for what a broker is:

"a person who, in exchange for a commission or other valuable consideration or with the expectation
of receiving a commission or other valuable consideration, performs for another person one of the following . . .

. . . (viii) aids or offers or attempts to aid in locating or obtaining real estate for purchase or lease;

(ix) procures or assists in procuring a prospect to effect the sale, exchange, or lease of real estate; or

(x) procures or assists in procuring property to effect the sale, exchange, or lease of real estate . . ."

Now there are a couple exceptions, if you are directly employed by someone who has an interest in it or if you are doing it for a close family member then you are exempt.

By the technicalities of the law, bird dogging is a violation of these laws. Wholesaling, in which you have an equitable interest in the property, is not regulated by the state's licensing laws since you are technically selling your own interest in the property.

Now there is another side to the whole birddog argument. Investors normally use birddogs that are people with occupations that will bring them into contact with vacant properties (i.e. cablemen, utility company employees, newspaper delivery people, etc.). Investing is not their job and the likelihood of someone like this being prosecuted for referring properties to someone would be very unlikely.

I have seen some discussion about the legalities of someone offering a referral fee for deals, and I would say technically it would violate the RE laws if you pay that fee to an unlicensed person. Now as the laws read, the one in trouble is the person receiving the fee and not the one paying it, and again I would be surprised to see any actual legal action taken against anyone in these circumstances.

With all that said, I am not an attorney, and I would recommend that you consult a qualified attorney in your state about these questions.

P.S. I pay $1,000 referral fee for properties. :D

What exactly makes birddoggin illegal, the fact that you are acting as a realtor bring buyers and sellers together, or the money aspect. I guess I dont really understand why its a problem to bring buyers and sellers together. My goal is to birddog on the side so that eventually I can start wholesaling instead, plus there is much less risk and complications.

If you need a license what type do you need, a real estate license?

You are generating the sale of that property by finding buyers and sellers. You are the "procuring" cause of the sale and are receiving funds for it. You can call it a fee for service or whatever you like, but under the law, it appears as a commission and you put the people together as is regulated of licensed real estate agents.

I did this for a while up until I realized how far over the line I was. People call it a gray area and I can't agree anymore. If it acts like a duck, walks like a duck and quacks like a duck, then it's probably a duck.

As Ryan was saying, I don't see legal action coming up against someone for this, unless you find an agent who is pissed because you're taking the commission that he's worked to be qualified to receive without doing any of that yourself or you piss a buyer or a seller off by not handling the deal well and it being exposed. You really have to be careful of everything you do to keep your butt covered. But in that case, why not go ahead and get your license and do something different than most realtors in investment real estate do? Why don't you take care of the investors well by giving them solid information under the legal parameters of the law and keep all of you safe?

That's the decision I made and while I didn't want to do it at first, I'm glad I did now.

That was a part of what I was wondering... whethter any of you birddoggers went ahead and got your RE license. After all, it's very inexpensive compared to potential penalties (not that I know what they are...).

One of the things that brought me into RE in the first place was some of the stuff I read about birddogging. It made me think, wait a minute, doing all this work, and not even having the resources that a RE office has must be pretty hard. Then I started to research the difference between the two, and found very little, and was afraid to do any birddogging.

That piqued my interest in RE, and the license was affordable, so I went for it. I dove into RE, and forgot all about birddogging until now.

Thanks guys!

I'm not sure that having an agent's license would help. Wouldn't you need to have a broker's license, or at least have a broker officially in on any of the deals (and presumably taking a cut) to make it less "illegal?"

You must become a licensed salesperson before you can become a broker. As a licensed salesperson, you work under a broker and their license. That is your protection.

If you're working with an agent and do not have a license, you'll have a little more cover for yourself to make it look less illegal, but, you're still doing the same thing as a broker, and would be better off getting the license and covering your butt. There's no point in taking a risk when you can cover yourself and your customers by getting your license.

I would highly suggest talking with a real estate attorney to ensure you cover yourself and avoid the problems that could come in working without one.

I'm not sure what you mean with your question, but every property that you locate and sell runs through your broker and you are paid by him, because you are protected by him.

This doesn't mean that you can't purchase properties on your own, but the brokers license & insurance cover them and the agents who work for them when deals go down. If you're selling a home, it must be run through your broker. But, if you're buying it yourself, renting it out, wholesaling or anything else, then you shouldn't have to run your deals through them. Check with your local state laws on this, as I'm not an attorney, but that's my understanding of Indiana's state laws.

I'll repeat that I did not want to get my license at first and was irritated about having to do so. But, now I'm glad I went ahead and finished it up now after meeting with several attorneys.

Originally posted by "landchasers":
But, if you're buying it yourself, renting it out, wholesaling or anything else, then you shouldn't have to run your deals through them.

But you don't need a RE license to do any of those things. I would say that if it is something you don't need a RE license for, then it doesn't need to go through a broker, but if you do need a RE license to do it, then I would think it would have to go through the broker. That's why I don't see how having a RE license without a broker's license is helpful to an investor (unless he/she also wants to be a real estate agent, but that's a different issue).

You have to get a salespersons license and hold it for one year in Indiana, and I believe every other state, before you can get a brokers license. If you're going to birddog properties, as they were suggesting, and if your attorney advises you to go in this direction, then it's a necessary step in the direction of getting your brokers license.

According to what I've read in the law and my attorneys have told me, it's essential to have your RE license if you're going to birddog and stay out of trouble. This doesn't mean you're going to get into trouble if you don't have one, but you're taking a risk that is unnecessary.

Originally posted by "landchasers":
According to what I've read in the law and my attorneys have told me, it's essential to have your RE license if you're going to birddog and stay out of trouble. This doesn't mean you're going to get into trouble if you don't have one, but you're taking a risk that is unnecessary.

Hmmm, I wonder why that would be. I would think that as a licensed agent you would be held to higher standard legally and ethically. If transacting bird-dog types of deals does fall under the category of things you need a license for, and you were doing them without the approval of a broker, I would think you'd be looking at more trouble than the typical (unlicensed) bird-dog.

The problem is that as a birddog, you are the procuring cause of the sale. That's the specific job of a licensed agent and if you don't have one, you're in a dangerous position. As a licensed agent, I can sell real estate or birddog it, as well as do everything you can do as an investor, but I have the protection when selling a property as a birddog does.

I fought getting my license and didn't for over a year and now couldn't imagine not having one for some of the aspects of what I do and how I do it. It provides me with protection I wouldn't have otherwise.

I'm a newbie, so please bear with me.

What if you were getting an option to buy, or signing a purchase contract, which allowed you the right to assign your interest to another party? Would that really be classified as wholesaling, and not bird dogging, or, are they one and the same?

So if you had your real estate license, is it possible to do bird dogging on a property and selling it as well? In other words, can you receive a referral fee and your regular commission as well?

I am a newbie and this is my understanding of the licensure requirements for practicing real estate as it applies to investors.

If one is not a principal in a transaction, one has to have a license in Illinois. You are putting buyers and sellers together in a property transaction and getting paid for it. This requires a license.

When you are wholesaling a property - assigning or "selling" the contract to a buyer - technically you are not a principal in the transaction because you have not closed with the seller. So long as you close and are a principal, you do not require a license.

With regard to bird-dogging. the "Real Estate Act of 2000" in Illinois, talks of words like "customer" versus "client" etc. and, talks of "activities not rising to the level of 'agency' or brokerage".
I would think that wholesaling and bird-dogging does not rise to the level of "agency" or "brokering" a transaction.
But the prosecutors at the department of professional regulation or someone sueing you for it - which like the others say is unlikely, to which I agree - can probably get you with the technicalities of the law.

If you get a sales license then you have to work with a brokerage and give them their cut of the commission. Now, after this, if you find a property on your own and, do the analysis on it for a buyer and, the buyer is willing to pay you the fee for it - either by putting together a contract with an assignment clause - wholesaling, - or simply giving the information to the buyer, bird-dogging - technically, the fee the buyer would pay you, would have to be routed thru the broker and the broker must get his cut. The salesperson must be paid thru a broker. Am I right ?

This defeats the purpose of setting up business as an investor i.e. of doing wholesaling and bird-dogging. And, if one wants to do wholesaling and bird-dogging one would have to be a broker and get a brokers license, not just a sales license - this in my opinion is an overkill to do the investor activities of wholesaling and bird-dogging.

It seems like I will have to get a sales license first. Then I can bird-dog and wholesale along with my broker - make sense ? Please correct me if I am wrong.
It doesn't make any freaking sense to get licensed to do bird-dogging or wholesaling but since it is regulated the way it is, we have no choice but to work with a brokerage with a sales license or get a brokers license, which one cannot get until you get a sales license.

The crux of the matter is, can wholesaling and bird-dogging be technically differenciated from "agency" or "brokerage". I mean in the event you get sued, can you win the case by changing lets say your job title and things like "customer of a business person" versus "client of a broker or sales agent" and saying things like "I am not an 'agent' of this principal - my intention is to 'be' the principal"- wholesaling - & "I am in the business of giving information - bird-dogging" and the "buyers are my customers not my clients to whom I have a fiduciary duty towards" etc etc.

I am trying to see if I can do wholesaling and bird-dogging without a license. I have not as yet enlisted an attorney to work on this in detail in Illinois to find out whether the specific activity of wholesaling and bird-dogging can be exempt from licensure - I have only spoken to an attorney and I was told that to be safe I should get a license. But in terms of time, money and effort of getting a sales license first and the outcome i.e. having to work with a broker should have a pay back that is proportional to the work you put in as a wholesaler or birdogger.

I mean is it worth it to get a sales license and then, if so, how do you setup the agreement with the broker for your wholesaling and bird-dogging activities ? That is, in terms of pay and agreements etc. Is it worth it ?

Has anyone checked with an attorney with regard to this and got a precise answer ?

Thanks