Wholesaling in Michigan - Legality

13 Replies

Hello,

My wife and I are new investors. We are starting out by wholesaling around the Lansing, MI area. I am wanting to learn a little bit more on the legality of wholesaling in Michigan and what are some of the common (legal) issues/obstacles when wholesaling in MI?

Thank you all for your help and I am so happy to be here!

I would say the key legal concern is that you should never act like a broker.  It would be illegal for you to get a commission for selling someone else's property.  That is the job of a licensed Realtor.

On the other hand, you can make a profit off of quickly selling a property you own.  Or, you can sell a contract that gives you the right to purchase a property.

Aside from that one big one, be sure to get educated.  That will keep you out of most legal issues.

Also, consider buy & hold real estate.  Wholesaling takes a lot of ongoing effort.   Buy & hold is passive income.

Thanks @Greg Scott. Appreciate the advice. Our long term goal is buy and hold properties. Without much capital to play with now we are venturing into wholesaling as a way to build capital. We are creating our buyers lists and working out the final pieces to our direct mail marketing. We are planning on using an assignment of contract. Figured with a double close we would, naturally, pay double the closing costs. The privacy/anonymity of the double close is attractive but with us using a lot of our capital on the front end for marketing, we would like to minimize any other costs if possible. 

Do you know if title companies have issues with an assignment of contract? Is there anything perceived "shady" about that, from a title companies perspective? Or does it not matter to them?

Thanks again.

@Ed Potter

Welcome to BP. Wholesaling is legal in Michigan as long as you don't commit fraud by saying you're buying in cash and secretly doing an assignment. Since you're pursuing a double-close strategy, that's a safe option. Why don't you go hang out at your local REIA and make friends. Make sure you have the right contracts before you starting your marketing.

@Ray Lai

Thanks Ray! Thanks for the advice. I have just started to attend some REI groups in Lansing and plan to continue. Hopefully, build my buyers list up a little more as well as network with a lot of other experienced investors. I like the idea of a checklist before marketing. If it's not too much trouble could I take a look at some of your resources?

Thanks again.

I was also wondering if anyone knew about how the commission from a wholesale is taxed or could point me in the right direction to find out more.

In addition, would creating an LLC have any implication in the taxation of profits from wholesaling?

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Wholesaling in Michigan – Are you licensed?

Some states specifically address wholesaling within their statutes; however, Michigan does not. Instead, Michigan relies on the definition of a real estate broker and what type of activity requires a broker’s license.

Let’s take a look at what Michigan licensure law says about when “owners” of real estate must be licensed:

Licensure as a real estate broker is required of an owner of real estate who engages in the sale of real estate as a principal vocation, unless the owner engages the services of a real estate broker. Acts constituting a principal vocation include any of the following:

(a) Engaging in more than 5 real estate sales in any 12-month period.

(b) Holding one’s self out to the public as being principally engaged in the sale of real estate.

(c) Devoting over 50% of one’s working time, or more than 15 hours per week in any 6-month period, to the sale of real estate.

Wholesalers often say: I don’t take title to the property, so I’m not an owner. Correct. As a wholesaler, they are not an “owner of real estate” per se under the licensing statute, but they do own an interest in real estate by way of the purchase agreement which the wholesaler offers for sale or assignment.

If we read the licensing rule in conjunction with the definition of “real estate broker” under Michigan’s occupational code, we find a very broad definition capturing any individual or entity that:

…who with intent to collect or receive a fee, compensation, or valuable consideration, sells or offers for sale, buys or offers to buy, provides or offers to provide market analyses, lists or offers or attempts to list, or negotiates the purchase or sale or exchange or mortgage of real estate, or negotiates for the construction of a building on real estate; who leases or offers or rents or offers for rent real estate or the improvements on the real estate for others, as a whole or partial vocation; who engages in property management as a whole or partial vocation; who sells or offers for sale, buys or offers to buy, leases or offers to lease, or negotiates the purchase or sale or exchange of a business, business opportunity, or the goodwill of an existing business for others; or who, as owner or otherwise, engages in the sale of real estate as a principal vocation.

One frequent and notable misconception is that if a person only conducts the sale of real estate on their own behalf, as most wholesalers do, they are exempt from licensing. Some states do provide such an exemption, but Michigan--as you can see from the statutes--requires that a person carry a real estate license, even if they do not “represent” third parties, if they meet the prescribed licensing threshold.

As can be seen, Michigan’s licensing statute and definition of “real estate broker” do not directly address wholesaling; however, if you engage in the sale of real estate (or interests in real estate), the State of Michigan could find licensing is required.

Although enforcement action against those only selling their own real estate or wholesalers is not prevalent, if you actively engage in the sale of real estate as your principal vocation--whether as a wholesale or otherwise--you should consider seeking a license.

Final thought: If you are considering wholesaling in another state, keep in mind that each state has slightly different licensing rules for real estate professionals. Be cautious about seeking or taking advice from others not familiar with the real estate statutes in the state in which you will be conducting real estate activity.

Thank you for the wealth of information Clay. Definitely aware of some of the "gray areas" of wholesaling. Still actively looking. Have some lines out there waiting for some answers. Brother-in-law is a lawyer and waiting to see if he can connect me with any real estate attorneys. Want to ensure I am doing things by the book.

Licensing is definitely an option if we reach 4 deals and its less than a month. We also want to eventually branch out to buy and holds and that would greatly benefit us if we had a license.

@Ed Potter do a full disclosure . make sure you have "and or assignee". make sure that the seller is aware that you might assign this contract to someone else. In the end you are assigning piece of paper

My husband and I would like to start wholesaling in Michigan also (Grand Rapids area). There is a lot of great info in this post!

I see you posted this 4 months ago, have you been able to make your first deal yet?

Best of luck to you!

Hi Ed! How's the wholesaling business going since you first posted?

Hi folks! Well, the wife and I might try to venture down a different route. We are looking for our first BRRR! Just starting to look and working on securing some cash via hard money, private, or traditional. If anyone has any leads on deals or lenders in the Lansing area let me know!

Thanks for the inquiries folks!

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