Licenses For Flipping Real
Estate
You
buy a property, you flip it, you profit. Does this require a real estate
license? In most cases, the answer is "no". Real estate brokerage is an activity
regulated by states on their own terms, thus each state defines which activities
require a license. There is a lot of vagueness and ambiguity in some of the
state licensing codes, as well as "gray areas", which complicate the matter.
Furthermore, if you vary the techniques and your business practices beyond the
scope of what I teach in my course, it is not always clear how the state
authorities might view your practices. Therefore, this discussion is limited to
the simple activity of buying and flipping as follows:
1. Sign a contract with a seller, assign it to a third party
2. Sign a contract with a seller, sign another one with a third party, then
double close
The large majority of states use the "for another" language in their state
licensing statutes. The "for another" language means the law provides a laundry
list of activities that require a license if you do it "for another."
A good example is the Ohio Statute:
§ 4735.01 Definitions. As used in this chapter:
(A) "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:
The code then goes on to list all types of activity, such as buying, selling,
offerings, leasing, negotiating, etc. This type of statute would clearly exempt
you from doing any of the listed activity so long as you were doing it on your
own behalf. The following court case clearly delineates the difference between
acting on your own behalf and acting as a broker.
In Xarin Real Estate v. Gamboa, 715 S.W. 80 (TX 1986), an investor named Xarin
entered into a purchase contract with the owner, Gamboa, then assigned his
purchase contract to a third party, Baker. When the deal blew up, Baker sued
Xarin claiming, among other things, that Xarin was illegally acting as a real
estate broker without a license.
The court ruled that, “No evidence exists to show that Xarin was acting for
anyone but itself when it sold its interest to Baker. Xarin was shown on the
sales contract to be only the purchaser and was not shown in any agency
capacity… There is also no evidence that Xarin acted for Baker when Xarin
acquired its interest in the property from the Gamboa's. Generally, to establish
that one person has acted for another in an normal agency relationship, there
must be an agreement between two persons and one must exercise some control over
the other.”
Two important points are worth noting here. First, the court acknowledged that
Xarin had “an interest in the property” when it signed a purchase contract with
Gamboa. As we will discuss later, having “an interest” in real estate allows you
to sell your interest, which is specifically exempt from many state licensing
laws. Second, the court made an important point that that the Xarin did not have
a deal with Baker in place when it made the deal with the owner of the property.
This is important because the reverse can also be true; if you make a deal with
a buyer first, then find him a property, a good argument can be made that
activity is brokering on behalf of the buyer.
Other states that do not use the "for another" language clearly identify
specific exemptions in their licensing statutes. A good example is the South
Carolina statute, which reads:
"This chapter does not apply to:
The sale, lease, or rental of real estate by an unlicensed owner of real estate
who owns any interest in the real estate if the interest being sold, leased, or
rented is identical to the owner's legal interest"
However, you must have an interest in the property before you sell it. In
general, a contract to purchase property gives the buyer an equitable interest
in the land. 27A Am. Jur. 2d Equitable Conversion § 10. Thus, if you have an
interest in the property, you are basically exempt from the licensing
regulations in these states.
A few states limit the real estate activity of any persons, even if you are
acting on your own behalf. SD, MN, WI, MI, MD & MN all have limitations on the
number and frequency of real estate transactions you can do before you will need
a real estate license. For example, Michigan law limits you to 4 transactions
per year, although it is not clear whether using multiple corporate entities
will be a workaround.
There's few, if any, reported cases of people being prosecuted anywhere in the
country for not having a real estate license. The issue of licensing is more
relevant in the enforcement of your profit. For example, if you assign your
contract prior to closing and expect the buyer to pay you at closing, he may
stiff you and argue "you don't have a license".
The bottom line is that if you don't act like a real estate broker, the state
agencies that license brokers will leave you alone. If you use the licensing
exemptions to skirt the licensing laws, you will likely hear from the state
licensing agencies. It is important that you make it very clear to all parties
in the transaction that you are not a broker and are acting on your own behalf.
Mortgage Glossary7
