Wholesaling a "Grey Area?" Illegal in Minnesota? Realtor..?

Question

Hello, just spoke to a reputable attorney in Minnesota about wholesaling real estate.  He basically said that if I did a few deals and someone "told" on me to the commerce most likely I would get a fine.  I'm writing this post because as many of you know, wholesaling is not easy and if I was to put in all this work, I don't want to end up doing so much work for getting in trouble at the end.  He also mentioned something about only able to buy/sell 4-5 houses a year without a license.  If I was to get a Limited Broker's license would this protect me from the Commerce coming after me?  Any advice would be greatly appreciated as I do not want to keep working this hard for nothing.  Thanks

Joseph Ziolkowski · Answer

Hey Greg, 
            As a disclaimer I am NOT an attorney, nor am I licensed to practice law in MN, but I'd say this character does not have his facts straight. In wholesaling, as you know, you become a principle in the transaction. Period. Whether each individual contract is assignable is between you and the seller. That's it. Assigning a contract is perfectly legal. It's not a mainstream strategy, and so it may make some people nervous, but don't let some atty that may never have done a deal in his/her life tell you that there's anything wrong with that. 
            Now as far as the 4 or 5 deal thing goes, I know that Fannie Mae (i think) will only allow you to get a personal note on 4 houses at a stretch since the big meltdown, but there are a gazillion ways around that, and it doesn't concern a wholesaler regardless.
            If there are any penalties to be paid, it's in the form of taxes... but a good CPA familiar with the game can probably help you out of some of that as well. Hope it helps!

Apryl McDowell · Answer

Just to give you an idea of this "grey area". I'm a virtual investor who deals with lease options and wholesaling in Minnesota. A real estate agent ran across one of my websites and declared what I was doing was illegal, and reported me to the Department of Commerce. Even though I know that I am acting as a principal in the transactions, therefore not needing a license, the Department of Commerce saw things differently. I have to get a real estate lawyer to prove this.

Well they said that if I do more than 5 transactions a year than I would need a broker's license. At the end of the day, I got off the hook because I had a real estate agent that I hired to show my properties.

This for some odd reason made it look like it was okay, even though that real estate agent's name is no where on the contracts with my buyers and sellers. So might get away with it or you might not...

Joseph Ziolkowski · Answer

Thanks Jon. And thanks jawsette, that shines a little bit of light on this. In my opinion, it is in fact the government protecting special interest groups at the expense of the freedom and entrepenuership of everyone else. RE agents often don't know enough about what we wholesalers do to justify complaining of lost sales. If they were better and more valuable than us in certain instances, they would get the sale and we wouldn't. Supply and Demand, yay capitalism. Instead of crying about being left in the dirt, perhaps more of them should learn to work with investors. If they brought the same kind of value that we did, there would be little need for us. But most of them don't, point blank. It's sour grapes.
  Agents are great for what they do, but in a sense, we perform two different functions in the market. For them to cross over, there's a learning curve that a lot of agents don't seem interested in overcoming. Plus, we risk more than they do financially, often times. 
  The government could choose to regulate us too, if they chose, but to say that we perform the same function as agents or brokers without the license, to me anyway, isn't completely true, and that's why in my gut, I feel that this is a special interest group thing being more important than the common good and the spirit of this country as a whole, which is NEVER ok. I'm a newb, and I know ten times more about wholesaling than any agent I've spoken with, all of whom have never even heard of us.

Jim Wineinger · Answer

The buying and selling of 4 properties a year is actually bases on the California law that states that if you do 8 or more deals in a year you are considered "in the business" and are required to be liscensed.
The buying of 4 properties then the selling of 4 properties would equal the 8 transactions a year threashold.
It is also interesting that (in CA) any deal that involves an RE agent does not count toward the 8 transaction limit. So it could be argued that the only reason for those limits is to protect the RE industry and that thereby the lobbying group is actually influincing and controlling the governemnt officials.

And interesting delimea indeed as on the one hand, the government is making laws just for special interest groups but on the other hand they may indeed be protecting their constituants from abuse by unliscensed predators.

Jon Holdman · Answer

I have no idea about how the laws in MN are worded, or how this commerce department enforces them, but I can understand the justification for their point of view.  Wholesaling is, after all, brokering real estate.  Not in fact, because being a principal to the transaction means you're actually involved rather than just brokering.  But in spirit, its tough to argue wholesaling is anything other than brokering.  A property goes from seller A to buyer C with you in the middle collecting a fee.  So, while we can argue its not brokering because you're a principal, I can see their argument that you're only doing that to avoid having to get a license and being bound by the licensing laws.  Be interesting to see what happens if that point of view is widely adopted.

Their argument will be someone may well be getting hurt.  Licensed agents are regulated in every state, and are bound by certain laws and overseen by some state government agency.  By acting as an unlicensed agent, you're not necessarily following those same regulations.

You bring up an interesting point, Joe, on the time period.  I'll be if you buy a house every month, then after five years, you start selling one a month, there would be no issue.  On the other hand, if you buy one a month, and later the same day sell one house, sounds like they're going to go after you.  So, what is the threshold?

Joseph Ziolkowski · Answer

I gotcha. That's interesting. I think it's false, but interesting just the same. I really don't see why it would be illegal. No one is getting hurt. You are facilitating a transaction that may not have happened otherwise. The seller is better off, the buyer is better off... 
            I would pose this to the attorney. Say that you were in the exact same business, but instead of assigning the contract, you actually bought the house and sold it again in 2 weeks, netting the exact same result (plus an extra set of closing costs, transfer taxes, etc.) and you did it over and over again? Would that be illegal too? Same exact result everytime, you know? I'm not an attorney, and I'm not sayin, I'm just sayin. :)

Greg P. · Answer

Thanks for the reply.  What the attorney was saying that we are acting as the principle but if the commerce sees that we are doing this over and over they will see that we aren't intending on buying it in the first place therefore, they will see that we are only doing this to sell.

Wholesaling a "Grey Area?" Illegal in Minnesota? Realtor..?

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