Is Wholesaling Illegal?

So, which of the following online rumors have YOU read in the past 6 months?

 

• New laws are being passed that will make wholesaling illegal
• Wholesaling is illegal in Ohio
• You can’t wholesale without a license

 

Yep, I love the web: one state’s Division of Real Estate prints an article claiming that CURRENT (not proposed) law says that wholesaling a licensable activity, and the internet explodes with misinformation about nationwide movements to make wholesaling a crime or something.

 

The truth, at least as of right now, is this:

1. There are no “new” laws being proposed anywhere in the country that would make wholesaling illegal
2. No official law enforcement organization, including the Ohio Division of Real Estate, has stated that wholesaling is illegal—just that under certain circumstances, it may require a real estate license
3. All states have licensing laws similar to Ohio’s, which say that it is illegal to buy, sell, manage, negotiate, etc real estate for a fee, and FOR ANOTHER, without a license
4. Most legal experts agree that wholesaling, when done CORRECTLY, is not done “for another” and thus probably does not require a license. “Correctly” means that you have a valid, signed agreement with the owner of the property to buy, and that what you’re selling is your rights in that agreement (in other words, assigning a contract), or that you’re buying properties and then reselling them

It IS true that the Ohio Department of Commerce has been on something of a campaign against unlicensed wholesalers in recent years. In addition to the article you’ve read about—which, by the way, was published in the spring 2014 ODRE newsletter—a number of wholesalers I know have received letters that say something like, “We think you may be doing something illegal, and if so, you should stop until you get into compliance”.

 

And there are some lessons that we can ALL draw on, whether we operating in Ohio or not, having to do with some of the things that seem to make regulators BELIEVE that a wholesaler is acting as an unlicensed broker, even when the wholesalers’ attorneys say they’re not.

 

While the DOC has not—and says that it will not—provide guidelines as to what they consider “proper” and “improper” advertising of wholesale deals, their own behavior in investigations and the verbal statements of their various enforcement officers indicate they consider certain types of marketing language to imply that the unlicensed wholesaler might be offering services for which a license is required.

 

While this is not legal advice, is not guaranteed to keep you out of trouble, and is not the official policy of the DOC or ODRE (as, again, they have none), the types of language that they’ve focused on in investigations of wholesalers, and that you should probably avoid no matter where you operate include:

 

Any language that implies that you find specific deals for specific buyers. Examples would include things like:

• We find great deals for experienced investors every day!
• Join our buyer’s list and let us find your next great deal for you!
• Looking for your next great deal? Let us know what it looks like, and we’ll find it for you

 

While most wholesalers do NOT look for specific deals for specific buyers, and these are just examples of marketing language rather than an actual description of what happens in a real wholesaling business, the DOC regulators have repeatedly pointed to this kind of wording as evidence that the wholesaler is, in fact, trying to get paid to find deals for buyers rather than putting deals under contract (and thus having a legal interest to sell, albeit in the contract instead of the property)

 

     Any language that implies that you “represent” either the buyer or the seller, or providing a service related to getting the property bought or sold. While this appears to be a bigger issue for investors who assign lease/options than for those who assign purchase agreements, it’s worth mentioning: language that seems to state that you are getting paid in order to get the property sold, as opposed to buying the property, may be problematic. Examples would include:

• We’ll get your house sold in 30 days or less
• We put buyers and sellers together
• Our commission is only paid if you like our deals [Note: the word commission should NEVER be used, as it’s inaccurate as well as a trigger—unless, perhaps, in the sense of “you’ll pay no commissions if your house isn’t listed, when stated to a seller]

 

Need I say, don’t advertise deals you don’t have under contract? This includes deals that you may have a “verbal” agreement on, but no actual signed documents, as well as deals that other people have under contract. Selling other people’s properties—and that’s what you’re doing when you have no legal interest whatsoever in a deal you’re trying to get paid to market—is exactly what real estate brokers DO, and should be avoided at all costs.

 

Failure to disclose that what you’re selling is a contract rather than a property. This issue has come up in a number of cases, and it seems to be around the idea that wholesalers advertise properties (with the address, picture, the words “property for sale”, in the “For sale” section of various publications etc) when, in fact, what they have is an interest in a contract for sale.

This creates some interesting practical (and free speech) issues; it’s basically impossible to find a buyer to whom to assign a contract without giving them the address of the property that they’ll be buying, but at the same time it is, probably, strictly speaking inaccurate to say that you have a house for sale when you don’t own that house.

On the other hand, Craigslist doesn’t have a “contracts for sale” section in which to put your wholesale deals (and “Contract available for assignment” is a bit unwieldy for a 24×36 yard sign), and so it’s difficult not, at some point, say or imply that there’s a property involved in the sale

 

However, attorneys familiar with these cases recommend that ALL marketing, including but not limited to website posts, emails to buyer’s lists, Craigslist ads, written materials, and social media posts, contain language SPECIFYING that a contract is being assigned, and that it is NOT property itself being sold. This would take the form of some sort of disclosure language such as:

 

I am assigning the rights in my purchase agreement on this property

 

Finally, note that these guidelines would apply  to ALL of your marketing, including marketing that you think is “internal”, such as emails to your buyer’s list. Any marketing you use, whether to the general public or to your facebook friends, buyer’s list, etc. could be turned over to an investigating body and could become part of the “facts and circumstances” in any investigation involving your business.