Wholesaling Real Estate – Is it Legal?
March 29, 2019 |
We’ve all seen the signs, “We Buy Houses.” Chances are the buyers are really investors seeking to wholesale property. Real Estate Wholesalers enter into a purchase agreement with a seller and then try to find an end buyer for the seller’s property. These investors are called Wholesalers because at any point in time they have high volumes of contracts with sellers. The Wholesaler typically finds buyers by marketing the property online. The end buyer will then pay the Wholesaler a fee for the assignment of the Wholesaler’s legal interest in the property (i.e. the right to purchase the property from the seller).
Wholesaling is different than flipping. A flipper will buy a property, take title to it, fix it up, and then sell it for a profit. Investors like wholesaling because they never take title to the property, thereby reducing liability for problems that may occur in the transaction. They also can gain a profit without having to outlay any cash to acquire the property. Buyers and sellers like wholesaling because they believe they are saving the commissions associated with a traditional brokerage transaction.
Many wholesalers may not realize that their advertising efforts to find a buyer triggers the need for licensure as a real estate salesperson. Under license law, any person for a fee, commission, or other consideration (or expectation of a fee, commission or other consideration) that procures a prospect for the sale of real estate must be licensed. So, when the Wholesaler advertises a property for sale, that the wholesaler doesn’t own, the Wholesaler is procuring a prospect to buy the property. Additionally, the Wholesaler is procuring the prospect with the expectation that it will be paid a fee for the assignment of the purchase contract to the buyer.
The law does permit a non-licensee to market its “interest” in property without licensure. So, for the Wholesaler, marketing would be limited to that which the Wholesaler owns, which is an equitable interest as a result of the purchase agreement. Thus, the Wholesaler would be able to market the assignment of the purchase agreement, but not the property itself.
In Ohio, the consequences for engaging in activity requiring licensure without a license can be expensive. The Ohio Real Estate Commission can investigate the unlicensed activity and ultimately impose a civil penalty of up to $1,000 per day a violation occurs. The civil penalties can be certified to the Ohio Attorney General’s Office for collection.
A Wholesaler can legally assign their interest in a purchase contract without obtaining licensure as a real estate salesperson. It is the advertising, marketing, and other efforts to procure a buyer of the seller’s property that triggers the need for licensure. Wholesalers are not exempt from Ohio license law. However, when operating with licensure, wholesaling is legal in Ohio.