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.
@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.
Yeah, the Marvin's are going to get crucified. Especially if they attract attention to themselves by saying that don't need a license for any business (?!), and by using the wrong language to describe what they do. Oh, and by being and/or acting stupid.
We've not seen any clear-cut case law or disciplinary action where someone contracted to buy property and then sold their contract. We're seeing all kinds of cases that tack on brokering issues. Just not the same thing.
Most businesses need a permit or even a basic business license. I pay fees and percentages to 4 government entities every year. These percentages are audited as part of process. This is all in Cali but I expect every city and state to follow suit soon.
thanks again,
Matt
I have a general question.
Would the MARKETING of a contract that you intend to DOUBLE CLOSE on would that constitute as a problem still?
Here is an example of a typical wholesale ad that sure comes close to brokering:
Interesting. What if you convince the seller to deed the property to a land trust and then you have him sign a change of beneficial interest in the trust to you. Then once you find a buyer, you assign that beneficial interest to him.
Once you are the beneficiary of the trust, you technically own the trust that owns the property. And now, you can market the property because not only you have an equitable interest in it, you actually own the trust that owns it.
This is one creative way to go around this issue, isn't it?
"Would the MARKETING of a contract that you intend to DOUBLE CLOSE on would that constitute as a problem still?"
Your question is flawed because if you plan to double close you are not selling a contract but a property - so you should not be marketing a contract for sale in the first place.
Getting beyond that, there's never a problem buying a property and reselling it in the same day so long as the end buyers financing doesn't require some type of seasoning.
It seems like ODR's issue is with wholesalers entering contracts in which they cannot close without the 3rd party buyer in place. If this is the case, would a HML or some other type of short-term bridge financing meet the requirements of ORC? This would eliminate the issue of needing to assign an option contract.
Any updates on where the dust has started to settle and/or be re-kicked up on this?
Any update as to where the dust has settled and/or begun to be kicked back up?
yea this is very interesting to me and I am in ohio
this very thing is what keeps people from real estate legal issues
I'm new to this site but I have an insurance background with a professional designation in contract law. However, I am a Canadian and there may be slight variations in the interpretation of the shared Common Law that governs both nations excluding Quebec.
There is a very defining difference at law that everyone on this thread has either over-looked or doesn't understand.
A real estate agent is a facilitator of a contract between two other interested parties and he/she has no vested interest in the property other than he/she will be paid a commission by the seller of the property. He/she is not a party to the contract in and of itself and is ONLY a facilitator.
The wholesaler (and I hate that title) on the other hand has entered into a legal agreement with one other interested party to buy the property according to the wording of the contractual agreement. He/she has a vested interest in the property under the terms stated within. It is a legal and binding contract between TWO people. Not three.
And, unless there is specific wording within that contract that stipulates he/she cannot act legally to attempt to sell, rent, lease etc that property for which the contract was constructed, he or she is free to enter into any negotiations, offerings, transactions or selling, renting, leasing etc his right in that property BECAUSE he/she owns the rights to that property as stated in the contract the original owner agreed to and signed. He/she only has to wait until closing day to have any of the above activated and legally binding. Hence you are not a 3rd party in a 2 party transaction. You are 1 of 2 different people and have entered into 2 separate contracts. You cannot collect a fee on a transaction of buying or selling something for which you have a vested interest. As a wholesaler, like any business person you are making money buying and selling real estate for YOURSELF! Not someone else.
So, the wholesaler can enter into a contractual agreement with any other person that wants to buy/inherit his/her rights under the original contract with the seller. The wholesaler (I hate it) has done nothing more than enter into 2 contractual agreements with 2 different people. He/she is not selling the original contract to his buyer. He/she has constructed a new contract with the buyer giving that buyer the right to assume ownership of the tangible asset contained in the original contract of which the wholesaler has control. Remember, having control of something is 9/10ths of the law.
Wholesaler-2 separate contracts with 2 different people. Profit
Realtor-facilitating 1 contract with 2 different people. Commission paid by seller.
The realtor is essentially a paid employee with a set return for his services. The creative investor (much better!) is a business person that is solely responsible for not only his profit but could also get hit with a huge loss. Many had huge losses not long ago.
I hope this clarifies the legality and applicability of contract law as it applies to the above situations. As you can see there is a vast difference between these transactions. Ohio or any other state has no legal standing in contractual case law against creative investors.
I'm very surprised a real estate lawyer could not figure this out. But hey! I'm only a Canadian.....eh?
@Ron Kilbreath, ah, but that last tenth can really pack a wallop, eh?...
Not if, everything is legally correct Brent. If the property was acquired by illegal means or through misrepresentation for example, you would definitely have problems.
A contract, is a contract, is a contract.....as long as there is nothing untoward (illegal) in the wording and there is not any misrepresentation or coercion, it is valid.
As a creative investor (wholesaler), you are entering into 2 separate contracts with 2 different people and hopefully establishing a profit with your negotiation skills. Not at anytime, are you bringing these 2 parties together to establish anything or sign a mutual contract. You are self-employed and taking a risk that you might even lose money.
As a real estate agent, you are facilitating 1 contract that is suitable to 2 other people. You are bringing 2 people together to agree on 1 contract and you are GUARANTEED a payment in the form of a fee ie commission. You are actually working for the property owner, who is responsible for paying you.
Two totally different animals.
@Ron Kilbreath, yes, a "contract, is a contract, is a contract.....", but when it's concerned with transferring principal interest in Real Estate, and the great State of Ohio DO take exception to the 9/10ths possession argument, then you had better pay very close attention to that final tenth.
These days, if you still want to make a business model in Ohio of getting properties under contract, followed by marketing those Contracts at a higher price without being the owner of the properties, or Licensed, then when you find yourself in front of the Regulators after refusing their request to cease and desist, you can hardly say you weren't warned!
Then how well will your arguments work?...
@Ron Kilbreath......incorrect.
James, why are you saying this is incorrect? I would like to here your reason(s).
James, why are you saying this is incorrect? I would like to here your reason(s).
They are all over this thread and several other threads on the same topic.
James, I have read this thread completely but the only thing that I'm seeing is a gentleman from the Chamber of Commerce saying that wholesaling is illegal because you need a realtors license for this activity. I don't see any quotes referring to an applicable case law. Only quotes from the real estate laws.
However, the quotes that are being stated IMHO are not applicable and are being misinterpreted to include wholesaling activities. That is why I responded to this thread and have given a concise reason to support this position.
I am not a wholesaler and I have never purchased real estate in the US and I don't profess to know the intricacies and differences of laws south of the border. But, we are governed by the same common law principles.
That being said, if wholesaling is illegal then why is there not a standard clause legally and forcefully included in every real estate contract used by anyone other than real estate agents, saying that wholesaling by anyone other than a licensed real estate agent/broker is illegal?
Further, if wholesaling is illegal why are lawyers still closing these deals? If they are caught participating in ANY illegal activity they could be disbarred. I would certainly think if there was even the slightest chance of engaging in an illegal activity most lawyers would run for the hills!
So James, could you please provide further comments? Hopefully, we will all benefit from this. Thanks.
Brent Coombs, it's not about me and fear of being caught has nothing to do with this. This is a matter of legalities not just opinions. Just because a certain government branch deems fit to hand out fines doesn't make wholesaling illegal. Only a court of law has the power to do that. And, from reading this thread all I see are quotes from the Chamber of Commerce interpreting what they see fit as an illegal activity. I have yet to see anyone provide applicable case law supporting this interpretation. I have given a scenario as to why IMHO wholesaling is not illegal.
But, I have yet to see anyone explain why I am wrong. Only that I am wrong. So someone please explain why.
@Ron Kilbreath, You might find this quote helpful:- "Ohio Revised Code Section 4735.01 sets forth those acts which require a real estate license if they are done for another person and for a fee, commission or any valuable consideration. Among these is anyone who “directs or assists in the procuring of prospects or the negotiation of any transaction … which does or is calculated to result in the sale, exchange, leasing or renting of any real estate.”
http://ohiorealtors.org/legal/topics/wpinducements...
If anyone wants to argue that they are not doing it "for another person", let them try. But the counter-argument people are likely to quote the next sentence: "Thus under this section, in order to receive any type of compensation or anything of value for referring a prospect for a real estate transaction, a person must hold either an Ohio real estate sales or broker’s license"....
The verdict is then likely to be:- "Anyone who engages in such activity without being licensed is guilty of a first degree misdemeanor and can be subject to fines of up to $1000 for every day they violate this law".
Do you still want to encourage people to try, eh?...
Anyone who wishes to challenge the legality of the state enforcement actions can do so in a court of law. Those that scream these rulings are not legal, etc should be the first to hire an attorney to defend them. We have some of the same enforcement issues going forward in Florida. There is a local "wholesaler" (or maybe ex-wholesaler) who is facing enforcement actions for brokering without a license. Complaints were filed against them and the state has determined there is sufficient legal evidence they violated the law by brokering without a license. All of the posters screaming about the awful actions taken against people "not violating the law" should band together, put money up, and bring a suit to defend this. Maybe a more appropriate title for this thread would be "Legal Ramifications Of Brokering RE Without A License"!!
Haha - this thing is still kicking...WOW!
Guys, I fail to understand this passion. There seems to be some logic missing. The reality is not not a question of whether something is morally right or wrong. It's not even whether something is legally right or wrong.
You can interpret whatever you want however you want. The State of Ohio has made a decision - that's a fact. Their attitude is what it is - that's a fact. Who cares whether they are right or wrong. It's done! Your opinion changes nothing...simple pragmatic reality.
So - the only recourse you have is to sue the State. If your livelihood is a function of being able to wholesale, then sue the State and see who's attorneys prevail. Or, you could get a license and be done with it :)
Your opinions don't matter, unless the court agrees.
Thanks Brent Coombs, John Thedford and Ben Leybovich for the Section info and opinions. IMHO and educational background I firmly believe this designation of the wording "for another person" is just plain wrong. You have negotiated and fulfilled 2 separate contracts as a principle signor with 2 unrelated parties. At no time do these parties merge or come together.
I firmly believe if anyone wanted to challenge this ruling in a court of law they would or should be successful. That was the point I was trying to make in my original post.
And I didn't post it to stir up a hornets nest or to further my own benefit or personal position as I am not nor have I ever engaged in wholesaling property. I posted this as a source of information for those that do engage and wish or would like to have grounds to fight this ruling.
I can see the logic from both sides but legislation and interpretation are always a point of contention where there is not clear case law on a certain matter and this is clearly one of those cases.
I hope these last few postings by everyone involved has defined the real contentious issue here and has enough information to make an enlightened and informed decision on their actions in Ohio and apparently Florida and governs themselves accordingly when it comes to wholesaling. Thanks to everyone for their valuable input!
I would like to add one final note......under Section 4735.01 of the revised edition of the Ohio Association Of Realtors found here http://ohiorealtors.org/legal/topics/wpinducements/ the wording of "for another person" is the relying paraphrase that is deemed to make this section enforceable and wholesaling illegal.
IMHO this interpretation is not only incorrect but is unconstitutional and an erosion of human rights that flies in the face of a free enterprise-based, capitalist system. This is something none of us should take lightly.