Is Wholesaling Real Estate Legal in Michigan?
In today’s market, some savvy investors have discovered wholesaling real estate as a creative way to leverage connections and marketing strategies to make an easy profit.
Wholesaling Real Estate in Michigan
The practice of wholesaling real estate involves making an offer on a residential property and, if it’s accepted and you are “under contract” during the inspection period, immediately assign the contract to a buyer you have lined up and charge a “fee” to the buyer for the assignment. Many might ask what happens if an investor gets the property under contract and cannot find a buyer, but most of these investors write purchase agreements in such a way that allows them to terminate the purchase agreement in the inspection period for any reason whatsoever.
These investors usually make money by leveraging both a strong network of potential buyers, along with a relentless cold calling approach aimed at property owners and negotiation tactics that allow them to purchase the property under market value, making it easier to turn around and assign at or above market value. Some say this approach preys upon the ignorance of most buyers, who do not know the true market value of their property and may be more likely to let the property go for well under its value. However, others believe this is simply a free-market purchase that each party freely and willingly agrees to.
In some cases, investors complete what’s called a “double closing.” This is similar to wholesaling, except instead of assigning the contract before closing, the investor will go through with purchasing the property and then immediately turn around and sell the property to another investor shortly after the first closing, for a double close.
What are the Legal Consequences?
When your offer on a property is accepted, and you are under contract, under contract law you do not possess more than an equitable interest in the property, which you may assign if allowed under the contract, as with any contract.
Since wholesaling real estate is a fairly recent phenomenon, regulation is still in its early stages. We see some early cities and states have begun regulating the practice, however. Arkansas and Illinois passed laws in 2017 and 2019 to increase regulations on wholesaling, and Philadelphia and Oklahoma now require wholesalers to obtain a license.
In 2017, Texas passed SB 2122 which clarified that a wholesaler needed to disclose the nature of the interest offered and requires wholesalers to obtain a brokerage license to offer a property for sale when the person does not own the property. Illinois amended its definition of “broker” to include the practice of wholesaling as well “if done as a business model” and defined the practice. Michigan does not require a license of any sort, but people will want to be mindful of a few legal consequences that might subject you to Michigan’s Occupational Code.
How is a Real Estate Broker Defined?
Under the Michigan Occupational Code, a “real estate broker” is defined as: “an individual or business entity that, with intent to collect or receive a fee, compensation, or valuable consideration, sells or offers for sale, buys or offers to buy, provides or offers to provide market analyses of, lists or offers or attempts to list, or negotiates the purchase, sale, or exchange of real estate; that negotiates the mortgage of real estate; that negotiates for the construction of a building on real estate; that leases or offers or rents or offers for rent real estate or the improvements on the real estate for others, as a whole or partial vocation; that engages in property management as a whole or partial vocation; that sells or offers for sale, buys or offers to buy, leases or offers to lease, or negotiates the purchase or sale or exchange of a business, business opportunity, or the goodwill of an existing business for others; or that, as owner or otherwise, engages in the sale of real estate as a principal vocation.”
Wholesalers must be careful when advertising about the purchase of their equitable interest, or rights to the contract. If a wholesaler were to advertise by stating that they are selling the property, and not selling their equitable interest in the property, wholesalers could be considered a “real estate broker” under Michigan Occupational Code. If a wholesaler is considered a “real estate broker” they are subject to not only all of the rules under the Michigan Occupational Code, but all of the Real Estate Brokers and Salespersons Administrative Rules as well. The Michigan Occupational Code carries fines and possibly criminal liability for brokering real estate without a license, and wholesalers can get into hot water if they are not careful with their verbiage.
Limit on the Number of Transactions Per Year
In Michigan, not only does a wholesaler need to be careful not to fall within the definition of a “real estate broker” under the Occupational Code, but, up until 2017, they also needed to be aware that there was a limit on the number of transactions they can engage in per year under the Michigan Occupational Code under R. 339.22319. This has since been rescinded as a rule, most likely because it was unpopular and archaic.
Commission vs. Fees Collected
It’s also illegal in the state of Michigan to collect a commission on the sale of real property without being a licensed real estate agent under MCL 339.2512(1)(h). However, instead of collecting a commission, a wholesaler generally will collect a “fee” for assigning their equitable interest in the contract. This seems to be a loophole that many have exploited, for better or for worse. It will be interesting to see if many realtors start pushing back legislatively or otherwise across the state in recent years, and how states continue to respond to this.
For wholesalers that assign their equitable interest away right after getting a property under contract, disclosure requirements are not applicable. Though, if a real estate investor is performing a double closing – purchasing and immediately closing to sell it to another realtor – they still need to comply with all of the disclosure requirements that all sellers need to comply with. This includes providing a lead disclosure form, if applicable, and providing a seller disclosure form regarding any known defects on the property. If they do not do this, investors open themselves up to liability, as this is a requirement.
If you are a property investor or wholesaler and have questions on legal pitfalls to avoid in Michigan, we here at Fausone Bohn, LLP can help. Call Business and Real Estate Associate Robert C. Pollock today at (248) 912-3213 for a free consultation.