Is wholesaling actually illegal in Ohio?

11 Replies

Full disclosure: I am a licensed real estate broker in Ohio. I am also an investor. I have done lots of research on the practice of wholesaling. I must say in my opinion this practice (in most forms) is at a minimum shady, and at a maximum an illegal way to screw over an un-educated home owner. I am putting this information out there because I don't think most wholesalers understand that they are breaking the law. Though most of them are profiting, very few are ever getting caught. Now that I have your attention, let me explain.

I just read this article that was put out by the Ohio Association of Realtors (so consider the source). It has really made me re-think the wholesaling practice that I see lots of investors doing. Though most unlicensed investors probably hate the licensing laws, they are LAWS, and practicing real estate without a license is illegal. In Ohio it is illegal for an individual to Sell, exchange, purchase, or negotiate the sale, exchange, purchase, of any real estate for another, for a fee, without first obtaining a real estate license. That means if you are not a principal in the transaction, you can not negotiate, sell, or market real estate and collect a fee. So signing a contract to purchase real estate from someone, and then marketing that contract to another person for more money is illegal unless you have a license. If you have a license, it is also illegal, because you are not acting in the clients best interest, you are acting in your own. If you know you can sell the property for more money to someone else, then you are acting outside of the cannons of ethics for licensed real estate agents or brokers. 

From what I see in my market in Columbus Ohio, most wholesalers work outside the laws, and run the risk of being caught, though unfortunately most don't actually get caught. It is my stance that you should obtain a license, and or practice your investing business within the laws. If you must operate outside the laws to profit, there is a problem with your business model. Not to mention, I hope you can sleep at night knowing that the only reason you profited was because you took advantage of some poor seller that does not know what is actually happening. 

If you tell someone "I will buy your house fast, for cash" then actually buy their house. If you are actually going to re-sell that contract to buy that house to someone else for a higher price, then do it above the table and disclose that to everyone involved in the deal. I started this article with a full disclosure, because in my opinion that is the only ethical way of doing things. Wholesalers that operate outside the laws in my opinion are worse than used car salesmen selling lemons. When I see bandit signs, and yellow letters that say "We buy houses fast, for cash" I want to take a marker and write on them "But only if you agree to sell it for less than what it is actually worth" because that is full disclosure. 

Ok, now that I have probably upset most wholesalers, tell me why I am wrong. Thanks!

If you follow the law, then yes, wholesaling is illegal under the Ohio cannon of ethics. This isn't a OAR position, but a division of real estate stance, and they have actually gone after wholesalers.

Will you get caught wholesaling? Likely not, but I'd be very careful and cautious of it. Getting your RE license is pretty darn easy and cheap, so I don't see the benefit in trying to skirit the laws to save $1500 or so to get your license.

But then, that's not why people wholesale.

If you'd ask most wholesalers, at least ones  starting out, you'd realize they're trying to break into real estate because they have virtually no money and wholesaling is the current get-rich-quick-scheme that the gurus are pushing. 

Originally posted by @Benjamin Vail :

Full disclosure: I am a licensed real estate broker in Ohio. I am also an investor. I have done lots of research on the practice of wholesaling. I must say in my opinion this practice (in most forms) is at a minimum shady, and at a maximum an illegal way to screw over an un-educated home owner. I am putting this information out there because I don't think most wholesalers understand that they are breaking the law. Though most of them are profiting, very few are ever getting caught. Now that I have your attention, let me explain.

I just read this article that was put out by the Ohio Association of Realtors (so consider the source). It has really made me re-think the wholesaling practice that I see lots of investors doing. Though most unlicensed investors probably hate the licensing laws, they are LAWS, and practicing real estate without a license is illegal. In Ohio it is illegal for an individual to Sell, exchange, purchase, or negotiate the sale, exchange, purchase, of any real estate for another, for a fee, without first obtaining a real estate license. That means if you are not a principal in the transaction, you can not negotiate, sell, or market real estate and collect a fee. So signing a contract to purchase real estate from someone, and then marketing that contract to another person for more money is illegal unless you have a license. If you have a license, it is also illegal, because you are not acting in the clients best interest, you are acting in your own. If you know you can sell the property for more money to someone else, then you are acting outside of the cannons of ethics for licensed real estate agents or brokers. 

From what I see in my market in Columbus Ohio, most wholesalers work outside the laws, and run the risk of being caught, though unfortunately most don't actually get caught. It is my stance that you should obtain a license, and or practice your investing business within the laws. If you must operate outside the laws to profit, there is a problem with your business model. Not to mention, I hope you can sleep at night knowing that the only reason you profited was because you took advantage of some poor seller that does not know what is actually happening. 

If you tell someone "I will buy your house fast, for cash" then actually buy their house. If you are actually going to re-sell that contract to buy that house to someone else for a higher price, then do it above the table and disclose that to everyone involved in the deal. I started this article with a full disclosure, because in my opinion that is the only ethical way of doing things. Wholesalers that operate outside the laws in my opinion are worse than used car salesmen selling lemons. When I see bandit signs, and yellow letters that say "We buy houses fast, for cash" I want to take a marker and write on them "But only if you agree to sell it for less than what it is actually worth" because that is full disclosure. 

Ok, now that I have probably upset most wholesalers, tell me why I am wrong. Thanks!

So I am a little confused, are you against wholesalers or just anyone who buys a property at below market value?  

I am an investor here in Columbus and I buy 3-4 discounted properties per month through my direct mail and website.  I am not a wholesaler, I pay cash for properties and I do close fast... but I certainly DO buy at a discount.  I am not a realtor, I do not have a listing agreement with the sellers and I have no obligation to pay the seller retail price for their property.  It is amazing the different forms of motivation that people may have, but I can't tell you how many people want to sell cash instead of dealing with an agent.

@Brandon Schlichter , the Ohio Associaton of Realtors canon of ethics is not law. It doesn't matter what the canon of ethics say. What is important is that the Ohio Revised Code chapter 4735 says it's illegal to wholesale without a license. It doesn't ever use that term, but the language makes it clear.

@John Horner , buying a property below market value is totally legal. You buy from distressed sellers all the time, and you add value by improving the properties. That's good business. The Ohio Real Estate Commission is concerned with unlicensed wholesalers who tie up a property in contract with little to no money, then assign the contract rights for a profit. That is viewed by them as predatory and unfair. In the case of most wholesalers, that's exactly what it is. There are, of course, wholesalers who operate legally (with a license) and ethically, but they are not in the majority.

@John Horner I am simply against wholesalers who don't actually purchase the property, but flip the contract. Especially if they don't disclose that to the seller they are negotiating with, that they never plan on purchasing the property. That is what is illegal. From what you describe that you do, I am in favor of. I made this post because I believe some investors are getting involved in this illegal form of wholesaling, and don't know that they are breaking the law. Keep up the good work! 

Benjamin... I agree with everything you said, except that I understand that an unlicensed person may aquire a right to purchase a property, and then sell that contract. However, he or she may not market the property. Plus, the individual must have both the intention and the ability to perform under the contract.

Thus, the vast majority of wholesale in Ohio is illegal. Very few wholesalers have the ability and intention to actually perform (buy) under each contract they enter into. If it ever goes before a court, they would simply count all of the wholesale deals and ask how many you actually purchased.

By their own admission, most wholesalers get into the business precisely because they do not have the funds to buy anything.

And of course they are taking advantage of a distressed owner. This is why wholesale is always illegal for a licensed agent. All agents in Ohio have a legal duty to put the interest of their clients ahead of their own, and to be fair and honest. Thus, if I know your property is worth $50,000, it would always be illegal for me as an agent to instead find you a $30,000 buyer without making a good faith effort to sell at or near fair market value.

Benjamin, you seem to have a very strong opinion... My primary income is wholesaling real estate in Indianapolis. Our investment market in this city relies on wholesalers. There are people who don't know what they are doing that give us a bad name, but that comes with the territory.
I would not say that I have ever taken advantage of any sellers and I sleep at night just fine. In fact a lot of the time my assignment fee is less than what a realtor fee would have been. We don't lie to anybody, and we only put deals under contract that we know are going to sell immediately.
I'm sure you've heard people say "you make your money when you buy, not when you sell," so why is it so hard to believe that investors are willing to pay a premium to people who find them those deals?

I agree with "some" of your points @Benjamin Vail . If you can't fully disclose what you are doing (and how much you will profit from it), that is a definite problem. If you are using deceptive practices in your marketing, that is a problem. What I DON'T see as a problem is buying a home for much less than it's worth and selling it for a profit. 

I say this respectfully but there are certain situations where wholesalers are the "only" option for a quick sell. I see a LOT of shady stuff going on out there and I think it's only a matter of time before more states crack down on it.

agreed @Benjamin Vail

disclose what you are doing with the property to the seller

there are wholesalers in my market that have lots of complaints against them with the BBB because they only say we buy with cash and then cant find a buyer then disappear

I see wholesalers ( those that flip contracts and don't purchase the property themselves) "adding value" to the market in a couple of different instances.  

1. The assignment fee is less than the standard 6% commission (which of course doesn't exist as all commissions are freely negotiated and it's just an incredible coincident that 98% of commissions are at 6% and that the majority of Realtors refuse to show properties listed by "discount" real estate brokers).

2. In lower priced properties that Realtors are not interested in representing 

3. In hard to sell properties with small markets such as properties needing a large amount of repairs that most Realtors have no experience in representing

4. In country properties where an active multiple listing service does not exist.

5. In 2 - 4 unit properties where Realtors may not have the training or knowledge.

6. Where a very quick sale is required and/or a sale without a fully warranted title needs to take place.

Anything promulgated by the National Association of Realtors, or any of their affiliates will have a bias attached. The NAR is NOT an agency representing consumers or home sellers, or home buyers. It is a trade organization representing it's membership. As such it's positions should be regarded with the same suspicion one would regard the positions taken by private corporations and unions. Further, many of the state laws making wholesaling illegal (which are not actually laws passed by the state legislature but are rules put into effect by state real estate commissions) were "suggested" by the NAR state affiliates. So these laws were suggested by a private trade association, happen to provide protection to that trade association against competition, and were put into effect by professional regulatory bureaucrats, and written by attorneys working for and billing those agencies on an hourly basis. Nothing bias about that!