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This article has been submitted for publication, October, 2004.
To Be a Licensee or Not to Be a Licensee, That is the Question
Must you be a licensed real estate Agent to be a real
estate investor? Must you be a
Licensee if you are a wholesaler? Must
you be a Licensee if you “wholesale” options or other interests in real
estate?
The average real estate investor probably feels comfortable
in answering the questions above with a “no” and going on about their
investing activities. But the answer
may not be “no” and the questions are not useless banter for the idle mind.
This author has investor clients that have been approached by
investigators with the Georgia Real Estate Commission with allegations of
violations of
Georgia
’s real estate license law.
In one such in instance an investigator posed as a newbie
investor and called a wholesaler that deals in options, among other investments.
The wholesaler asked a series of pertinent questions, advised that he
felt he could secure an option on suitable property, and would charge a modest
fee for assigning the option. The
assignment fee was to be less than $5,000.00, payable at closing.
The “investor” agreed. The
wholesaler secured an option on an appropriate piece of property and then went
to a meeting with his erstwhile “investor”.
At the meeting the “investor” revealed that he was a Georgia Real
Estate Commission investigator and pulled out a “Consent Cease & Desist
Order” for the wholesaler to sign. Believing
he had no option the wholesaler signed the Cease and Desist Order and has been
forced to change his business model substantially.
Click through to see a redacted version of the Consent
Cease & Desist Order.
It appears that the Georgia Real Estate Commission has
begun to engage in enforcement activity that may be a surprise to many real
estate investors. This enforcement
activity appears to be a new effort on the part of the Commission.
The legal questions that arise in this atmosphere are many and varied.
Below we will attempt to address some of those questions.
The analysis begins with understanding the basic framework
of real estate license law, set forth in Official Code of Georgia Annotated (“O.C.G.A.”)
43-40-1 et. seq. Generally the law
allows only real estate Brokers to earn a real estate commission.
O.C.G.A. 43-40-30. Real
estate Agents are legally allowed to share a portion of a real estate commission
with their Broker. In this article
when we refer to Brokers and Agents together we will call them Licensees.
The practice of real estate is defined in terms of the types of conduct
that are allowed only to Licensees and is set forth as follows.
“(2) "Broker"
means any person who, for another, and who, for a fee, commission, or any
other valuable consideration or with the intent or expectation of receiving the
same from another:
(A) Negotiates or attempts to
negotiate, or assists in procuring prospects for the listing, sale, purchase,
exchange, renting, lease, or option for any real estate or of the improvements
thereon;
(B) Holds himself or herself out as a
referral Agent for the purpose of securing prospects for the listing, sale,
purchase, exchange, renting, lease, or option for any real estate;
(C) Collects rents, assessments, or
other trust funds or attempts to collect rents, assessments, or other trust
funds;
(D) Is employed by or on behalf of the
owner or owners of lots, time-share intervals, or other parcels of real estate
at a salary, fee, commission, or any other valuable consideration to sell such
real estate or any part thereof in lots or parcels or intervals or other
disposition thereof;
(E) Engages in the business of charging
an advance fee or contracting for collecting of a fee, other than an advertising
fee, in connection with any contract whereby he or she undertakes primarily to
promote the sale of real estate either through its listing in a publication
issued primarily for such purpose, or for referral of information concerning
such real estate to Brokers, or both;
(F) Auctions or offers or attempts or
agrees to auction real estate;
(G) Buys or offers to buy, sells or
offers to sell, or otherwise deals in options to buy real estate;
(H) Performs property management
services or community association management services;
(I) Provides or attempts to provide to
any party to a real estate transaction consulting services designed to assist
the party in the negotiations or procurement of prospects for the listing, sale,
purchase, exchange, renting, lease, or option for any real estate or the
improvements thereon; or
(J) Advertises or holds himself or
herself out as engaged in any of the foregoing.” (emphasis supplied).
O.C.G.A. 43-40-1.
Generally the law of the State of
Georgia
defines the acts that require a real estate license very broadly.
There is some relief in O.C.G.A. 43-40-29 in terms of exceptions for
attorneys, trustees, property managers, and the like, but those exceptions will
be narrowly construed.
The part of the above quoted provision that appears to have
tripped up one options wholesaler is underlined above.
Basically if you offer to acquire or arrange the acquisition of property
“for another” and “for a fee” you are engaging in activity that requires
you to be a Licensee. However, if
buying an option and then assigning it is activity for which you must be a real
estate Licensee then cannot the same be said for contracting to purchase the
property and assigning your position to another investor?
Does not the Georgia Real Estate Commission’s position on this issue
implicate any investor that is a wholesaler?
The are no clear answers to these questions but the
analysis lies in an exploration of the “for another” and “for a fee”
language. It would seem if you sign
a contract to purchase real estate or an option to purchase property with the
intent to close and then change your mind and assign your position to another
you have not run afoul of Georgia real estate license law because you entered
into the contract for yourself not “for another”.
Even if you then assign your interest in the contract to another, you
have assigned the contract to which you are a party for the benefit of yourself.
The question then becomes what if you enter into the contract or option
with the intention of assigning and not closing in your own name?
Many of the
Georgia
cases interpreting the
Georgia
real estate license law basically hold that if you are not a Licensee your
lawsuit for a real estate commission will fail despite the agreement between the
parties. On the other hand the Barnes
et. v. Didschuneit, 94 Ga. App. 661 (1956) case held that a person that was
a part owner of property could earn a portion of the proceeds of the sale
without being a Licensee even if the other owner of the property provided all
the money to acquire the property. There
are relatively few cases interpreting
Georgia
’s real estate license law in this area. It
cannot even be said definitively that a wholesaler that intends to take title to
property, and later changes his mind and flips his position, will be exempt from
the prying eyes of the Georgia Real Estate Commission.
What is known is that if the Commission has evidence that the
wholesaler’s intention was not to close but was to convey its position, the
Commission may take the position that the wholesaler is practicing real estate
without a license and seek sanctions. Furthermore,
the response that the wholesaler acquired the contract or option in the
wholesaler’s name, in other words, not “for another” but for the
wholesaler, may be an insufficient defense if the Commission has evidence that
the wholesaler intended to convey its position without closing in its own name.
The stakes here are significant, $1,000.00 per day fines and the like.
What can be done by the wholesaler or even the infrequent investor that
occasionally flips a position in a property to a fellow investor?
First, be careful who you are dealing with, learn about them, perhaps
even have them sign a non-disclosure agreement, an application, or some other
clever document. Second, even if it
is your practice, do not casually reveal that it is common for you to flip your
position to other investors. Third,
do not attempt to structure a deal for another, in other words, put your name or
the name of your company down as the buyer and have the person to whom you sell
the property assume your purchase obligation.
Fourth, close on at least some portion of the positions you acquire so as
to leave a paper trail regarding your intent.
Fifth, consider taking an interest in the property at least for a time,
perhaps with a mandatory buy out after some period.
Sixth, and last, but certainly not least, become an Agent.
The author has successfully been a Licensee and an investor
simultaneously for three and one half years.
Becoming an Agent not only keeps you on the right side of the law but it
opens up new research and business tools, costs far less than you may think,
does not cause substantial impairment to your ability to enter into
transactions, and will educate you and make you a better, more knowledgeable
investor.
About the Author
David J. Reed is in the private practice of law in
Atlanta
. He specializes in real estate
litigation, is a licensed real estate Broker, an active real estate investor,
and a licensed pilot. For inquiries
see davidjreed.com.
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