Heads Up Ohio Wholesalers! Potential NEW Legal Ramifications of Wholesaling
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?
Take care out there.
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.
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.
@Darrin Carey , is there some information out there that you have other than the disciplinary action report?
The descriptions of the violations of the five unlicensed persons are all exactly the same wording. It's boilerplate language, and it includes buying/selling as well as property management.
> by renting, leasing or negotiating the rental or lease of the subject property; offering, attempting or agreeing to negotiate the rental or leasing of the subject property; managing or offering, or attempting to operate or manage the subject property; and/or holding himself out as engaging in the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee, commission, or other valuable compensation or the expectation of a fee, commission, or other compensation.
Here are the details for each one.
http://www.com.ohio.gov/documents/Spring14REdiscip...
Even though it's "boilerplate" the pieces chosen make It very clear from the reading that it was doing property management without a license.
Chad Fields, a person not licensed under Ohio Revised Code 4735, Delaware, Ohio, was
ordered to pay a civil penalty of $930,000.00 for committing between the dates of about
November 14, 2010 through on or about May 31, 2013, 930 violations of 4735.02 by renting,
leasing or negotiating the rental or lease of the subject property; offering, attempting or
agreeing to negotiate the rental or leasing of the subject property; managing or offering, or
attempting to operate or manage the subject property; and/or holding himself out as engaging in
the selling, exchanging, purchasing, renting, or leasing of real estate for another, for a fee,
commission, or other valuable compensation or the expectation of a fee, commission, or other
compensation.
What are you reading that i'm missing that makes it absolutely clear it was property management and not wholesaling?
But if it needs to be made any more clear here you go. Here are some other penalties.
UNLICENSED ACTIVITY
BEN LeQUANG, Torrance, California, was found by the Commission to have violated ORC 4735.02, unlicensed activity,
and was assessed a civil penalty in the amount of $56,000.00. The Commission found that Mr. LeQuang engaged in the
business of charging an advance fee, or contracting for collection of a fee, in connection with any contract for the referral
of information concerning real estate to brokers, while not licensed under Chapter 4735.
MUNNA AGARWAL, Euclid, Ohio, was found by the Commission to have violated ORC 4735.02, unlicensed activity,
and was assessed a civil penalty in the amount of $1,000.00. The Commission found that Mr. Agarwal agreed to negotiate
and negotiated a potential purchase of property, agreed to list and listed, agreed to offer and offered a property for sale,
advertised and held himself out as engaged in the business of selling real estate, directed and assisted in the procuring of
prospects and in the negotiation of a transaction which was calculated to result in the sale of a property and intended or
expected to receive compensation or other valuable consideration for the above conduct, while not licensed under Chapter
4735.
ELYHUE E. DUFF, Akron, Ohio, was found by the Commission to have violated ORC 4735.02, unlicensed activity, and
was assessed a civil penalty in the amount of $1,000.00. The Commission found that Mr. Duff assisted in the procuring of
a prospect and negotiation of a transaction, which was calculated to result in the sale of a property, wrote a sales contract
for the parties, and intended or expected to receive compensation or other valuable consideration for the above conduct,
while not licensed under Chapter 4735.
PAUL M. SNOOK, Euclid, Ohio, was found by the Commission to have violated ORC 4735.02 as that section incorporates
ORC 4735.01(A)(05), unlicensed activity, and was assessed a civil penalty in the amount of $27,600.00. The Commission
found that Mr. Snook entered into an agreement to provide management services for a property and subsequently provided
these services, while not licensed under Chapter 4735.
R
Here are the details for each one.
http://www.com.ohio.gov/documents/Spring14REdiscip...
Even though it's "boilerplate" the pieces chosen make It very clear from the reading that it was doing property management without a license.
Darrin: I read this link when it was first posted as well as other cases. I even researched some of the specific cases. None of the ones I read involved wholesalers (contracting to buy and the reselling the property or their contract). All of it was PM related and/or agents working without a license.
Many on this thread appear to want to continually support the idea that wholesaling has been prohibited in OH without being willing (or able) to analyze actual disciplinary cases or relevant case law. I doubt you'll find relevant info to help you make a decision on this thread.
Other then on BiggerPockets an a handful of REI sales pages, the term "wholesale" is not used to describe the activities of the BP 'wholesaler'. The term is like "bird dog"... if you are looking for that term (as in legal cases), you won't find it. Maybe "finder" for "bird dog" as in the link I posted a few days ago, but say "wholesaler" to anyone outside this site (or select REI circles) and they think about products (tobacco, alcohol, automobiles, etc.) not property.
The highlighted text from @James Wise certainly looks like what people on BP call a "wholesaler"... without using that term.
@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.
Here is a link that will do just that for state of IN:
If you take a closer look at http://codes.ohio.gov/orc/4735 I think you will find some history(1). In this section of ORC, I'm looking for the phrase 'an interest in'... as in ... "I am a wholesaler, and I can do anything I want because I have 'an interest in' the property I am selling." This phrase is not there. However, in Court of Appeals of Ohio, Seventh District, Mahoning County, No. 96 C.A. 203., Decided June 18, 1998 (2), this concept... 'an interest in'... was material in the court consideration. From the proceedings:
"That exemption specifically excludes from the commission's jurisdiction those transactions involving real estate which is either owned by the party or in which the party has ‘an interest in’, or which is ‘acquired on his own account ..." (emphasis mine)
So in the last decade and a half, the Ohio legislature has changed Ohio law and removed the phrase "...has ‘an interest in’..." from exclusion from the statute. There is no case law because there is no ambiguity in ORC and the statutory definition applies.
I doubt someone wants to be a guinea pig and say to the attorey general 'I'm a wholesaler and I can do what I want because I have an interest in the property via my contract.' The AG will say, by statute, your 'interest' is not material to your being excluded from operating as a broker.
Just My 2 cents.
(1) Full disaclosure: I have no interest in the outcome either way since I operate exclusively in NC. (However, my SDIRA custodian is in Ohio.) Discuss your business with your attorney
(2) http://caselaw.findlaw.com/oh-court-of-appeals/1196563.html
Looking at the five examples you chose, one from 2014, four from 2006.
@Steve Babiak That case is one that gives everyone in real estate a bad name. The case was mortgage fraud, via inflated appraisals, kickbacks, and straw buyers.
There is more here: http://www.insuranceupanddown.com/node/2628
http://www.journalgazette.net/apps/pbcs.dll/articl...
Glitch.
Sorry, got a posting error, and it posted repeatedly. Anyone know how to delete your own post?
@Darrin Carey of the 5 I posted. The 1st one was what was already posted in the thread that has a catch all phrase in it. You have determined it was property management but I'm reading a catch all. I posted it to ask how you determined what it was.?
of the following 4 I copied and pasted from a RE commission news letter and I bolded the font from the 2 that were not related to property management
All three statements above only mention "leasing", no mention of selling.
The statement above is marketing a licensed activity (Leasing we can assume, based on the previous three statements).
No statements said "Negotiating the sale of the subject property", or attempting to negotiate a sale.
@Darrin Carey Remember, I'm not in Ohio and have no vested interest in this topic either way. And certainly, I'm not trying to be argumentative. But from your post, specifically "2 - Acting as agent for a third parties; no indication of being a principal in the transaction" it seems like you feel that the "being a principal" somehow enables an exemption in ORC. Certainly, an unlicensed person can purchase property for themselves. Says so under 4735.01 division (I)(1)(a). But "principal" by statute means you closed on the deal, not that you "have 'an interest in'" per ORC which identifies exemptions and says:
"With reference to real estate situated in this state owned by such person... or acquired on its own account in the regular course of, or as an incident to the management of the property and the investment in it; " (emphasis mine)
See also my prior post. Post 1998 (or so) having a property under contract and selling your interest in the property is not exempt from the real estate license requirement, per ORC. It's Statutory. Now closing on the property (acquiring) and becoming a "principal" (ORC definition) will meet the exemption.
scare tactics = harassment
When you know your rights, people usually won't mess with you including exulted state employees who act before understanding.
Maybe.... maybe not. Don't forget that the govt (even the state) has virtually unlimited resources. Do you?
If you think wholesaling is "illegal", don't do it. More opportunity for the rest of us.
It is simply assigning a agreement to another party. I find it hard to believe that you can sanction or prosecute someone based upon "intent" (i.e., they entered into this legal agreement but they really intend to do something else...). I'm not attorney, but I don't think legal agreements don't work like that.
And is there ANY EXAMPLE in all these posts of someone in Ohio being busted (?) for assigning a purchase contract? I get the feeling most comments in support of the "wholesaling is illegal" idea are being posted by licensed agents.
If you think wholesaling is "illegal", don't do it. More opportunity for the rest of us.
It is simply assigning a agreement to another party. I find it hard to believe that you can sanction or prosecute someone based upon "intent" (i.e., they entered into this legal agreement but they really intend to do something else...). I'm not attorney, but I don't think legal agreements don't work like that.
And is there ANY EXAMPLE in all these posts of someone in Ohio being busted (?) for assigning a purchase contract? I get the feeling most comments in support of the "wholesaling is illegal" idea are being posted by licensed agents.
Hi Dev. The boilerplate copy of the OH code violations copied here is used for EVERY SINGLE CASE in the OH RE department list of disciplinary actions. So there is no way to know what happened and what the violations were without reading the actual cases. Somehow I just don't think there is anyone here that's actually going to be doing that.
When this thread started I found more details on about six of the disciplinary cases listed. None of them involved anything resembling a sale of contract via assignment. Not that an assignment couldn't have been part of the transactions, but that's not what they were going after. Compensation for offering for a property for sale and property management services were the main issues I read about. Compensation for any kind of service in real estate is a big licensing issue. That's why it's dumb to call your mark-up on a contract a "fee". Just dumb. Don't collect fees. Sell what you own. How hard is this to understand? :) By calling it a fee, you give regulators more fuel for the idea that wholesaling is a real estate service, and not buyers and sellers acting as principals. I am in agreement with the regulators and lawmakers on this. If you are offering a service to your sellers or buyers for a fee, you should get licensed.
It is a big mistake to go after listed properties to wholesale. Real estate agents see you as competition and will turn you in no matter what you do. Plus everyone and their brother knows about these properties so you have stiff competition and will pay much more than if you bought from the seller directly.
K Marie Poe summed it up as "Sell what you own. How hard is this to understand?" Indeed. I'll sum it up this way. Ohio state law CHANGED. I posted a link to the case earlier that I posted again at the end. Old exemption wording:
“(1)?With reference to real estate situated in this state or any interest in it owned by such person, partnership, association, or corporation, or acquired on his own account in the regular course of, or as an incident to the management of the property and the investment in it[.]”
New wording:
"(a) With reference to real estate situated in this state owned by such person, partnership, association, limited liability company, limited liability partnership, or corporation, or acquired on its own account in the regular course of, or as an incident to the management of the property and the investment in it;"
The law changed after this case: OHIO DIVISION OF REAL ESTATE et al., Appellees, v. VANTELL, Appellant. Why the motivation for statutory change to remove those pesky little words 'or any interest in it'? BECAUSE OHIO DIVISION OF REAL ESTATE LOST THE CASE.
Having a property under contract (in Ohio) and selling your interest in the property is not exempt from the real estate license requirement per Ohio Revised Code (ORC). The law says 'Sell what you own.' If you don't close on the property and get the deed, your are brokering.
My 2 cents. Hopefully my last post on this topic.
http://caselaw.findlaw.com/oh-court-of-appeals/1196563.html
http://codes.ohio.gov/orc/4735
@Dev Horn Yes you are right most of the people posting here the wholesaling is illegal in ohio are agent/attorneys. No its not because we care if you make money wholesaling that we could make. Its because regardless of what people think we as licensed sales people in ohio have to take REAL ESTATE LAW classes in college as part of out license. So as we take these classes we have to learn what is legal and ILLEGAL in ohio. its a simple concept really the people who have the classes and went to school to study this topic are simply trying to educate others so they don't get in trouble. but some people simply don't listen.
what does it cost to set up an LLC in Ohio?
Write the contract that the LLC is buying the property.
Instead of selling the house,= or the contract (which would have a different buyer)
sell the shares of the LLC
what does it cost to set up an LLC in Ohio?
Write the contract that the LLC is buying the property.
Instead of selling the house,= or the contract (which would have a different buyer)
sell the shares of the LLC
As long as the LLC buys the property... ORC states "...owned by such person, partnership, association, , limited liability partnership, or corporation..."
what does it cost to set up an LLC in Ohio?
Write the contract that the LLC is buying the property.
Instead of selling the house,= or the contract (which would have a different buyer)
sell the shares of the LLC
As long as the LLC buys the property... ORC states "...owned by such person, partnership, association, , limited liability partnership, or corporation..."
I understand the ORC brokering definition and rules. I read the case you posted where the state lost because the investors involved DID "have an interest in" the property, so weren't acting improperly without a license. So I understand the tweak in the code in 1990s to take out "have an interest in" from the exemptions to brokering.
Even so, I'll go out on a limb and say IMO there is NO way that the ORC can legally prevent or fine someone selling their interest in a contract via assignment. It wouldn't hold in court because there is a slew of contract law that would prevail. There are assignments of contract happening in residential and commercial real estate everyday in OH, with no agent. Not saying I want to be the test case, just that this thread has a very narrow understanding of basic real estate and contract law. The ORC doesn't write all the law in Ohio. They manage only RE licensing and RE consumer issues.
The issue of "intent" remains and the ORC will continue to go after those they feel intend to do brokering activities without a license. So do what you have to to protect yourself knowing that your intent matters. But the ORC can't and won't stop every day assignment of contracts.
@K Marie Poe, I don't disagree with most of what you say. Assignments, clearly, are not by themselves a problem. There are thousands of assignemnts to MERS every day. The ORC (IMO) is setting the tone, so to speak, based on statute and intent. IMO, the Ohio RE Commission won't go after the average 'wholesaler'. But regarding your statement "Even so, I'll go out on a limb and say IMO there is NO way that the ORC can legally prevent or fine someone selling their interest in a contract via assignment." Well, I disagree. There seems to always be someone who sticks out. I think the Ohio RE Commission will find a Marvin.
Check out the post below. Specifically, the response by Marvin to @Don Konipol's post. This is the type the Commission will find and crucify.
http://www.biggerpockets.com/forums/517/topics/135043-properties-located-charlotte-nc?page=1#p135043
Again, I am in NC and not in Ohio and this whole discussion is moot for me in NC. Not that I really care, since if I sign a contract I am ready willing and able to close. The Marvins aren't.
I think the takeaway is that 'wholesaler' dealers need to pay attention. For sure in Ohio. The irony is that in NC, apparently state law, NCREC, and MLS have made wholesaling easier. See also
http://www.biggerpockets.com/forums/521/topics/133866-charlotte-nc-wholesaling-101-and-basic-rehabbing and the comments within. Another takeaway... 50 unique states.