Is wholesaling actually illegal in Ohio?

Question

Full disclosure: I am a licensed real estate broker in Ohio. I am also an investor. I have done lots of research on the practice of wholesaling. I must say in my opinion this practice (in most forms) is at a minimum shady, and at a maximum an illegal way to screw over an un-educated home owner. I am putting this information out there because I don't think most wholesalers understand that they are breaking the law. Though most of them are profiting, very few are ever getting caught. Now that I have your attention, let me explain.

I just read this article that was put out by the Ohio Association of Realtors (so consider the source). It has really made me re-think the wholesaling practice that I see lots of investors doing. Though most unlicensed investors probably hate the licensing laws, they are LAWS, and practicing real estate without a license is illegal. In Ohio it is illegal for an individual to Sell, exchange, purchase, or negotiate the sale, exchange, purchase, of any real estate for another, for a fee, without first obtaining a real estate license. That means if you are not a principal in the transaction, you can not negotiate, sell, or market real estate and collect a fee. So signing a contract to purchase real estate from someone, and then marketing that contract to another person for more money is illegal unless you have a license. If you have a license, it is also illegal, because you are not acting in the clients best interest, you are acting in your own. If you know you can sell the property for more money to someone else, then you are acting outside of the cannons of ethics for licensed real estate agents or brokers.

From what I see in my market in Columbus Ohio, most wholesalers work outside the laws, and run the risk of being caught, though unfortunately most don't actually get caught. It is my stance that you should obtain a license, and or practice your investing business within the laws. If you must operate outside the laws to profit, there is a problem with your business model. Not to mention, I hope you can sleep at night knowing that the only reason you profited was because you took advantage of some poor seller that does not know what is actually happening.

If you tell someone "I will buy your house fast, for cash" then actually buy their house. If you are actually going to re-sell that contract to buy that house to someone else for a higher price, then do it above the table and disclose that to everyone involved in the deal. I started this article with a full disclosure, because in my opinion that is the only ethical way of doing things. Wholesalers that operate outside the laws in my opinion are worse than used car salesmen selling lemons. When I see bandit signs, and yellow letters that say "We buy houses fast, for cash" I want to take a marker and write on them "But only if you agree to sell it for less than what it is actually worth" because that is full disclosure.

Ok, now that I have probably upset most wholesalers, tell me why I am wrong. Thanks!

Don Konipol · Answer

I see wholesalers ( those that flip contracts and don't purchase the property themselves) "adding value" to the market in a couple of different instances.

1. The assignment fee is less than the standard 6% commission (which of course doesn't exist as all commissions are freely negotiated and it's just an incredible coincident that 98% of commissions are at 6% and that the majority of Realtors refuse to show properties listed by "discount" real estate brokers).

2. In lower priced properties that Realtors are not interested in representing

3. In hard to sell properties with small markets such as properties needing a large amount of repairs that most Realtors have no experience in representing

4. In country properties where an active multiple listing service does not exist.

5. In 2 - 4 unit properties where Realtors may not have the training or knowledge.

6. Where a very quick sale is required and/or a sale without a fully warranted title needs to take place.

Anything promulgated by the National Association of Realtors, or any of their affiliates will have a bias attached.  The NAR is NOT an agency representing consumers or home sellers, or home buyers.  It is a trade organization representing it's membership.  As such it's positions should be regarded with the same suspicion one would regard the positions taken by private corporations and unions.  Further, many of the state laws making wholesaling illegal (which are not actually laws passed by the state legislature but are rules put into effect by state real estate commissions) were "suggested" by the NAR state affiliates.  So these laws were suggested by a private trade association, happen to provide protection to that trade association against competition, and were put into effect by professional regulatory bureaucrats, and written by attorneys working for and billing those agencies on an hourly basis.  Nothing bias about that!

John Horner · Answer

So I am a little confused, are you against wholesalers or just anyone who buys a property at below market value?

I am an investor here in Columbus and I buy 3-4 discounted properties per month through my direct mail and website.  I am not a wholesaler, I pay cash for properties and I do close fast... but I certainly DO buy at a discount.  I am not a realtor, I do not have a listing agreement with the sellers and I have no obligation to pay the seller retail price for their property.  It is amazing the different forms of motivation that people may have, but I can't tell you how many people want to sell cash instead of dealing with an agent.

Jennifer Kaplan · Answer

It should be noted that this thread is specific to wholesaling in Ohio. Several of the commenters above are referring to their experiences with the laws and/or wholesalers in other states, like Texas and Indiana. Not that those experiences are unimportant, but some of them are not relevant to the topic of wholesaling in Ohio. I came here to this thread while attempting to double check what I heard a few years back: that wholesaling in Ohio is basically illegal. Specifically, there is a very narrow margin a wholesaler can navigate and remain inside the law, in Ohio, but accidentally falling out of that margin is incredibly easy. For example, you can't ever say or imply that you are going to buy the house yourself, if your intention from the start is something else. Literally, the phrase "we buy houses" is illegal, if you are actually wholesaling. You also can't say you're going to help them sell their property, because that's acting as an agent without a license. (Or, if you have a license, there are other restrictions.) You can say that you're going to sell the rights to a contract, but even slightly miss-speaking can make the whole transaction illegal. And since I am neither a lawyer, nor a wholesaler, my understanding of the nitty-gritty is limited. However, since this thread is potentially pretty important for Ohioan beginners, I thought I should add in what little I do know.

Will Barnard · Answer

This is an older thread getting revived and per the post above, I will keep it about OHIO real estate, however, what I am about to say applies in all states.

“Wholesaling” in of itself is not illegal but how you execute the transaction can make it illegal. In OH, if you negotiate a purchase price with a seller, market that property, bring buyer and seller together, and receive a fee for that, you have violated the real estate laws and it is punishable by fines, jail, and/or restitution.

As stated above by others, it is mostly the gurus selling their BS courses to take money from those looking for the pie in the sky real esale riches. Unfortunately, they teach illegal means to perform the trans action and additionally, even teach immoral practices like silly contingency clauses, lying to sellers, etc.

All this said, there are legal ways to wholesale in all states. If you close on it, then market and resale as the owner, you are a principle and therefore have not violated any laws.  You may also line up your wholesale buyer in advance, find the property, form a new entity naming you and your buyer as owners, and vest the offer in the name of that entity. You are now a principle in the transaction and you do not need to publicly market the property as your buyer is actually your “partner” for lack of another term. Then at close of escrow, you simply sell your shares in the entity for your fee. Nothing illegal about doing it that way in any state.

Brandon Schlichter · Answer

If you follow the law, then yes, wholesaling is illegal under the Ohio cannon of ethics. This isn't a OAR position, but a division of real estate stance, and they have actually gone after wholesalers.Will you get caught wholesaling? Likely not, but I'd be very careful and cautious of it. Getting your RE license is pretty darn easy and cheap, so I don't see the benefit in trying to skirit the laws to save $1500 or so to get your license. But then, that's not why people wholesale.If you'd ask most wholesalers, at least ones  starting out, you'd realize they're trying to break into real estate because they have virtually no money and wholesaling is the current get-rich-quick-scheme that the gurus are pushing.

Robert Mennella · Answer

What is “Wholesaling” ? Selling a property for any amount less than the Market Value can be considered wholesaling. I know many people who bought a house at what would be considered a wholesale price and moved in. Having a real estate license is selling a property that you do not own for a fee. When you own a property you can sell it how you want to sell it. This dialogue always coming from the agent side of things, is understandable, however unfounded. The reality is there’s a place for agents and industry standard business practices as well as real estate investors wholesaling and fixing and flipping and most importantly Fixing the properties that are improving the neighborhood substantially. Investors get this bad rap, bad publicity but in fact who’s going to serve this purpose? An agent typically will have you investing money you don’t have to bring the property up to snuff, so they can sell it at a higher price therefore net a higher yield. There has to be a way for struggling owners to get out of a bad situation that investors give a solution to. Are you saying agents don’t take advantage of people? Ok. Now I understand the difference between assignment of contract and double closing. Honestly that is just another money grab for the city/state involved to make extra money collecting double fees. There’s laws in place and for good reasons, but the argument that wholesaling is illegal is just not true. Now recently to keep the realtor industry at bay some markets have tightened up and created some new laws requiring wholesalers to have a license, such as Philadelphia Pa.where you need a Residential Property Wholesalers License to wholesale property within the city of Philadelphia, however outside the city, it go’s back to no license needed. If you already have a realtors license, you are not required to get the wholesalers license. Wholesalers serve a purpose…They supply “rehabbers” with many times vacant run down houses that need a complete overhaul to bring back to market standards. These are houses that a real estate agency will not can not sell to a typical end user. This is why it all works out. The city’s and municipalities should be grateful to the investors who don’t get the just credit they are due for updating the neighborhood, cleaning out the isore properties that are bringing down the property values in a particular area, the surrounding owners are certainly reaping the rewards of the investors efforts. Wholesaling is not going away anytime soon.  There’s always going to be a market for homeowners who don’t want to pay commission fees etc. I suggest you get yourself licensed if your in a market where it’s required and embrace the laws.

Corey Liepelt · Answer

@Brandon Schlichter, the Ohio Associaton of Realtors canon of ethics is not law. It doesn't matter what the canon of ethics say. What is important is that the Ohio Revised Code chapter 4735 says it's illegal to wholesale without a license. It doesn't ever use that term, but the language makes it clear.

@John Horner, buying a property below market value is totally legal. You buy from distressed sellers all the time, and you add value by improving the properties. That's good business. The Ohio Real Estate Commission is concerned with unlicensed wholesalers who tie up a property in contract with little to no money, then assign the contract rights for a profit. That is viewed by them as predatory and unfair. In the case of most wholesalers, that's exactly what it is. There are, of course, wholesalers who operate legally (with a license) and ethically, but they are not in the majority.

Robert Mennella · Answer

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Mark Brogan · Answer

agreed @Benjamin Vail

disclose what you are doing with the property to the seller

there are wholesalers in my market that have lots of complaints against them with the BBB because they only say we buy with cash and then cant find a buyer then disappear

Is wholesaling actually illegal in Ohio?

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