I am a real estate agent and my LLC is a wholesaler..
REA and accountant (CPA) · Omaha, NE · Member since 2015 · 28 posts · 11 votes
Just starting wholesaler operations and registered an LLC, which will be the front end of it.
I am not the only owner of the LLC...
Would appreciate any comments (from other active or inactive licensee) on disclosures to buyer/sellers during the first contact, which can be appropriate in this case. Any other considerations to keep in mind while doing wholesaling on active license.
DISCLOSE immediately. Also, I would represent, in writing, that I am working on my own behalf and not wearing an agent hat. I have purchased several properties (I don't play the assignment game) and always put in my offer contracts that I am a licensed agent, making an offer with a profit motive, and under market value. I have found through the years there is no need to deceive people. Some will sell and some won't. Remember, all they want is the money and don't care who it comes from. I have had people approach me because I am an agent. Does that fact hurt you? Usually not. Remember though, of the ten most common reasons agents get sued two are:
1. misrepresentation of value
2. fraud
Working as an agent you probably have E&O insurance. Working on your own you don't. So, I tell the seller: I will list it for x or buy it for y. Simple enough!
Full disclosure from the initial contact is a must. I say this from something that happened a week ago.
I found a 6 unit mix-use in PA on MLS and contacted the listing agent. We saw the property a few days later and decided to make an offer on it. She said she'll prepare the offer and contract (in PA, the offer is the written contract). She then calls me a few days later and says another agent from her office will be preparing the offer/contract, which I thought was a little strange; and I found out why.
She said there are 2 offers on the table. 1 is ours at X amount, and the other offer will be hers, which is why she was having her colleague prepare our offer/contract, and that this is what her broker told her to do. This is when I gave her a piece of my mind. It's like playing poker where the other person already knows your hand. My partner got on the phone and told her she'll put a lis pendens on the property so fast, she wouldn't do anything with that property and hung up. Agent called me back 3, 4 times and said she won't put in an offer.
Obviously this wasn't a wholesale deal, but when someone is a licensed agent, they have to remember who they're representing and the possible conflict of interest their action poses.
I'm not an agent, so I'm not sure how you'd have to proceed operating in an LLC with a partner to wholesale deals, but there's certainly more disclosures you have to provide as an agent than solely as an investor.
@Johnny Kang Wow. That's simply ridiculous, and this agent must have been an idiot of the next level sort to have tried something like that. Such an obvious conflict of interest.
@Lyuba Barrington I'm trying to do the same thing, so I'll basically just describe how I'm navigating the territory. Now, this is certainly a grey area, no doubt about it, and I've talked to three attorneys and several brokers trying to navigate it.Yes, I have an LLC that I plan to wholesale under, and am currently sending out marketing. And yes also, I am a licensed agent. In Wisconsin they have laws about how many deals you can do, 5 in 1 year, without being licensed (though again, grey area, and I know wholesalers who don't have licenses), so it might be just as well that I have it. The first broker I tried to work under was so unfamiliar with wholesaling, and wanted to treat the whole thing as real estate commission, that it just wasn't going to work out. As of today, I'm at a different broker who will let me wholesale on my own under my LLC, and I will give them $500 per transaction for holding my license -- and really, any way you read the legal texts, it does constitute brokerage activity.
But, as to your disclosure question, yes. I will always tell the individual I have a real estate license. But that doesn't mean I have to work in their interest or anything of the sort. I'm basically a 'principal' in the deal, meaning our relationship is adversarial and I am negotiating on behalf of my own interests, so just because I have a real estate license nothing like fiduciary responsibility applies.
But anyways, sorry if that rambled, yes, I will always disclose. It seems simple enough, and the honest thing to do. I don't like to feel like I'm hiding things.
I hope that helped a bit, I know I was having trouble finding a clear way to navigate this whole area, but that's what I've come up with. Pretty happy with it.
Best of luck,
JTM
As for 'first contact,' I might just wait till I see them in person. It probably won't be the very first thing I say when I get on the phone.
I know, it was beyond belief to say the least. lol
Yea, when I said "Full disclosure from the initial contact," I don't necessarily mean the 1st phone conversation. But definitely don't time it in a manner where a property was shown already, and then decide to also make an offer so you can do the deal yourself. :)
My concern with wholesaling as an agent, i dont know about Nebraska, but in Wisconsin, it could be construed as a "net listing" an illegal activity even though an agent is not listing the property, but selling their contract, given that its potentially a significant spread, the state could see it that way. The other part of wholesaling that is a possible red flag is Equity Stripping, AKA Illegal Flipping, this was heavily regulated till a few years ago by lenders, especially M.I. companies, they have relaxed the rules, but was a problem pre and post crash. seeing the increase in this activity seems eerily familiar, like 2007 all over again. just be careful especially with your license, Disclose Early, Often, and in Writing, My license is too valuable to me to be involved in this type of transaction, so i steer clear. if my entity is on the contract, I am the one closing. period.
I agree with Scott: bad idea. You are in violation of at least half a dozend rules plus there are moral and ethical issues. The fact that you are trying to hide behinde a multi-member LLC and had to switch brokers until you found a small flat fee outfit that does not have a compliance department that really understands the legal implications should be a red flag to yourself. Please understand I am supportive of wholesaleing, but once you become licensed you have to play by a different set of rules. No matter if you are an investor, landlord, agent or wholesaler - integrity, honesty and transparancy are core values and adhereing to them will serve you well in the long run.
@Johnny Kang Yeah, that was ridiculous of the agent, but.....your partner is a bit delusional if she thinks this would give you the right to file an LP against the subject property. The property owner has no deal with you, and no obligation to you, for you to enforce.
On first thought I remember an instructor I had that used to say when in doubt, DISCLOSE, DISCLOSE, AND....DISCLOSE....However, while you said you are listed on the LLC you did not say if you are the managing director. While I think that is important to know and would effect those Disclosures I would highly recommend clarifying with the local Board as well as the State board of licensing to make sure. Good luck!
@Lyuba Barrington I don't know about the requirements as a licensed real estate agent in your state, but in Texas it is required that you disclose if you are licensed. When I interact with a home seller I always let them know that I'm an agent and take several steps further than that. I normally have them sign the Information About Brokerage Services if we meet up and ALWAYS have them sign the IABS and a non representation agreement if we agree on a price and I get the house under contract. Better safe than sorry! Hope this helps!
I had a similar experience with an agent I had contacted about an MLS listed HUD property. After agreeing to put in the offer for me, then getting the address, then asking me for my bid amount, she suddenly "remembered" that she was already "going" to put in an offer for "an investor she had been working with for years and you know it would just be a type of conflict of interest if she put in offers for both of us and don't you see that's why she just couldn't help me." Yeah, that happened. In my initial anger, I asked her about the obvious conflict of interest in asking me for my bid amount. And then I calculated the angles and immediately started playing dumb. You know, cause I understood her position and maybe next time. Basically I contacted an honest agent, raised my bid, and got the property. But it cost me more than it should have.
@Wayne Brooks
Of course we can't file an LP against the building based on that. It was a comment she made to make the agent know we're not going to let someone handle the offers the way she was about to do and not do anything about it. At the very least, we will go to the Association of Realtors because I did get a text from her when she forwarded her colleague's info on why she was sending it. Certainly it's unethical, if not illegal. Thanks for commenting on my post.
Ridiculous for an agent to pull a stunt like that. Disclosure is best
I switched brokers, from Coldwell, who deals almost exclusively with traditional real estate to Berkshire Hathaway. Not exactly a tiny brokerage, and their familiar with the process and okay with it. I think they're just more investor friendly. As to potential dangerous situations for having a license, I guess it's possible, but I think unlikely. Disclose early and often, and I think I'll be fine. I also plan to draft an acknowledgements addendum so they understand exactly what is going on. It just isn't the case that I am representing them and trying to get top dollar for their house, not in this situation. Buying is an individual, or with my LLC as the client, it's necessarily adversarial. I know it a hot issu, but I think I'll be alright
Best,
JTM
@Lyuba Barrington I don't know about the requirements as a licensed real estate agent in your state, but in Texas it is required that you disclose if you are licensed. When I interact with a home seller I always let them know that I'm an agent and take several steps further than that. I normally have them sign the Information About Brokerage Services if we meet up and ALWAYS have them sign the IABS and a non representation agreement if we agree on a price and I get the house under contract. Better safe than sorry! Hope this helps!
Jonathan - this is very helpful. Thank you for sharing your approach.
I would think that a seller/buyer would really value the fact that licensed professional is involved in a transaction, but in my rather short experience, people out there are suspicious about the motives of a real estate agent vs just regular buyer. In my CPA practice I got very used to clients disclosing the most intimate details of their financial life to me, and the public's attitude towards realtors is surprising and upsetting. Despite the fact that the extent of background check for a RE license is such, that I am now automatically given pre-TSA check-in when flying out of Omaha :)
I switched brokers, from Coldwell, who deals almost exclusively with traditional real estate to Berkshire Hathaway. Not exactly a tiny brokerage, and their familiar with the process and okay with it. I think they're just more investor friendly. As to potential dangerous situations for having a license, I guess it's possible, but I think unlikely. Disclose early and often, and I think I'll be fine. I also plan to draft an acknowledgements addendum so they understand exactly what is going on. It just isn't the case that I am representing them and trying to get top dollar for their house, not in this situation. Buying is an individual, or with my LLC as the client, it's necessarily adversarial. I know it a hot issu, but I think I'll be alright
Best,
JTM
Joshua - I appreciate you sharing the insights. Thinking of switching to more investor friendly brokerage as well, if the business takes off. My primary thought for involvement with the LLC was to get access to sellers who would not qualify for investor deal, but may be interested in short sale listing (which must be done with the agent for bank to consider it), or some other solution. Funny that Coldwell in Omaha is dealing a lot with investors and short sales :)
DISCLOSE immediately. Also, I would represent, in writing, that I am working on my own behalf and not wearing an agent hat. I have purchased several properties (I don't play the assignment game) and always put in my offer contracts that I am a licensed agent, making an offer with a profit motive, and under market value. I have found through the years there is no need to deceive people. Some will sell and some won't. Remember, all they want is the money and don't care who it comes from. I have had people approach me because I am an agent. Does that fact hurt you? Usually not. Remember though, of the ten most common reasons agents get sued two are:
1. misrepresentation of value
2. fraud
Working as an agent you probably have E&O insurance. Working on your own you don't. So, I tell the seller: I will list it for x or buy it for y. Simple enough!
@Lyuba Barrington What I do to negate them thinking I have suspicious motives is that I tell the them that even though I am a licensed agent I am not acting in that capacity as I'm not representing them or anyone else. This honesty has worked for me in the past but I'm sure there are many ways to counter a seller thinking you have suspicious motives. I would love to hear what other agents do in this type of situation.
Totally agreed. And based on one of your other posts, and what you're talking about now, I want to line up transactional funding for just that reason.
Not sure which post you are referring to. It is like I am glued to this darn computer..I just can't get away! Truthfully, been on the road several days this week dealing with problems at a rental. Sitting around waiting for servicemen, etc gives me plenty of time on BP. There is always something interesting!
Transactional funding is great. Look for someone in your area or state that offers it. I would definitely check them out first to make sure I was dealing with someone to be trusted. I can't speak to those offering this type of loan, but in the event they want up front fees other than an appraisal I think I would steer clear. Everyone is out to make a buck and some don't care how they get it.
The scenarios I see are what I consider to be not arms-length transactions. As a broker, your represented interest in a short sale should be consistent with the bank's (sellers) interest, not your LLC interest. I see major conflicts of interest, regardless of your disclosure.
Why exactly are you doing this?
This reminds me of the early days of dual agency, in the 1980s when it wasn't clear which side a broker was representing. Except worse... because your LLC will peel off the profits, which end up back in your pocket.
In my view, pick a side. Stay on that side. Per client, choose one strategy and one only... independently each time, each client... then disclose, and don't get tempted to cheat. That's my educated but unlicensed opinion.The scenarios I see are what I consider to be not arms-length transactions. As a broker, your represented interest in a short sale should be consistent with the bank's (sellers) interest, not your LLC interest. I see major conflicts of interest, regardless of your disclosure.
Why exactly are you doing this?
I don't recall mentioning that I would engage in short sale fraud :)@Joshua Martin sounds like you are on the right track. I am not familiar with Berkshire's interal legal infrastructur, you may or may not have a fully competent advisor. And some are just willing to take the risk until they get sued. Good luck!