Being a licensed agent means the law doesn't apply to you?

43 Replies

Let me preface by saying I have a genuine interest in the answer and I'm not trying to stir up the passions more. I'm really just trying to understand where my logic is faulty.

Here's the scenario.

The big thread right now is http://www.biggerpockets.com/forums/93/topics/1847...

Several on the the thread stated that you get into trouble if you are brokering a property without having an ownership interest in the property and you are not licensed.

In this scenario, I advertise "I Buy Houses Fast". As a side note, I have my license but I don't advertise that on my bandit signs. (I'm stirring a bunch of passions up here, aren't I)

A person, we'll call him Brian Gibbons, calls to discuss a property he wants to sell right away.

As he describes the situation (he needs the money right away to buy an alpaca farm), I realize I want to buy this property and make him an offer that's 50% of ARV. He is so impressed by me that he decides 50% ARV is too much - why not go 45% instead!

Our contract clearly states I am a licensed agent, but in this transaction I am acting as a principle. It clearly states in big bold letters that my intention is to make a ton of money off this thing when I sell it. It clearly states I am going to begin to market the property for sale immediately after Brian signs. And it clearly states I have the right to assign (sell) this contract to another party at any time without recourse. And my earnest money is $1.

I go onto Craigslist, Backpage, Facebook, Instagram, my personal website, and every other site I can think of to advertise this property for sale. I put up bandit signs all over the neighborhood (this time with a tiny * that says I am licensed but acting as a principal) advertising it for sale. 

Joshua Dorkin is driving along looking for bandit signs (one of his passions is taking pictures of them to hang in his basement). He sees my bandit sign and wonders if this could be the property he was looking for. We meet and he buys my sales contract for 75% of ARV.

If I understand what everyone was saying, because I am licensed I have committed no foul. If I wasn't licensed, I would get into all sort of trouble.

Maybe my logic is flawed, but I think the law allows agents to broker transactions where they shouldn't be able to.

1) I have clearly stated I am acting as a principal, not as a licensed agent. (I essentially give up any right to act as an agent).

2) If you are not an agent, you are not allowed to broker transactions.

Therefore, as a principal I am not allowed to broker a transaction on the property.

So in the scenario above, I have broken the law. I have no ownership in the property, I have clearly given away my rights to act as a broker, yet I brokered it anyway.

However, the law is written in a way that says I can do this. It gives me a privilege others do not have. Kind of like the "accredited investor" Bryan Hancock writes about.

I think Ben Leybovich had it correct. The industry is all-powerful and with deep pockets and will protect their interests at all costs. It may not be fair, but it is reality.

So my logic must be flawed, my understanding of the law is flawed, and I readily admit I am flawed in a bunch of ways. Please help me understand where my flaws exist.

Your premise is flawed.  If you have a contract on this property then you have an equitable interest in this property and can legally do everythng that you wish to do. 

Where this gets a little murkey is the details of how you close this deal   This is also a great example of why you need a real estate lawyer on your team to keep you out of trouble.  I live in Pennsylvania and next to OH we have some of the strictest laws in this case.  The only thing I need to do is to register my contract.  Once registered, I can get paid right on the Hud 1 for releasing my rights to the property as if it were a lein.  I can even do this when my buyer is getting bank financing.  Its all in the paperwork that the lawyer creates.

For most states, you dont have to go as far as I do. In most states, all you need is a contract on the property and you are good to go. 

Make sure you contact your local lawyer and ask him what you need to do to be legal in your area, but there is no magic.  If you have a contract then you are covered unless your area has some other hurdle to deal with. 

To your success

Josh

@Josh Caldwell so you are saying that the folks in the referenced post were incorrect? Many said that you cannot "advertise" the property without a license as that is considered brokering. And you cannot broker without a license.

Even if they are correct, I think I could advertise by saying "I am selling my contract to buy property 123 Main St" for $XXX. That would clearly show that I am selling the contract and not the property.

From the seller's perspective, I don't like the assignment clause. I would want to know with whom I am doing business and I don't want to give up that right. As the buyer/wholesaler, I love the clause because I want plenty of exit options.

@Ronald Perich - right on! This entire topic is a function of realtors not wanting the competition. Those who want to fight that fight will loose. Besides, there are tens, hundreds, and millions of dollars trading hands in RE - why you'd wanna build a business model out of walking over those dollars to get to the cents is beyond me. Wanna make commissions, get a license, it's easy!

@Josh Caldwell - nice try. If you think that brokering securities, which a contract is, will go unnoticed where double closings do not, you are kidding yourself. They may not have started there, but it'll get to that - I promise. If they can't get you for selling without a license, they'll get you on securities law.

Is it worth the risk just so you can pull a property off of Loopnet and send it to me? Just happened the other day! Hah - c'mon guys - wholesaling is standing on its last leg...Get a freaking license if you must. I turned mine into the State (Ohio), cause I haven't used it in 3 years. I am an investor; I invest. I let licensed agents make money on me, and they bring me ****... 

@Ben Leybovich

I am no lawyer but I do use 9 differant real estate lawyers in my city and they agree with me. I wasnt guessing. I consult lawyers pretty often. The joy of running a REIA is that I get a ton of free legal advice. I may be wrong, but it is highly unlikely.

Ohio is the outlier.  I know what you guys are going through in OH.  I wouldnt wholesale in your state.  I remember when Vena Jones-Cox first told me about the whitch hunt that your state was going through.   I also know about OREIA's efforts to fight it.  OH is a lot differant than PA when it comes to real estate law.  You guys are leading the charge in a bad direction. You really have two choices, find a new way, or get a license.

to your success

Josh

@Josh Caldwell - yes, Ohio seems to be on the front lines of this. I disagree that others won't follow. Fact is realtors are wise to how much money they are leaving on the table as long as wholesaling is legal, which is why they are working hard against it.

Be as it may. It doesn't bother me either way. I don't wholesale, nor ever want to. Whether I agree with the State or not is beside the point. I'm not arguing that. All I am saying is that realtors will win this fights, and any other they decide to engage in - this is a hell of a powerful lobby! To think that in time other states won't follow is naive - they will follow the money. It's a tide that's happening, and in my opinion, players everywhere are well-advised to recognize what's going on...

Interesting angle @Ronald Perich . The brokers I know that wholesale all close on their properties then may wholesale them. They don't do double closes. 

If your seller doesn't object you probably won't have a problem. If he complains and you have a license then you will have a problem, one of which could be the question of why you choose to hold a license in the first place. Licenses aren't designed to give an investor an edge for their own pursuits; they are designed to "help" the public market their properties, negotiate terms,  and set up escrow to safeguard their funds.

Some of your assumptions are wrong. In Florida, an agent may not advertise property for sale under that circumstance. At this time, I have a condo under contract. It is not advertised because I don't have title to it yet. If I was advertising it for the owner, with a listing contract, it would be for his benefit. However, I have a contract for purchase, so my advertising would be for my benefit...BUT I DON'T OWN IT. I have fully funded it with the title company, but the title has not been transferred. I would be in BIG trouble and jeopardize my license if I advertised it under these circumstances. In Florida we are governed by FREC and believe me: they don't take infractions lightly. As in your ad, if a licensed agent has a sign or ad stating "we buy houses" that same ad MUST disclose they are an agent and also what brokerage they work under. These are two  assumptions in your post I found with just a quick glance without reading the entire post at are incorrect. As for buying under value from a seller who originally called about a listing, I don't see a problem with that as long as everything is disclosed. Not every seller is concerned with getting the highest price. Every now and then, the only thing they are concerned with is making their problem (property) go away quickly. As far as flaws  or lack of.....it appears you have perfect typing and spelling skills:)

@Ronald Perich It is looking very much as if there is NOTHING wrong with your logic. @Ben Leybovich seems to have summed it up well: "This entire topic is a function of realtors not wanting the competition", and "- this is a hell of a powerful lobby!"

And to @Jeff S. , who are your Broker friends kidding when they tell you they "all close on their properties then may wholesale them. They don't do double closes"? Pretending to be MORE ethical than double-closers? Every one here can see that even if that IS their ethical philosophy, how many of them have still ended up closing first, then only waiting until the NEXT day to flip!? 

Yes, "Licenses aren't designed to give a (Licensed) investor an edge for their own pursuits" - but who is going to stop it happening?!!! [No legal advice given]...

It's been debated for decades. People on both sides will still be talking about it ten years from now.

I do not really care what wholesalers do. I focus on what I do with my business.

How close do they want to get to the flame before they get burned in the pursuit of the dollar?? It's their life so let them justify whatever it is they are doing and take the chance.

NAR is a powerful organization. Not everyone in the country is a REALTOR. The state commissions do not care about NAR as they are viewed as a third party organization. The state commission cares about protecting the interests of the general public and enforcing license laws.

@John Thedford thanks for the clarification. I'm beginning to see where I may have misinterpreted what folks in the other thread were saying. But I'm not so sure.

I think @Ben Leybovich has stated it correctly (don't let it go to your head) that this is really a matter of keeping control over a marketplace. It's the same as the auto dealers association fighting Tesla's model of not having dealerships - protection of their interests. 

I'll be honest, the strategy of selling my interest in a contract is way down on the bottom of my list. My business is buy-and-hold and soon to be buy-and-flip. I like Michaels Quarles' model of wholetailing if the property is good enough for re-sale. I chose a long time ago to follow Sharon Vornholt's pattern - buy and double close/simultaneous close. I want full protection on title and a clean move of the money through third-party hands.

And I don't want to see my name in the paper under the Police Blotter section.

However, and this statement probably is controversial to some, I don't think having a license makes you any better at negotiating or creating opportunities or doing right by your clients. Or from being a lying, cheating SOB. 

The fact is, fraud is fraud, being a jerk or cheat is freely available to anyone. And while being part of the licensed community is more likely to get you caught and criminally prosecuted, that license doesn't make you any more ethical than the gal putting up those crummy bandit signs.

When I go to my REIA meetings, it's readily apparent who has been shut out by the investing community. You blow your reputation in a market, you're going to get shut out. The investment game is very good at regulating its own, and probably better than any state-run license board.

Originally posted by @Ronald Perich :

@John Thedford thanks for the clarification. I'm beginning to see where I may have misinterpreted what folks in the other thread were saying. But I'm not so sure.

I think @Ben Leybovichhas stated it correctly (don't let it go to your head) that this is really a matter of keeping control over a marketplace. It's the same as the auto dealers association fighting Tesla's model of not having dealerships - protection of their interests. 

EXACTLY!!!

Originally posted by @John Thedford :

Some of your assumptions are wrong. In Florida, an agent may not advertise property for sale under that circumstance. At this time, I have a condo under contract. It is not advertised because I don't have title to it yet. If I was advertising it for the owner, with a listing contract, it would be for his benefit. However, I have a contract for purchase, so my advertising would be for my benefit...BUT I DON'T OWN IT. I have fully funded it with the title company, but the title has not been transferred. I would be in BIG trouble and jeopardize my license if I advertised it under these circumstances. In Florida we are governed by FREC and believe me: they don't take infractions lightly. As in your ad, if a licensed agent has a sign or ad stating "we buy houses" that same ad MUST disclose they are an agent and also what brokerage they work under. These are two  assumptions in your post I found with just a quick glance without reading the entire post at are incorrect. As for buying under value from a seller who originally called about a listing, I don't see a problem with that as long as everything is disclosed. Not every seller is concerned with getting the highest price. Every now and then, the only thing they are concerned with is making their problem (property) go away quickly. As far as flaws  or lack of.....it appears you have perfect typing and spelling skills:)

John, I am not saying you're wrong, but can you show me a case of where a broker has received any kind of punishment for advertising a wholesale deal prior to closing? I know LOTS of brokers who do this, in fact some of them advertise wholesale deals on MLS BEFORE they have purchased the property. You are the first person who I've ever heard say you can't advertise a deal in Florida that you have an equitable interest in.

Again, I am not saying you're wrong, I'd just like to see where the DBPR or FREC has clearly outlined this rule. 

@Brent Coombs it is hard to know where you are coming from because you have hidden your background. In Oregon it is very questionable whether wholesaling is legal or not. It is up for interpretation. There are lawyers here that want to fight this in court, at the expense of some wholesaler of course, that are saying it is legal to sign an EMA and assign it and make a profit. The question really becomes is this a way of doing business or a one time thing. 

The people I know have capital and can make good on their offers. That is entirely different then some broke individual tying up some unsuspecting individuals property and is unable to perform w/o a real buyer in the waiting. Even then if the wholesaler is honest and upfront about what they are doing, they may have a lot less problems than one who misrepresents that they want to buy the property but can't.

As always there will be ways around the laws and there will always be slimy individuals.

There are also people operating in this space that have lost their licenses and continue to operate and actually have lots of capital; so having money doesn't make them good or legal.

@Jeff S. No disrespect intended to any specific Broker friend of yours. But by them telling you that they won't do a double close, but may end up wholesaling it some day, to me seems akin to: "how do you know when a politician is lying"? (when their lips are moving)...

Do you seriously believe that every time they close, they NEVER know who their next Buyer is going to be? That's where I was coming from. Cheers...

@Jeff S. I appreciate your comments, and I certainly have nothing but respect and admiration of your experience. But if I might be sold bold as to ask how intentions or experience have anything to do with the legality of wholesaling? I wouldn't think it matters if I had a cash buyer who always closes at the end of the deal or if I was new and had nobody lined up. If the act of marketing a property I don't own is illegal, then it is... 

And I'm not so sure it is in every state, but a lot of people on here are sure saying it is.

@Joel Owens

you are correct these laws or the enforcement of laws that have been on the books since you first needed to get licensed in RE have nothing to do with NAR or Realtors @Ben Leybovich as Ben is alluding too  RE 101 is commission does not get into commission disputes.. the issue here are being generated by complaints either by RE folks or the public. and the the states follow up on them.

@Jeff S.

  State of Oregon has some nice people working there and if you do things by their rule your fine step over the line and you will be down in Salem in a heartbeat defencing yourself and I can tell you as a Oregon RE broker.. the act of putting a home you do not own on craigs list and representing that you are the seller is a licensed activity and you have no defense..

State of ORegon went very hard after private lenders that were making loans with out NMLS license ( of which I am one of those as well) Oregon requires NMLS license for any loan on 1 to 4 regardless of who borrows or what purpose.. I was having some of the bigger private lenders coming into my office with their cease and desist letters.

NOw for people doing wholesaling in this state if you have a pattern of this and get wrung up your going to get fined no ifs ands or butts.

@Josh Caldwell

your side of the coin comes from running a REIA were you make money trying to teach non licensed people to act as investor realtors.. and of course the simple answer is to just close then resell but I for one take the opposite view as you as seeing this cleaning up the industry not going in a bad direction.. this is a proud industry with a lot of folks that dedicate their lives to this career do their CE pay their E and O give proper disclosures etc.

For those that just want to jump in with no training or licensure because they learned it at some REIA meeting and have 32 days of experience .. that just turning a bunch of uneducated ( in the ways of RE) unregulated ( and some have very limited character) lose on the general public.. and we all know the crooks out there... And many get away with it for years and years.. A bad RE broker or agent gets a complaint and if its verified they are punished and or get their licenses revoked.... happens every month. So I take the opposite side of the coin for sure.

Account Closedaccording to my broker. They state it is an ethics violation. I have questioned that and when i have time will call the legal hotline and ask for an opinion. 

@Brent Coombs  nobody has told me anything. I know some who take the laws very seriously and they aren't doing double closes or assigning options or EMA because they are good at what they do, and don't want scrutiny from anybody. This activity has become too questionable for the smart players to do. If they have a buyer in mind then let them sell it. They have taken a risk because there is no guarantee their buyer will perform.

@Ronald Perich the reason I mention the intent thing is because I have been interviewed by the Oregon RE Agency about some activity that a group here was doing because they tried to snag me into their dishonest web. The agency has lots and lots of complaints. When they investigate they want to prove a pattern of dishonest dealings along with violations of Oregon statutes. Chances are if you are above board and people aren't hurt you may just have a discussion. If people are hurt or claim to be then the discussion takes on an entirely different flavor.

But...like they say ignorance is no defense

Account Closed

in our state Oregon.... You may put it on MLS with explicit written permission from the owner.... But again what the RE and MLS allows and what are state laws are two very different things... Just because MLS allows it the state may not.

Then you have the RE Board which is separate from MLS...

Its much like when I am building a new housing subdivision even though I own the whole property.. my lots are not recorded yet ( Plat recorded) so I may not advertise specific lots for pre sale ( as much as I would like to ) I can just do a generic MLS listing. ( which I do)

@Jay Hinrichs I believe we can do that in Florida too, but I've never tried. I completely understand what you mean though regarding MLS rules and state laws.

@John Thedford I think your broker is more than likely confused with the process or confusing it with a net listing. Whereas a net listing would have an agent enter into an actual listing agreement with the seller, not a P&S contract. Regardless, if the process is done properly, it's not against any rules. My attorney, who handles all of our double closes and assignments, was on the FREC board for many years. He would've probably at least mentioned something to me especially since he has a very good understanding of our business model.

Account Closedjust got more clarification from my broker. If a broker or their agents are not members of a local board and not members of NAR they can advertise in this manner. According to my broker (who teaches ethics and is the current president of the board in Ft Myers) advertising property you do not own is a violation of article 12 of NAR's Code of Ethics. This is different that FREC which is the state agency. Either way, I want to be as up front as possible.

@John Thedford That's great, thank you for getting the clarity from your broker. I read article 12 and will copy and paste it here 

"Article 12 – REALTORS® shall be honest and truthful in their real estate communication and shall present a true picture in their advertising, marketing, and other representations. REALTORS® shall ensure that their status as real estate professionals is readily apparent in their advertising, marketing, and other representations, and that the recipient of all real estate communications are, or have been, notified that those communications are from a real estate professional."

I don't disagree with you that ALL advertising must contain the brokerage and disclose you're licensed. I don't see though why you can't resell a property you have under contract (maybe we've been talking about two different things this entire time). You said previously you have a condo under contract but you can't resell it until you take title. Maybe it's just me, but I don't come to that conclusion based on what your broker referenced. 

There are a couple things going on in Ohio. Remember, we're operating with a backdrop of ground zero of the real estate foreclosure crisis, where shysters descended in masses to buy up cheap properties for speculation and letting them rot (without paying their property taxes!) The government is simply responding to the excessive amount of fraud and deceit that has arisen in the market in the last ten years. "Scheming" is not looked upon with kind eyes here.

Wholesaling is an activity that is very often done with the intent of deceiving the seller (and sometimes, the buyer) in order to collect an excessive commission. I wrote a BP blog article recently describing how a relatively mundane wholesaling transaction could get the wholesaler in trouble for fraud. "We Buy Houses" signs not only often violate city ordinance, they can also be misleading if you are not the end-buyer in the transaction.

Ohio has a fairly strong Consumer Sales Protection Act ("CSPA"), where any kind of bait-and-switch activity or deceit can land a business in very hot water. Even sending a mailer out that deceives the customer into thinking it's something other than an advertisement is a violation.  Selling a service that a consumer can get for free is also a violation. The law authorizes the Attorney General to go after persons and businesses violating this law, because the unsophisticated consumer may not be able to defend his/her rights as effectively as a state government. Since the enactment of the CSPA, the state has managed to effectively shut down thousands of scams.

The catch for wholesalers -- and the state -- is that the CSPA exempts real estate transactions. This prevents the state from using a significantly effective tool in regulating the amount of fraud and cheating that occurs in the industry. The perceived solution is to try to control it using the division of real estate -- require people dealing in real estate to obtain a license. Then additional ethical standards must be followed, and discipline is easier to mete out through an administrative proceeding.

This is not just some kind of draconian measure designed to promote market protectionism -- it's one of the only ways the state can effectively regulate the real estate marketplace. Just reading newbie posts on BP can give you a strong indication that fraud and scams are absolutely rampant among wholesalers, not to mention the emails I have in my inbox of wholesalers trying to sell me properties that were already listed on the MLS!

Account Closedmy broker says i cannot put it in the MLS and advertise it because I don't own it yet. Maybe I could advertise that it is under contract...but either way...no problem waiting till we get title and then I will advertise it. I am not in that big of a hurry and don't need to sell it to fund something else. Made 2 offers this week without any being accepted...so moving on. Just found two different ads on CL...both blind ads. Both are agents that didn't post they are agents, that the properties are listed, and their brokerage. Typical..sad to say.

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