Wholesaling Real Estate On The Right Side of The Law

Real Estate "wholesalers" often violate state law when soliciting finder's fees from sellers or buyers.

Many newcomers to real estate hope to get their start as investors by collecting "finder's fees" or referral fees when they connect sellers with prospective buyers. The problem is in almost every state there are statutes or licensing laws which make clear only licensed real agents may be compensated for facilitating real estate transactions (of any sort).

In a recent discussion on a BiggerPockets.com forum a writer in Florida asked: "I post an ad on Facebook offering a $500 referral fee for anyone who can give and address of a crappy, ugly house. Is that illegal?" The question attracted a lot of interest – and, for some it was a hot topic – drawing responses from across the country.

Here was my take on the subject–

In Illinois the State Licensing Act is clear: Anyone facilitating a real estate transaction for compensation of any kind must be licensed. Nevertheless there is much confusion on this point.

Many (unlicensed) "wholesalers" insist no license is needed, especially in cases where they have brought a likely property to an investor who subsequently purchases the property. Their argument is they merely earned and collected collected a "finder's" or "referral" fee. The flaw in this argument is clear with even the most cursory review of state licensing law.

Interestingly, it is also understood that the payor of the "referral fee" - the person paying the "referral fee", is also a participant in the violation and subject to a comparable fine. (Which, in Illinois, is not subject to judicial proceedings but "administered" solely by the state licensing agency.)

To be safe, wholesalers are well advised to secure assignable Contract Rights to the property which - as others have noted above - are in fact "personal property" and as such may be sold. Thereby, one is not selling real estate per se, which in fact they do not own; rather they are selling the real estate "interest" they own: the contractual right to complete a real estate transaction subject to the terms of the contract.

This is our view in Illinois and may vary in other jurisdictions (though I doubt it).

Finally, while I am a licensed real estate broker (since 1971), I am not a lawyer. Save the attorney's fee and consult your state's real estate licensing regulations.

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Originally posted by @Kingsley Siribour:
Well in Wisconsin, I learned in my pre license State law book it is not allowed in any way for licensed [agents] to pay non-license referral/finder's fee. But as Philip Elmes stated above, better to check with "your state's real estate licensing regulations.".

Good point to clarify here, Kingsley. Generally this has less to do with who originates or solicits the "finders" fee, or whatever they choose to call it. It's about "practicing real estate without a license".

Licensing regulations–be they legal or "professional" (as with NAR, etc.)–are meant to protect citizens from ill-prepared or unscrupulous individuals engaging in the practice of real estate for a "consideration", monetary or in kind; they are assuming and performing an "agency" role in a real estate transaction for compensation. Thus the severity of the penalties.

When I am approached by an erstwhile "wholesaler", my first question is whether they are licensed. Absent a license, the only way I will deal with them is to purchase their Contract Rights should they in fact have them in hand. And, yes, even in that case I only pay upon the final closing of the deal. We document the deal with a written Assignment of their contract (for "$10 and other good and valuable consideration"), which I bring to the closing table; and a written side agreement that stipulates the financial arrangements, terms, conditions, etc., which is treated as an actionable yet confidential side agreement.

Short of that, I will pay a "scout" something like $250-500 for facts surrounding a property that may be available, including the seller's contact information. This is generally paid whether in the end I purchase the property or not. Importantly, the scout is not party to the transaction: I am paying for information only, not for his or her role in consummating a deal. Keeping these roles clearly in mind, documented accordingly, seems to satisfy the distinctions drawn by the relevant regulating statutes. But, once again, I'm just an 'old real estate guy', not a lawyer...  🙂

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[ After Chris quoted Florida law…]

Thanks, Chris
I and others have tried to make this clear, but... There are always those who cite "local protocols" and "what they've always done" as validation. Happens here in Chicago as well: I've had unlicensed "wholesalers” insist in open forum that they KNOW a referral fee is legit! that an expert told 'em so, etc.

Guess I should have cited the Illinois law. ('Though there would be those who believe that's just a problem for us folks in Illinois. And maybe the 'unsophisticated'.) If called to account, they will find that ignorance is no defense in court.

Good for you for taking the time.

This was a great–and lively–discussion. You will find the entire string most interesting: http://www.biggerpockets.com/forums/93/topics/139634-is-illegal-to-pay-referral-fees-to-non-realtors?page=5#p931250
– Philip Elmes