Legal Issues with Wholesaling in D.C.

[Kasey Nordeen]

I'm very interested in starting a part-time wholesaling operation in D.C., but I have some questions to pose to experienced wholesalers and investors in the area. 

I've read about how Ohio and some other states are cracking down on wholesalers, claiming that they're acting as a real estate broker without a license. 

Many states seem to define "real estate broker" just like D.C. does: D.C. Code 47-2853.161 defines it as someone who "for a fee, commission, or other valuable consideration, lists for sale, or sells, exchanges, purchases, rents, or leases property." 

Now, there are about 10 different ways to interpret most statutes, and there do not seem to be any judicial decisions on this statute that would offer any guidance as to whether a wholesaler constitutes a "real estate broker." So, until this issue is actually litigated, whether or not wholesaling is currently illegal in D.C. basically depends on how the D.C. Real Estate Commission chooses to treat it.

I'm not going to start a wholesaling business if there is any significant chance that it is, or in the near future may become, illegal. My questions are: Does anyone know if the D.C. Real Estate Commission has taken a stance on wholesaling? If so, do they actually take action against wholesalers? Have any wholesalers on here run into any legal issues with the D.C. Real Estate Commission?

[Sherman Ragland]

Wholesaling (done correctly) is NOT acting as a broker/agent, whereas Bird Dogging (generally) IS, and here's why...

1) When done correctly, as a wholesaler yo are actually stepping into the path of the transaction by putting the property under contract.  When you put the property under contract to become the "Contract purchaser" and therefore you have certain rights (which bird dogs do not), such as the right to assign or sell your contract, even before you close.  This right is protected by the U.S. Constitution.  Specifically, the right to own property.  Even though you don't (yet) have title, the contract itself has value. If I remember my Contract law class correctly, every contract had the inherent right if assignment, unless the contract itself stipulates that it can not be assigned.  Even aboard of Realtor contracts (agreements) do not prohibit assignment.  They (almost) all say that assignment must be by mutual (written) consent, but there is rarely an absolute prohibition.  Doubtful that any efforts by the state of Ohio (or others) would withstand a court challenge, IF, the intent is to prohibit the assignment if contracts.  Therefore, it's important that if you are truly acting as a Wholesaler that you place yourself, or entity, in the path of the transaction and be prepared to honor the contract (what ever it says) including buying the property, if you can't find a buyer, or you don't have a valid (written into the signed contract) "Out" clause.

2) Bird Dogs (or Scouts) are a totally different matter.  As a Bird Dog you have "no skin in the game".  Your not in the path of the transaction, you are merely an observer, or facilitator.  You are truly making money (a fee) by simply passing on information, or putting two parties together, because you have NOT actually placed the property under agreement with the seller.  YES! Almost every state has its own definition of "brokerage activities" and in almost every case, Bird dogs are doing the exact same things real estate brokers (and their agents) do.  So, pretty much every Bird dog is acting like an agent without a license, unless of course they go and get one.  Every state (and DC) looks at this differently, depending upon how strong the state Board of Realtors® Is.  In DC, you can generally get away with it (for a limited number of transactions) because of the "Peggy Cooper Cafritz" law, but in Virginia, when you get caught (3 times) it's a class 6 felony and a $3,000 fine.

It's important to know whether or not you are actually a Bird Dog, or Wholesaler, not by heat you call yourself, but by what you are actually doing.  One requires a real estate license in almost every state (Bird Dog) and the other (Wholesaler) does not.

P.s. Although I went to law school, I'm not a lawyer, nor do I pretend to be one, but I am a licensed Broker (licensed for 30+ years) and I'm pretty confident of what I've shared in this issue...