As I'm studying for me RE license, I'm paying close attention to the definitions/reasons for needing a RE license (Or not needing one). Wholesaling does seem to check out so far because, technically, you are not selling real estate. You are selling your rights to purchase that home. (Your contract/A piece of paper) You have a separate contract (Assignment contract) stating that. Bird dogging however, (If I am understanding the process correctly) may be illegal because you do not have a contract to purchase this house yourself and are bringing it to another purchaser and asking for a fee for connecting the two of you?
I bring this up because I considered bird dogging as an entry point. It was mentioned at a weekend RE traiing I went to. However, I felt it was too close to wholesaling, just much smaller profit. The only additional work needed between the two was the paperwork from what I understand. The paperwork does seem intimidating to learn, but at the same time, this is the difference between making hundreds of dollars(Bird dogging) or making thousands(Wholesaling)
The answer has my curiosity...
I'm new so maybe I'm just missing something here...
I know that in my state you have to be careful if you are offering on behalf of others for the sale or purchase of real estate, exchange of properties, negotiation of rents or leases, collecting rents, listing property for sale, writing and presenting offers, negotiating options, conducting auctions, advertising real estate, prospecting for clients and customers.
For sure find out what the laws are in your area and follow them. It's not a bad idea to sit down with a real estate attorney and have them look over your marketing and your contracts. Maybe work within an LLC with a licensed agent. Or you could wait until you have gotten your license and not have to worry about it anyway - sounds like you're right on track! I got my license a little while ago and it has helped in many aspects. Good luck!
Yes, I was very surprised to see that you could work within an LLC with a broker or salesperson to avoid needing your own license. When it says this, is it talking about any transaction or only certain types of transactions allowed through this?
I am getting my license just so I do not have to worry about doing anything illegal. The lines are too fine for me... In my opinion it sounds like one heck of a definition battle if things were to ever get taken to court...
@Jessica Martin Despite rumblings about this (especially in Ohio) I have never heard of a case where penalties have been levied against someone for wholesaling or bird dogging. I hardly think bird dogging is illegal...I see it on two levels: 1) A good way to learn RE markets 2) A good opportunity to build relationships.
That said, my take on wholesaling is that it is a necessary evil, but can can certainly help those in a tight spot. If you are going to do it, take title to the property and double close...assigning contracts is really unprofessional.
Originally posted by @Brandon Sturgill:
" If you are going to do it, take title to the property and double close...assigning contracts is really unprofessional."
Would you mind expanding on this thought a bit? I'm also researching getting into wholesaling and it seems that there really is no standard for how it gets done. Thanks
Why is assigning a contract unprofessional, if you are disclosing that up front, to the potential seller? It doesn't seem to be illegal, immoral or unethical, so to me it does not appear to be a problem. But then again, I'm new to this, so I may not totally understand.
Although I took my classes over 10 years ago in the state of NH, I remember that licensed agents have a fiduciary responsibility to those who they work on behalf of..... that being said, I would think, it would be necessary to disclose to a seller in a potential wholesale deal, that although you are a real estate agent, that you would not be "Listing" their property or providing any services that would bind you to a fiduciary responsibility to them (or receiving a commission from either party) when attempting to make an investing transaction with them. If you decide to wholesale a property, I would explain the process, as well as your role, and include a disclosure that frees you from any responsibility to represent the seller.
Don't know if this is correct or makes sense, as I said, it was a long time ago when I learned about agency and agent ethics. This may also vary from state to state. I just think that many people who are not well versed in real estate may mistakenly think that if you are licensed that it somehow prevents you from being personally involved it the transaction of the property and expect you to work in their best interest.
Just re-read my post and wanted to include that I decided not to become licensed. Did not want the fact that I took the classes to cause any confusion.
Also, @Brandon Sturgill , I am curious to know why you view assignments as unprofessional? Is it not similar to banks selling a mortgage note? They are essentially assigning their interest in a property to another financial institution.
Another example to illustrate could be car dealerships, when we "Trade In" our car, we are essentially accepting very low compensation for our property (car) with the knowledge that the car dealership will sell it on the "used" market and most likely realize a profit. When we sign our auto title over to the dealership and that dealership then assigns it over to one of their used lots, it becomes a very similar comparison and is widely accepted as a "professional" business model.
I have yet to get to the part of the course that teaches ethical rules, exc. I will base the way I conduct business from those guidelines of course. If need be, and if considered ethical in this business, my husband may just have the responsibility of carrying out those transactions instead so that there is not confusion. I'm def a "by the book" kind of person. I just have to learn all rules, laws, and ethics to decide how to conduct my real estate agent career as well as the investor side.
Before I started studying, wholesaling did seem possibly unprofessional and a bit sketchy, but after reading the laws I have so far, everything checks out to be completely legal. So as long as it is legal according to the state, I don't see a problem with it now.
@Jenny Pena Good comparison. I personally think wholesaling should be as discrete as possible for the sake of the seller and the end buyer. If you are assigning, you are completely exposed on the HUD-1 to all interested parties. It's easier for everyone involved if you keep it simple...bottom line, you get compensated reasonably for your work, and everyone gets a good deal.
...and no one shows up at your house at midnight with a shotgun because you just made $20k on their property for "not doing anything" in their opinion.
I don't have a license and don't plan on getting one. Won't need it since my wife will have it. Which means I can do the deals she shouldn't be a part of due to any agent/broker ethics.
Yeah. I haven't done a wholesale deal yet but good to know about HUD-1 papers will state that... From the training we've gone through we were under the impression you do not tell the seller... That's what made me feel uncomfortable about it and like it was somewhat "sketchy"..
Experienced investors... Do you tell your seller up front?
@Mark Beno just check out my response to @Jenny Pena . This is just a matter of opinion. IF you are honest and upfront with the seller, that is good. It is my opinion that you retain a higher standard of professionalism if you constantly solve buyers problems and provide your investors a fair deal. Nobody needs to know what you make from wholesaling. Keep it simple.
@Jenny Pena To contradict your examples: both the Bank and the car dealership fully PURCHASE / FUND the property prior to reselling it. The dealership takes full possession, so that the end buyer knows for certain they can buy the vehicle.
In the case of wholesale reassignment, the first contract-holder never takes possession. In fact, often times they do not even give a earnest deposit to seller. Think of this like selling a vehicle to Joe Blow on Craigslist and leaving the title open... He's going to sell it to someone else and make the profit without ever putting his name on the transaction. Although this is illegal, even an open title is more desirable because he has possession and the seller is out of the picture!
I do agree with @Brandon Sturgill .. contract reassignments are unprofessional. There are several time sucks from both ends. In a reassignment, as a buyer I have a hard time suing for specific action should the seller back out. As the seller, I have little to no recourse against the original contract holder to hold the new assignee responsible... In order for this to be fully-binding the seller, original contract holder, and new buyer would need to agree.
Whenever you have to ask the question: "How would this go over in court?" You probably want to re-think the way you are doing it...
Oh yah, and being a licensed agent and a wholesaler is a big no-no. Brokers are not real happy with agents who decide to start wholesaling... lots of issues from a professional / legal standpoint.
EDIT: All of that said I am a broker... and buy property re-assignments from wholesalers fairly often. I am not against the practice, but do find it unprofessional without a double closing. Wholesaling is a necessary evil and there is money to be made for everyone.
Regarding ethics, don't expect to get a clear understanding from a book. As you can see by responses, some find assignments perfectly acceptable and others find them offensive, even llegal.
In general, I am not pro or con regarding assignments. I have no idea what is legal or illegal in other states, but since you're in Texas I can assure you there is nothing illegal about proper assignments in Texas. They have been happening in the commercial arena since the beginning of time. In fact, I'm assigning a property I currently have under contract, although admittedly I seldom assign contracts.
With that said, when selling my flips, my contracts specifically prohibit an assignment by the purchaser...period. Prohibiting assignments is an easy way to solve the problem for anyone who finds assignments offensive, unethical, immoral or illegal.
On the buy side, assignments can be problematic but it's more often caused by newer investors who go to a weekend seminar, get pumped up and go out on an assignment binge with little or no guidance.
Running a product driven business means you buy low and sell high (WalMart, Costco, HEB, etc.). How much I make on a deal does not determine the ethics of my transaction. I am proud when I make a ton of money with little or no effort. It means my years of education, thousands of hours of research and my marketing is paying off. I didn't create the seller's problem, but solving it creatively allows me maximize my profit. After all, if I pay too much and lose money do I have the right to go back to the seller and ask for some of my money back? No, business is about acting on opportunities and mitigating risk.
Bottom line for me is this Jessica. If you get to the point where you feel guilty about how much money you'll make on a deal, please call me...I'll be glad to take the deal, solve a problem and get paid dearly...kind of like doctors and lawyers do.
BTW Jessica, I'm a broker and investor, and with proper disclosures and a properly drafted contract there is no problem with acting under one hat or the other..just not both at the same time.
I admit that there has been sketchy situations, my opinion is as with anything, due diligence is key. Wholesaling's purpose is to provide a burdened property owner with a compensated exit strategy. I do feel that it is good practice to disclose to the seller that wholesaling the property may be in the plan, and that there will be a profit involved. Wholesalers do work. They invest their time, they market, they network, they do put money into making deals happen, just not in conventional ways. I will agree that no EMD is bogus and unlawful.... I would have to argue that the seller would then have recourse because the contract was not valid without EMD.
This is straight from the TREC and pretty much kills the idea of birddogging in Texas:
Q. May I pay a finder's fee to someone to drive around and look for vacant houses for me to purchase and renovate?
A. You may only pay a finder's fee, which would be the same as a commission, to a person who is a licensed real estate broker or salesperson. Under the , a license is required for a person to procure or assist in procuring, for a fee or other consideration (commission), property for a prospective purchaser of real estate. Anyone performing these services without a license may be charged with and convicted of a criminal offense as well as being assessed an administrative fine for unlicensed activity.
Just a side note...E/M is not required to have a legally binding contract is Texas as long as all other contractual elements are present. I've disclosed on many occasions, I, and most investors I know, frequently purchase properties with no earnest money involved. Granted, when there is a listing agent involved the dynamics of this changes for customs, not legal reasons.
Thanks @Brandon Sturgill for the comments. This is good stuff.
I appreciate all the responses and perspective on this subject. Thank you all
For BP members in Texas, I think the question was answered. For others, here is another topic that may be of interest: http://www.biggerpockets.com/forums/311/topics/144023-finders-fee-for-non-agents-illegal
In this court case, http://law.justia.com/cases/new-york/other-courts/2010/2010-20104.html there is a good discussion under the heading "Distinguishing Brokers and Finders" that is worth the few minutes it takes to read...
Thanks @Guy Gimenez , I understand that each state is different, I tend to speak more to my own circumstances where it is required. Maybe, I need to come to Texas then, LOL.
Just curious...does MA specify the amount of E/M required? For instance, a percentage of the purchase price or some other formula? Interesting how different state laws are concerning these matters.
Massachusetts Law is deeply rooted in "common law" and so... if I am correct...
(insert "I am not an attorney disclosure here)
it simply states that "consideration" is necessary for a contract to be valid.
Consideration is defined as anything "of value"..... so there is no set amount.
So I suppose I could even put up the family cow and some magic beans! LOL
Just a side note:
I have read many recorded transaction records at the county registrar that show
"$1 as consideration"
in order to validate a transfer of property between family members.
UGH.... why was my last post double spaced?!
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