By William Bronchick, Real Estate Mentor and Attorney
In real estate investing, if you buy a property, you wholesale it, you profit. Do you need a license to wholesale properties? In most cases, the answer is “no”.
Real estate brokerage is an activity regulated by states on their own terms, thus each state defines which activities require a license. There is a lot of vagueness and ambiguity in some of the state licensing codes, as well as “gray areas”, which complicate the matter. Furthermore, if you vary the techniques and your business practices beyond the scope of what I teach in my courses, it is not always clear how the state authorities might view your practices. Therefore, this discussion is limited to the simple act of buying and flipping as follows:
1. Sign a contract with a seller, assign it to another investor
2. Sign a contract with a seller, sign another one with a third party, then double close
The large majority of states use the “for another” language in their state licensing statutes. The “for another” language means the law provides a laundry list of activities that require a license if you do it “for another.”
A good example is the Ohio Statute:
§ 4735.01 Definitions. As used in this chapter:
(A) “Real estate broker” includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:
The Ohio code then goes on to list all types of activity, such as buying, selling, offerings, leasing, negotiating, etc. This type of statute would clearly exempt you from doing any of the listed activities so long as you were doing it on your own behalf. The following court case clearly delineates the difference between acting on your own behalf and acting as a broker.
In Xarin Real Estate v. Gamboa, 715 S.W. 80 (TX 1986), an investor named Xarin entered into a purchase contract with the owner, Gamboa, then assigned his purchase contract to a third party, Baker. When the deal blew up, Baker sued Xarin claiming, among other things, that Xarin was illegally acting as a real estate broker without a license.
The court ruled that “No evidence exists to show that Xarin was acting for anyone but itself when it sold its interest to Baker. Xarin was shown on the sales contract to be only the purchaser and was not shown in any agency capacity… There is also no evidence that Xarin acted for Baker when Xarin acquired its interest in the property from the Gamboa’s. Generally, to establish that one person has acted for another in a normal agency relationship, there must be an agreement between two persons and one must exercise some control over the other.”
Two important points are worth noting here. First, the court acknowledged that Xarin had “an interest in the property” when it signed a purchase contract with Gamboa. As we will discuss later, having “an interest” in real estate allows you to sell your interest, which is specifically exempt from many state licensing laws. Second, the court made an important point that the Xarin did not have a deal with Baker in place when it made the deal with the owner of the property. This is important because the reverse can also be true; if you make a deal with a buyer first, then find him a property, a good argument can be made that activity is brokering on behalf of the buyer.
Other states that do not use the “for another” language clearly identify specific exemptions in their licensing statutes. A good example is the South Carolina statute, which reads:
“This chapter does not apply to:
The sale, lease, or rental of real estate by an unlicensed owner of real estate who owns any interest in the real estate if the interest being sold, leased, or rented is identical to the owner’s legal interest”
However, you must have an interest in the property before you sell it. In general, a contract to purchase property gives the buyer an equitable interest in the land. 27A Am. Jur. 2d Equitable Conversion § 10. Thus, if you have an interest in the property, you are basically exempt from the licensing regulations in these states.
TRYING TO SKIRT THE LICENSING RULES
While the basic types of activity I have described are generally exempt from licensing regulations, there are cases in which a license would be required. For example, if you are finding buyers first, then shopping around for properties you can wholesale to them, this could be essentially acting as a buyer’s broker. The premises of my discussion assumes that when you go under contract with the seller you do not have a buyer to assign or flip to, thus you are “at-risk”.
REGULATION FOR ALL
A few states limit the real estate activity of any person, even if you are acting on your own behalf. SD, MN, WI, MI, MD & MN all have limitations on the number and frequency of real estate transactions you can do before you will need a real estate license. For example, Michigan law limits you to 4 transactions per year, although it is not clear whether using multiple corporate entities will be a workaround. In real estate investing, make sure you keep current on local and national law changes.
There’s few, if any, reported cases of people being prosecuted anywhere in the country for not having a real estate license. The issue of licensing is more relevant to the enforcement of your profit. For example, if you assign your contract prior to closing and expect the buyer to pay you at closing, he may stiff you and argue “you don’t have a license”.
The bottom line is that if you don’t act like a real estate broker, the state agencies that license brokers will leave you alone. If you use the licensing exemptions to skirt the licensing laws, you will likely hear from the state licensing agencies. It is important that you make it very clear to all parties in the transaction that you are not a broker and are acting on your own behalf. Sometimes having a trusted advisor, attorney, or real estate coach an truly keep you out of trouble.