Full time real estate investor · Port Orchard, WA · Member since 2013 · 54 posts · 16 votes
The other day, I had an interesting conversation with the executive director of the Ohio Department of Commerce. He had called me in response to a complaint I filed against a broker who asked me not to make any offers on any more of her properties in the future. It was apparent that she either does not like--or does not understand--the business of wholesaling. Anyway, the complaint earned me a call from the director who told me that his department is actively pursuing wholesalers in Ohio who are not licensed to "market properties that they do not own." In other words, even though there is a purchase and sale agreement, a wholesaler needs to have a real estate license in order to market the property during the inspection period. Insane!
He called it "unlicensed activity." The funny thing is when I asked him about marketing the contract--as oppose to the property--he never responded.
Anyway, just take this as a heads up that Ohio is not playing nice. They are investigating and fining unlicensed wholesalers $1,000.00 per day per violation.
It's very sad , but true that people tend to fear what they do not understand. I wonder if wholesalers in other industries experience the same type of static?
Everyone should note the lead sentence in the article includes the clause "which may be providing instructions on how to circumvent real estate license law"
@Steve Babiak @Jonny S. @Andy Argonaut The unlicensed activity on page 8 was for Property Management without a license. There is no court of law involved, only the Division of Real Estate.
Interestingly, after looking through several years of disciplinary actions for unlicensed activity, I did not find a single instance where it was for wholesaling. @James Wise have you found any?
I've had a few conversations with the State of Ohio Division of Real Estate about wholesaling and other typical real estate investor activities.
Back in 2007 the Division of Real Estate head Attorney explicitly stated that wholesaling by assigning a Purchase and Sale agreement did not need a license, however for an option agreement she thought it did need a license.
In Sept 2013, I had a lengthy conversation with one of the Division of Real Estate enforcement section investigators. I believe he was the lead investigator.
The summary of the conversation is as follows.
The Dept is concerned about people who are writing a lot of contracts with the intent to only wholesale, and no intent or ability to close otherwise. He gave an example of people writing 40-50 contracts a month, and only closing on one or two.
Assigning a real estate contract is legal. I was very specific about this one. I literally told him I was about to assign a current contract to another investor for a few bucks, because I had decided I was too busy did not have time to rehab it. He said it was fine.
One of the items he keyed in on was I had the intent and the ability to close the contract.
I was unable to pursue the marketing of a real estate contract due to time constraints, The methods how wholesalers are marketing their deals may be an issue.
For giggles I was just reading a few of Ohio's standard board-approved sales agreements. There are provisions in these agreements for assigning the contract - or verbiage on how an assignment needs to be done (with the seller's permission). Obviously there is nothing illegal about doing this. So it's not a matter of what the investor is doing, it's how he is going about it. Maybe advertising, "Buy my real estate contract and make $25,000!" while posting a copy of the contract is how it should be done. Then there is no house advertised for sale - just a contract.
After reading through this entire thread, not one example of a contract assigner getting torched has been brought to light. Seems like a lot of fear mongering.
I am in PA and have had people tell me (including realtors) that it was illegal to assign a contract. Apparently they are speaking out of ignorance. Our PAR agreements (Pennsylvania Association of Realtors) have a provision covering doing an assignment. If I was ever challenged on it I would ask, "Why would the state contracts have a provision that allowed for such a transaction if doing such a transaction was illegal?" And by the way, you're not selling a contract "for another." You're doing it for yourself and your own business' interest. Again, if you emphasize the contract first and foremost and then include details of what's involved with the contract (property location & description) I don't foresee there being a problem - although others may level accusations out of their ignorance.
Seems like what is getting people in trouble is marketing the PROPERTY when they don't own it, but make it sound like they do (or are brokering the sale without a license).
What if in your ad instead of putting: 3/2 1780sqft home for sale in Some Town, OH -- $32K
You put:
Purchase Contract for sale for a 3/2 1780sqft home in Some Town, OH -- $32K
Wouldn't that more or less solve the issue? You are NOT saying you have a property for sale, you are explicitly saying you are selling a purchase contract. There is also no ambiguity about brokering as a broker doesn't enter a purchase contract with the seller.
I also don't see much downside in terms of marketing. If you are a wholesaler you are presumably looking to sell to other investors as cash buyers so they know the game and understand what the 2nd headline means. Only thing with teh first is that they might think you are selling your own property, until they actually talk to you. However either they won't care you are a wholesaler once they talk to you or if they don't want to dela with a wholesaler they just wasted time talking to you.
Sadly, I haven't had the time to go thru every post in this thread. However, I thought I would add this: there is legal action being pursued to clarify both the wording in the revised code and the first amendment issues involved in "marketing ones' contract". More info will be discussed tonight at the CAA building at 1740 Langdon Farm in Cincinnati at 6 p.m. if anyone wants to attend. An attorney who believes that the ODRE is overstepping will be addressing the group.
Sadly, I haven't had the time to go thru every post in this thread. However, I thought I would add this: there is legal action being pursued to clarify both the wording in the revised code and the first amendment issues involved in "marketing ones' contract". More info will be discussed tonight at the CAA building at 1740 Langdon Farm in Cincinnati at 6 p.m. if anyone wants to attend. An attorney who believes that the ODRE is overstepping will be addressing the group.
Glad you chimmed in. You were the first person that popped in my head when I was seeing all this discussion around wholesaling in OH.
Please post an update hear about anything interesting at the meeting and updates as the legal proceedings move forward.
I received this in my email, and thought it might interest the people on this thread.
Vena Jones-Cox is hosting a webinar on wholesaling and state law Monday June 30 at 8:00pm Eastern.
She's an agent, and a wholesaler, so it should be interesting.
https://www1.gotomeeting.com/register/818567569
From the email: "On Monday night, in a NO SALES webinar, I'll talk about what's brought this on, what the laws really say, why lots of legal experts think the state is WRONG, and exactly what you should do in the meantime if you want to keep flipping houses."
Thanks for the post. I'm all signed up to attend the webinar. I haven't wholesaled anything in Ohio but since I invest there it definitely interest me and I would also like to know because I have come across deals I couldn't do or wasn't interested in and I would like to wholesale those or get a finders fee or something for passing on to another investor that might be interested but right now I just pass them on with no compensation because the last thing I want to do is get in legal trouble with the state.
I am signed up as well for the webinar. Thanks @Darrin Carey
Although this is concerning Ohio, all investors should tune into this because you never know when it will be effecting the laws in your state. Across the country the real estate commission is looking hard at wholesalers. If Ohio is successful in squashing the wholesaling business by regulating it out of existence they may be the posted child for what's to come.
I was once told that you could always use the strategy of registering an LLC and making an offer with the LLC's name on it and then selling the shares of the LLC to a buyer. Using this technique only records one real estate transaction (e.g. registering the title in the LLC's name). So in essence you're not assigning the contract, you're selling the contract as part of the assets that accompany the LLC.
There were a few wholesalers that were using this technique to get around "double closing." I would imagine it's perfectly legal since one is a real estate transaction and the other is a business transaction.
Scenario 1: Let's assume Mr. Pink has an empty briefcase, market value $50. He sells the briefcase to Mr. Brown for $50.
Scenario 2: Let's assume Mr. Pink has a briefcase full of fine Colombian cocaine. The briefcase's market value, empty, is still $50. Mr. Pink sells the briefcase to Mr. Brown for $250,000.
Do you see the difference between those two scenarios?
Mr. Pink can make all the arguments he wants to a court that he wasn't selling cocaine, but was really only selling the briefcase that contained the cocaine. I'm going to let you guess how that argument would pan out.
As said before, if it quacks like a duck, it's probably a duck.
Wholesaling brings a buyer and seller together to negotiate a transaction, the subject of which is real estate. I don't care how many iterations of documentation or shell companies that transaction runs through. The point is your intent. Are you trying to buy houses on your own account, or are you trying to collect a commission by bringing a buyer and a seller together?
There are no standards here except the kangaroo court/admin hearing before the ODC. Armchair legal speculation is not going to help anyone, and least of all the ODC isn't going to buy it. Proceed at your own peril.
I think being a 'wholesaler' who can show they are 'ready, willing, and able' to transact a real estate contract is a good defense. Happy sellers don't cry foul. Generally states are not against free market capitalism. But when 'wholesalers' create contracts they don't (and can't) execute and operate in the guise of a broker/brokerage... that's what the state AG and a state REC will act on. All my opinion, as an observer from a state that has less scrutiny in the unlicensed broker/dealer aspect of REI.
We fix and flip deals. We hold rentals. We wholesale. If it looks like a real estate investor and does deals like a real estate investor, it must be a real estate investor. Quack! Quack!
If you do the LLC thing, you have to find someone who wants to buy your LLC. I know people have done this, but to me and the investors I know most don't want to buy someone else's LLC, even if it has a good contract attached to it. They already have their own entity(s) set up. Personally I wouldn't buy a property like this unless there was a substantial profit attached to it... like 50K+. Would you?
Sorry I wasn't clear, I agree with you. I neglected to clarify that setting up the LLC would need to be part of the wholesale process. I would be willing to buy the LLC if it was a brand new LLC specifically for the wholesale property that I was buying and I knew of the numbers ahead of time. The seller would need to agree provide the documentation of setting up the LLC before closing and it would need to show that their interests are vested or outline specific activities that they are excluded from doing with the LLC with the LLC between the time of setting up the LLC and closing. I wouldn't want to buy a property tied to an LLC that has a history because there is too much due diligence that is involved.
We fix and flip deals. We hold rentals. We wholesale. If it looks like a real estate investor and does deals like a real estate investor, it must be a real estate investor. Quack! Quack!
I am not a lawyer but that seems key to me in this entire debate. Intent seems to be a large portion. If you are entering into a contract where the only way you can be compensated is to assign it, than I don't think its unreasonable to say you are selling on behalf of another. You can play all kinds of word games as far as this is or isn't violating the law based on loop holes, but at the end of the day you only get paid from a sale which seems like the kind of thing that you need a license for.
Your fight is potentially against the state with a basically unlimited legal budget and they can levy multi million non dis-chargeable fines against you too. I'd much rather be in that fight saying "Hey I had the cash to close this, I just chose not to because of whatever reasons" vs in a position of only being able to get paid if I found a buyer.
Someone mentioned it up thread, but I think a business that rehabs, does rentals, and yes wholesales when they decide to is much more defensible than someone who has no means to fulfill the contracts that they are signing.
I am going to repeat again that I am not a lawyer and highly suggest anyone doing anything that could result in millions in fines should be having an active relationship with one, but I think land contracts are worth looking at here. I'm not sure I agree, but the common suggestion seems to be that actually taking title eliminates much of the liability here. The key problem seems to be many folks don't have the cash or do not wish to pay the costs to use someone else's to do so. A land contract with no prepayment penalty largely eliminates this and legally gives you a lot of legal standing as selling on behalf of yourself. While you do have a lot of equitable interests in a contract (you can challenge zoning and file lawsuits based on this for example), it would seem to shift a future ownership role to a current one.
If I was into assignments this would concern me. Honestly they might go after a big fish to make a big splash, but the big fish have attorneys and can pay a $100k legal bill. They also have a better defense as they typically are involved in numerous real estate investment activities. The state may decide to nail up a few small guys who can't defend their self to make a quick point.
Simply put, if your only compensation in a deal is contingent on it selling than you probably need a real estate license, no matter how you structure it. Get one, its not that hard.
I understood that you meant a deal-specific LLC. What I was pointing to was the fact that most investors I know would not agree to "buy an LLC" specifically for the reason of obtaining a deal. Would I want to own 10 LLC's for 10 rental properties? HECK NO!
I understood that you meant a deal-specific LLC. What I was pointing to was the fact that most investors I know would not agree to "buy an LLC" specifically for the reason of obtaining a deal. Would I want to own 10 LLC's for 10 rental properties? HECK NO!
I'm curious why you wouldn't? I would understand not wanting to deal with past debt/tax liabilities on an LLC and that head ache but for a new llc just to hold a property it doesn't seem like an issue to me. An llc per property actually is something you may want to think about doing regardless of how it is sold.
In case anyone was wondering, this is pretty common. I practice in multiple states under my Ohio license. I know some people that practice in like 5+ states under one license. Generally speaking, consumer protections are reduced greatly for commercial as a typical transaction involves an attorney for the buyer and the seller and you are dealing with executive level clients who are more educated on legal/real estate matters.
@Christian Carson Without reopening the discussion or legal or not--I've been looking for some case law or other examples where a state has imposed or attempted to levy a fine for "wholesaling" via assigning a contract or otherwise. Have you found any? I looked Ohio Div of RE archive and did not find any published instance where they have even imposed a fine for it.
@Christian Carson Without reopening the discussion or legal or not--I've been looking for some case law or other examples where a state has imposed or attempted to levy a fine for "wholesaling" via assigning a contract or otherwise. Have you found any? I looked Ohio Div of RE archive and did not find any published instance where they have even imposed a fine for it.
Earlier in this thread, James Wise posted the latest disciplinary actions from spring quarter 2014. There were at least three actions against unlicensed persons, with fines ranging from $82,000 to $1.4 million.
@Christian Carson I saw those, and read them. They were all for Property Management. There is a long history of the state cracking down on Property Management without a license. I am looking for something specific to "wholesaling"