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

Wholesaling
11yFollow

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

Ronald PerichPro Member
Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes

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.

3Reply
73 views

Most Popular Reply

Christian CarsonPro Member
Cleveland, OH · Member since 2011 · 400 posts · 223 votes
11y

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!

5Reply
See this reply in the discussion

43 Replies

Jump to latestLatest
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    11y
    Originally posted by @Braden C.:
    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. 

    This is a clear case of self-dealing. Some states, and I'm not familiar with FL, will reprimand (or worse) brokers for benefitting from another's (perceived or otherwise) loss.

    Who does a broker represent in this case? The owner? The broker Himself? It's these cases of self-dealing that create problems. I would bet that in OH, you will see new legislation when the first person who gets screwed for $10K by a broker selling "his" property in a "wholesaler" role complains that the broker didn't represent the OWNER in the transaction.

    Each state interprets differently. I don't wholesale, but have had the opportunity to "sell" courthouse "contracts" and believe that NC has several things right. Even with the state's restrictive lease/option...the crap scammers left the scene. As long as states keep it consistent, I'm personally ok with it.

    0Reply
  • Ronald PerichPro Member
    OP
    Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
    11y

    @John Thedford and @Braden C.,

    NAR Article 12 only applies to someone who is licensed, not to someone not licensed. What I really like about being a Realtor is the fact that they self-manage the enforcement of those holding membership. They keep their own reputation by going after those that don't live up to it.

    I am still trying to wrap my head around what others have said regarding if you are licensed, it's OK to advertise your property under contract. I think there is some confusion out there still. So let me ask the audience using a slightly different scenario:

    • I do not hold a license.
    • I get a property under contract with everything clearly spelled out (make tons of money, will bring people over to look it over, etc.)
    • I include a provision in the contract that I can sell this contract to another person.
    • I clearly state in the contract that I will advertise the property will be for sale.
    • I clearly state in my advertisement that if someone would like to buy my contract for the property, they may do so.
    • A flipper buys my contract for $5000 and then closes with title.

    So I am advertising that a property will be for sale, not that it is for sale. I advertise I am selling the contract to buy, not the property itself. Have I committed a crime punishable by certain death and dismemberment?

    0Reply
  • Braden C.
    Real Estate Investor · FL · Member since 2011 · 586 posts · 360 votes
    11y

    @Chris Martin 

    I don't disagree with you. This is why I put in all my contracts the following language "the buyer is a licensed real estate agent in the state of Florida and does not represent the seller". I also have sellers sign a "no-brokerage relationship notice". 

    I've done hundreds of deals and it's never been an issue, but I still protect myself just in case. We also close on everything we put under contract unless we missed a major issue during the initial walk-thru. 

    1Reply
  • Braden C.
    Real Estate Investor · FL · Member since 2011 · 586 posts · 360 votes
    11y

    @Ronald Perich

    Certain death, no... Dismemberment, maybe…

    Until the other thread started I've always been under the impression that you could wholesale without a license because of equitable interest, obviously that's not the case in Ohio. I believe now it's on a state-by-state basis but because it's being slung by every seminar around, I wouldn't be surprised to see it become illegal at some point in the not-so-distant future. 

    With no legal advice given, your scenario seems fine to me. 

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    11y
    Originally posted by @Ronald Perich:

    @John Thedford and @Braden C.,

    NAR Article 12 only applies to someone who is licensed, not to someone not licensed. What I really like about being a Realtor is the fact that they self-manage the enforcement of those holding membership. They keep their own reputation by going after those that don't live up to it.

    I am still trying to wrap my head around what others have said regarding if you are licensed, it's OK to advertise your property under contract. I think there is some confusion out there still. So let me ask the audience using a slightly different scenario:

    • I do not hold a license.
    • I get a property under contract with everything clearly spelled out (make tons of money, will bring people over to look it over, etc.)
    • I include a provision in the contract that I can sell this contract to another person.
    • I clearly state in the contract that I will advertise the property will be for sale.
    • I clearly state in my advertisement that if someone would like to buy my contract for the property, they may do so.
    • A flipper buys my contract for $5000 and then closes with title.

    So I am advertising that a property will be for sale, not that it is for sale. I advertise I am selling the contract to buy, not the property itself. Have I committed a crime punishable by certain death and dismemberment?

    In your scenario, in OH if a third-party foreclosure buyer like myself were to market the property where I as the "to be" buyer marketed the property prior to ownership where rights were sealed but title not granted, and buyer was not licensed, then I would be violating the law.

    What's interesting is that third party auction houses represent bank foreclosure (rights NOT sealed) and pre-foreclosure property (w/o OWNER consent), yet they are not the bank (they are their own entity) and they seem to be exempt from these "marketing" laws. They can say, 'well... we have a licensed broker representing us.' Indeed. Representing... the end BUYER or LIEN HOLDER, not the owner.

    So I'd contend there are OH laws for us, and then there are laws for those who are de-facto exempt (or the regulators just don't want to fight).

    Not to be construed as  legal advice Consult your own attorney for guidance.

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    11y

    The bottom line is: agents have a LOT more to lose than non-licensed persons. Agents have to answer to FREC and in some cases NAR. We have lots more requirements. We have required training. We have CE. We are open to inspection. Non-licensed people aren't subject to most of these scenarios and unless they do something really outrageous, more than likely they will never see the inside of a courthouse. Agents that mess up get to appear before FREC, can have their license taken away, and face huge penalties for violations. Given all this, I would still rather be an agent. I do enjoy helping people, love RE, and encourage anyone considering it as a career to do it.

    1Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    11y
    Originally posted by @John Thedford:

    The bottom line is: agents have a LOT more to lose than non-licensed persons. Agents have to answer to FREC and in some cases NAR. We have lots more requirements. We have required training. We have CE. We are open to inspection. Non-licensed people aren't subject to most of these scenarios and unless they do something really outrageous, more than likely they will never see the inside of a courthouse. Agents that mess up get to appear before FREC, can have their license taken away, and face huge penalties for violations. Given all this, I would still rather be an agent. I do enjoy helping people, love RE, and encourage anyone considering it as a career to do it.

    Licensed agents don't get treated like unlicensed folks in states like OH and IL. Not sure about FL. From www.com.ohio.gov/documents/Spring14REdiscipline.pdf ... for UNLICENSED ACTIVITY, "ordered to pay a civil penalty of $930,000.00 for ... renting, leasing or negotiating the rental or lease of the subject property..." and "...a civil penalty of $1,499,000.00 for "... renting, or leasing or negotiating the rental or lease of the subject property... " In some states, they stake the definition of brokering on your "gain" or compensation or attempt for compensation. In  some states that doesn't matter. In some states like NC, giving free advice can be considered practicing law.

    Always know your state law and local real estate practices.

    The above is not to be construed as legal advice. Consult your attorney for guidance and legal opinion.

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    11y

    I made two offers this week and we got an answer on one: "we have another offer so give us your highest and best by ....... Am I "self dealing". I am buying for my personal investment and gain. In my offers here is what I put: "buyer is a licensed sales agent purchasing for their personal benefit, for the least amount possible, with a profit motive. Buyer encourages seller to consult an attorney". That lays it out very clear. There is no mention of value (sellers often have their own idea of value) nor is there mention of any % discount off of "retail". What it does says is: I want to buy this. I am licensed. I want to purchase it as cheaply as possible. Get another opinion before you decide. Here is what my offers are: OPEN. HONEST. FULLY DISCLOSED. As far as I know, nobody has gotten upset or mad or disgruntled because I spell it out. They can simply accept, decline, or counter.

    2Reply
  • Jesse T.
    Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
    11y

    One possible danger of wholesaling as an agent is the transaction could be interpreted as a net listing.  Since the upside for the seller is limited to the original contract price and the agent has all the upside of the final selling price.

    0Reply
  • Mary B.
    Real Estate Investor · Lansdowne, PA · Member since 2013 · 1k+ posts · 656 votes
    11y
    Originally posted by @Ronald Perich:

    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.

    Ok, so in your senario, the licensee is a salesperson acting as principal with the objective to flip the contract for profit at a wholesaled price. Yet you didn't provide your brokers info in any of the advertisements and you aren't including the property on MLS nor splitting your profit with your broker of record. Is this correct? If so I see what you're trying to establish.

    Even as a real estate investor with a license in real estate(aimed to serve the investment business rather than the salesperson/broker side of things), there are still laws to follow as a licensee regardless. One being to put the brokers name in all advertisements and emails Another is the broker is the only one that can pay the licensee.

    I believe its a national requirement to hang your license with a broker, with the exception of the State of IL which only offer r.e. broker licenses.  If its not the State of IL that your license is in and you're not a r.e. broker then many real estate investors may very well be braking laws of their Commission. It varies of course how the laws are in the state of which the license is held and the state of where the property / properties are purchased if different.... Great topic. I'll definitely have to check back later to see additional responses.

    Kudos,

    Mary   

    0Reply
  • Luretta Marsh
    Columbus, OH · Member since 2015 · 1 post · 0 votes
    11y

    absolutely not

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    11y

    @Jeff S.Hah! You said: "If they (your non-double-closing Broker friends) have a buyer in mind then let them sell it. They have taken a risk because there is no guarantee their buyer will perform". 

    EXACTLY! No different from double-closing!!!!! (Yes, five exclamation points)...

    It is BLATANTLY obvious that your "smart" friends are not necessarily any more ethical than the double-closers that they snigger at. And Richard, you are in danger of being no better than a double-closer yourself if you seek to justify your Broker friends as having "higher standards" just because they are Licensed! [No legal advice given]. Cheers...

    0Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    11y

    If @Brent Coombs buying a property that is in need of repairs, paying cash, assessing the repair costs and marketing it to a group of investors (wholesaling) is unethical in your eyes, then so be it. They might be licensed but they could be unlicensed, it makes no difference. These are the wholesale deals I see.

    Some of these are found off market through marketing and some are bought at foreclosure auctions without seeing the inside, where the risk is significant. The point is capital is put at risk and they are legal. 

    Is this brokering properties? No, it is not. Is buying and selling contracts brokering? Maybe. 

    Can you be an idiot and tie up properties and harm people in the process with no money or knowledge? Yes, and you can call that wholesaling. Can an idiot buy properties for cash and make money? Probably not. Most idiots don't have money.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    11y

    @Jeff S.Where did you get the idea that it is ME who thinks that "buying a property that is in need of repairs, paying cash, assessing the repair costs and marketing it to a group of investors (wholesaling)" is unethical (whether licensed OR unlicensed)?

    All I was inferring is that regardless of the ethics question, the SAME ethics apply to double-closers (whether licensed or unlicensed).  I felt you were implying that the ethics used by your Broker friends was somehow "higher", but, I want YOU to understand that it is NOT higher!

    Your unjustified bias against double-closers was evident when you pigeonholed them as a separate group from your "smart" people by writing: "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". @Ronald Perichalready pulled you up on that if you recall.

    [No legal advice given, but my opinions ARE]...

    0Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    11y

    @Brent Coombs ethics many times are in the eye of the beholder. There will always be low or non-producing agents  that will accuse high producing agents of being unethical because they do a lot of business. If these top producers are smart they will make an effort to stay away from the edge of the laws and while they may employ "sales tactics" they will develop habits that keep themselves legal. 

    What are ethics anyway? I had a professor that said ethics are rules that are developed by people who have full stomachs that want to keep their stomachs full. In other words if you have no money your business models will be challenged by those that do. There are also good reasons why having "skin in the game" (putting capital at risk) is required by most people that would advise a seller in a transaction.

    I don't believe "wholesaling" in any of its forms is unethical. Unfortunately there are bad players out there that do damage to the industry and "wholesaling" is a perfect vehicle for them to operate in. 

    My point isn't about ethics, it is about smart business practices. And IMO staying farther from the line of the law is a smart business practice.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Jeff S.

      the Issue I have with wholesalers by and large is the attitude hey if it does not work I just don't close and am only out 100 bucks.. with little to no regard to the seller.

    I had more than one instance in PDX market that I bought a foreclosure at court house steps only to show up and the owners were in shock.. the nice guy that was going to wholesale their house had told them it was no problem they had it done its going to close don't worry about it.. those self serving you know whats just lied to these folks and they lost their homes.. And so many homeowners are just to naïve to understand some of this stuff.

    Its this type of behavior and transactions that will get the attention of regulators.. A RE agent at least would know the score and keep the people informed.. and if they needed to file BK they might have been able to do that so they could have protected some of the equity.. etc etc.

    It was the same with the foreclosure rescue company's that finally all got shut down.. they were the worse of the worse.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    11y

    Agree @Jay Hinrichs. That is a sad scenario. There isn't enough education for those getting into trouble when they can't afford legal advice.

    0Reply
  • Vanessa Blais
    Wholesaler · Port Richey, FL · Member since 2013 · 76 posts · 40 votes
    11y

    So let me see if I understand this correctly... the purpose of the license is to ensure that the agent/broker maintains a fiduciary responsibility to the seller, yet, at any time, the agent/broker can simply say, "I'm acting as a principal and therefore have no fiduciary responsibility whatsoever,"... so what exactly is the point of having the license at all?  How does it 'protect' anyone, buyer, seller, lender, et al... if the license allows the agent/broker to simply say "I am not bound by this license?"  

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free