Wholesaling real estate typically occurs when an investor enters into one or more contracts to purchase real estate and then assigns his or her legal interest in those purchase contracts to another buyer for a fee. Investors feel that they benefit from wholesaling in a variety of ways. Some investors believe that wholesaling requires less start up cash than a typical purchase of an investment property, that it allows investors to be involved in a large number of deals at once, and that there aren’t the same liabilities with wholesaling that come with owning investment real estate.
However, investors should be cautious. There are some who are concerned that wholesaling in Ohio without doing so under the license of a real estate broker may violate Ohio laws that require a person to be acting under a broker’s license to do certain actions. Ohio Revised Code Section 4735.01(A) defines “real estate broker” and lists the actions a licensed real estate broker or someone operating under a broker’s license may take:
“Real estate broker includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:
(1) Sells, exchanges, purchases, rents, or leases, or negotiates the sale, exchange, purchase, rental, or leasing of any real estate;
(2) Offers, attempts, or agrees to negotiate the sale, exchange, purchase, rental, or leasing of any real estate;
(3) Lists, or offers, attempts, or agrees to list, or auctions, or offers, attempts, or agrees to auction, any real estate;
(4) Buys or offers to buy, sells or offers to sell, or otherwise deals in options on real estate;
(5) Operates, manages, or rents, or offers or attempts to operate, manage, or rent, other than as custodian, caretaker, or janitor, any building or portions of buildings to the public as tenants;
(6) Advertises or holds self out as engaged in the business of selling, exchanging, purchasing, renting, or leasing real estate;
(7) Directs or assists in the procuring of prospects or the negotiation of any transaction, other than mortgage financing, which does or is calculated to result in the sale, exchange, leasing, or renting of any real estate;
(8) Is engaged in the business of charging an advance fee or contracting for collection of a fee in connection with any contract whereby the broker undertakes primarily to promote the sale, exchange, purchase, rental, or leasing of real estate through its listing in a publication issued primarily for such purpose, or for referral of information concerning such real estate to brokers, or both, except that this division does not apply to a publisher of listings or compilations of sales of real estate by their owners;
(9) Collects rental information for purposes of referring prospective tenants to rental units or locations of such units and charges the prospective tenants a fee.”
You are required to obtain a real estate broker’s license or act under a broker with a license in Ohio if your wholesaling practice constitutes actions as described in the above Ohio Revised Code Section 4735.01(A). While you could be subject to penalties in Ohio for wholesaling without a broker’s license or under another’s broker’s license, you are permitted under contract law in Ohio to assign your interest in a contract to another party without a broker’s license. The Ohio Department of Commerce Division of Real Estate (“ODCDRE”) states that intent is the biggest factor they look at to determine if someone is assigning their legal interest in a real estate purchase contract appropriately without a broker’s license. If a non-broker buyer demonstrates the intent to perform under the contract and buy the real estate, then the buyer can assign his or her interest in the contract to another buyer if the opportunity arises and be acting in a manner that ODCDRE deems appropriate. If a non-broker buyer is not demonstrating the intent to close and buy the real estate, the non-broker buyer could be subject to penalties from the ODCDRE after assigning his or her interest in the contract to another buyer. Examples of red flags to the ODCDRE from non-broker buyers who do not have the intent to close include not having the financial ability to purchase the property, entering into a large number of contracts in a short period of time and only closing on a few of those contracts, and having clauses in the purchase contract evidencing the intent of the buyer not to close but to assign its interest in the contract to another buyer. The ODCRE takes the totality of the circumstances, which includes all relevant facts about the buyer, to make their determination as to whether the non-broker buyer had the intent to close on the deal before assigning the contract.
Luckily, the Ohio Revised Code does recognize that many individuals do the acts described in Ohio Revised Code Section 4735.01(A) as part of their professions. Under Ohio Revised Code Section 4735(I), Ohio law exempts certain individuals and entities from the requirement of having a broker’s license as follows:
(1) The terms “real estate broker,” “real estate salesperson,” “foreign real estate dealer,” and “foreign real estate salesperson” do not include a person, partnership, association, limited liability company, limited liability partnership, or corporation, or the regular employees thereof, who perform any of the acts or transactions specified or comprehended in division (A) of this section, whether or not for, or with the intention, in expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration:
(a) With reference to real estate situated in this state owned by such person, partnership, association, limited liability company, limited liability partnership, or corporation, or acquired on its own account in the regular course of, or as an incident to the management of the property and the investment in it;
(b) As receiver or trustee in bankruptcy, as guardian, executor, administrator, trustee, assignee, commissioner, or any person doing the things mentioned in this section, under authority or appointment of, or incident to a proceeding in, any court, or as a bona fide public officer, or as executor, trustee, or other bona fide fiduciary under any trust agreement, deed of trust, will, or other instrument that has been executed in good faith creating a like bona fide fiduciary obligation;
(c) As a public officer while performing the officer’s official duties;
(d) As an attorney at law in the performance of the attorney’s duties;
(e) As a person who engages in the brokering of the sale of business assets, not including the sale, lease, exchange, or assignment of any interest in real estate;
(f) As a person who engages in the sale of manufactured homes as defined in division (C)(4) of section 3781.06 of the Revised Code, or of mobile homes as defined in division (O) of section 4501.01 of the Revised Code, provided the sale does not include the negotiation, sale, lease, exchange, or assignment of any interest in real estate;
(g) As a person who engages in the sale of commercial real estate pursuant to the requirements of section 4735.022 of the Revised Code.
(2) A person, partnership, association, limited liability company, limited liability partnership, or corporation exempt under division (I)(1)(a) of this section shall be limited by the legal interest in the real estate held by that person or entity to performing any of the acts or transactions specified in or comprehended by division (A) of this section.
Bottom line, if you’re a wholesaler and are not a broker or operating under the license of a broker in Ohio, and are not exempt from the requirement of having a broker’s license as described above in Ohio Revised Code Section 4735(I), then you are risking fines from the OCDCRE, which could amount to up to $1,000 a day.