Is it illegal to simply assign contract as a non-licensed investor in PA?

Question

A real estate attorney @ one my REI groups talked about the legalities of wholesaling in Pa and he said that negotiating the sale and simply assigning the contract via back to back closing for a fee is acting as a R.E. licensee, thus illegal for non-licensed investor.  He said to get around this use a "Release Fee" in the contract to be received post closing.  Anyone heard of this? The Attorney also said that when you do a back to back closing as middle man you are paying double transfer fees.  So, do you have to do a simultaneous closing?  I'm just not exactly sure how to put this all together.

Steve Babiak · Answer

The PA Dept of Revenue expects to be paid two sets of transfer taxes even on an assignment of contract.  Some wholesalers look for what they call "investor friendly" title companies that won't charge that "extra" set of transfer tax; I don't consider that "investor friendly" because the end buyer is the actual one putting up the money and as such is the true investor - "wholesaler friendly" is more appropriate for that sort of title company.

The problem is that the PA Dept of Revenue is auditing transfer tax payments.  A seller that I helped ended up getting an audit letter on a deal they sold that was the classic 60% to 70% of ARV minus repairs, so a 90K ARV property needing 35K to 40K of work sold in the low 20Ks.  PA wanted transfer taxes on 90K, or an explanation.  Same letter was sent to buyer and title company too.  This seller almost sold using a wholesaler so the audit could have triggered somebody having to come up with that "extra" set of transfer tax if they used a "wholesaler friendly" title company.  And PA could put a lien on the property - guess what, the investor gets stuck with that.

But assignment isn't illegal, you just have to be prepared to pay extra transfer tax.  and if you are already paying the extra transfer tax, then maybe a double close makes sense (it might not still make sense because you have to come up with transactional funding, and you have to get title insurance, and you will be recorded on title in any subsequent title search).

I believe that you were at a presentation by attorney Brad Dornish - correct me if I'm wrong - who was the first person I heard mention using a release as a way to circumvent transfer taxes.  I was at one of Brad's presentations with a very experienced investor; when we got to discussing using a release afterward, this experienced investor suggested to not make it a habit because then you appear to have intent to just circumvent the transfer taxes and the state of PA won't be happy with that.  One thing that @Chris Martin mentioned was the HUD1 where all fees must appear; the release fee can appear on the seller side of the HUD1 so a buyer using bank financing can get that fee paid at closing since it comes from the seller's proceeds (almost like paying delinquent property taxes).

Here's another thread where somebody explained how they used a release - but in another state but same concept applies:

http://www.biggerpockets.com/forums/223/topics/140...

A simultaneous closing is still two separate closings, so still two sets of transfer taxes; some use that term to indicate that no transactional funding is involved (only end buyer's funds show up in the two sets of closings).

As an end buyer, I expect the wholesaler to actually pay that extra set of transfer taxes at closing, because i sure am not ending up having to pay that!  And I don't want any collection letters or liens from the PA Dept of Revenue either.

Chris Martin · Answer

One thing I can say with certainty. Each state in our country has different sets of laws regarding brokerage and agency. Knowing the law in the state(s) you operate is extremely important. Regarding any fee(s) paid outside closing (and presumed to be off the HUD-1)... if the end buyer is receiving financing from a GSE (Government Sponsored Entity, like Fannie Mae) you should know RESPA inside and out. @Steve Babiak  is a good resource in PA for transfer tax stuff that I can't competently comment on. In general, get as much knowledge as you can about a given subject before talking to an attorney. But, honestly, in the end a competent PA attorney representing your interests (not a room of REI) should be the resource you employ if you have any legal question marks about your RE activities.