Hey BP, I just recently got licensed as a real estate agent and have set foot onto a rather large firm in the Kansas City area. I'm with a firm called Reece&Nichols, I originally got my license because I thought it would do nothing but give me the resources and tools to further my interest in investing. The primary focus at this firm is with traditional residential sales. Additionally, they charge a flat $350 brokerage fee on the seller per transaction. (I'd imagine this would significantly hurt a wholesale deal).
With that,
--> my question is who has experience wholesaling as an agent and if so, how exactly can you do that given the increased legalities of having a license. I know it can be done but, it almost sounds better to wholesale without one! :0
I had mentioned wholesaling to my broker and she knew very little about it and the legalities of it in relation to an agent. She contact one of the firms attorneys and they said the following:
"There are a lot of potential issues going on in this email. =) First, before we get into the weeds, anytime an agent is buying or selling investment property, they do NOT have E&O coverage. While we prohibit agents from selling their own personal residence, we do permit agents to represent themselves in the purchase and sale of investment property. That being said, the cleanest way to handle buying and selling investment property owned in whole or in part (or indirectly through an LLC or something like that) is to have another agent represent you for a reduced commission (something like 500-1000). We strongly encourage this, and I can provide horror stories if needed. They do happen, and when they do, they are ugly because the agent's license can be on the line given real estate is involved.
As to “wholesaling” there are both federal and state laws at play that make the question complicated. For example, when the real estate market was depressed and we saw lots of short sales, there were people and companies out there trying to “wholesale” or “flop” (federal government calls this flopping in the short sale context) these properties. Where a mortgage is not getting paid off, it’s very possible that the practice of wholesaling or flopping could be considered mortgage fraud – a federal crime. Assuming the mortgage holder is getting paid in full, theoretically there would not be mortgage fraud, but there can be other issues. Some states have laws that prohibit the practice or have a holding period requirement. Other states do not, and it’s unclear whether the practice is legal. There’s a lot of debate on this topic, and you can find lots of articles about it online. Bottom line is that it would be much cleaner and legal if the agent just got a buyer’s agency with and investor. If that’s not feasible, the second best option is to buy, close, and then turnaround and sell at a later date. I’m not sure what exactly a title company would require, but some may refuse to close a simultaneous or double closing type of deal. Others may be okay with it…it really depends on their underwriting standards.
Given the nature of the issues at hand and the fact that this isn’t a legal question for an agent so much as it is a person (who happens to be an agent) asking for legal advice about an investment plan, I strongly encourage them to seek legal advice.
If the agent is trying to double dip – go under contract as the buyer, assign the contract for an assignment fee AND represent the buyer to receive commission, there could be additional issues. As a side point, whenever an agent buys or sells without representation, if they are audited by the IRS and didn’t take a commission, it’s very likely that the IRS will impute income to the agent and then say they owe taxes on that imputed income. Also, keep in mind that if the agent is the buyer under the contract planning to assign or simultaneously close but can’t find an investor and then can’t close, that could get ugly.
It’s also possible that the REC would say this is brokering property and requires a license. If that’s the case, it would somehow need to run through RN, but we are not in the business of assigning contracts, so that wouldn’t work.
I’m happy to discuss further if you like. I’m sure I haven’t covered everything! I know people do this, but I saw someone go to jail (Fed Pen) over what the federal government calls “flopping” even though he’d spoken to an attorney before he did it, so I’d be careful."
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Thoughts, comments, considerations?
Thanks!
