Questions About Legality Of Wholesaling/flipping
I live in Durham, North Carolina. I have been working toward starting a new career in real estate. I have attended the National Grants Conference twice (http://www.nationalgrants.com/) and I purchased the program and I am a lifetime member. Before becoming a member I check out National Grants Conference on the Better Business Bureau website and saw that they have a satisfactory rating and they are also a BBB member. See http://www.bbbsoutheastflorida.org/nis/newsearch2.asp?ID=1&strBCode=06330000&ComID=0633000026001441
I have joined several online real estate groups, networked with real estate investors in the North Carolina Triangle Real Estate Investment Association (NC-TREIA). See http://www.nc-treia.org/html/. On these online real estate groups, I have posted many messages asking questions and asking for mentors/partners to assist me in my first few wholesale deals until I become more comfortable. In these posts, I include my contact information.
Because I am a beginner I decided to try one of the no Money Down methods of real estate investing called Flipping or Wholesaling. It has been explained to us at these seminars and I have repeatedly read that one does not have to be licensed to invest in real estate or to wholesale real estate. I have devoured as much information as I can possibly read about Wholesaling and I purchased William Bronchick's book called "Flipping Properties - Generate Instant Cash Profits in Real Estate"
I have talked to investors who have agreed to let me wholesale properties to them by assigning purchase contracts to them or double closing. I have consulted with Prepaid Legal and asked if they would be willing to do title searches for me and to close my deals. I have a good working knowledge of wholesaling and was in the process of starting my first deal.
Well early this morning, I received a call from a man who identified himself as Special Agent Mike Young from the FBI in Charlotte, NC. He told me that I could check the inside cover of the phone book and call the FBI phone number listed there to verify him.
Special Agent Young explained that someone tipped him off about what I was trying to do in real estate. He explained that they have just prosecuted several people in N.C. who were involved in illegal real estate wholesale deals. He also suggested that I talk to the N.C. Real Estate Commission to find out if I need to be licensed agent or broker to do what I am trying to do. Let me know if I need to be licensed to wholesale properties. Or please let me know about any documentation that you can that will enlighten me.
After this phone call I was nervous and I felt that my dream was crushed since I have worked and studied so long and so hard to start this new career in real estate...especially since I have been laid off 3 times and wanted to go into business for myself.
Thank you...
Millionaire1
Millinaire1,
When you talk about wholesale properties, use that term.
Sadly, thanks to the press and the mis-informed, many folks call mortgage fraud , flipping.
This is illegal, because it is based on fraudulent actions.
Wholesaling is basically this............buy VERY low, sell higher, but below market value.
Because you intend to sign a contract to purchase these properties, and either double close, or assign, you are a principle in the transaction, and therefore need no license.
I am curious as to how an FBI agent got ahold of your info, and why?
Just follow the law, use an attorney to close your deals, and you should be fine.
HTH,
Jim FL
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To expand on what Jim said, there was an interesting post a few weeks ago on the forum by a woman who (I believe was working with her husband) was doing Sub2 deals. She was very honest and up-front about what she was doing with both the "sellers" and the new "buyers" or tenents. But, she was having all kinds of problems with the NC Attorney Generals office. While she wasn't doing anything illegal, the Atty Generals office was investigating her nonetheless (because they didn't understand the process it must be illegal, if you know what I mean).
Sounds as if you are getting some of the same "harrassment". I can't think of another word for it. What you are doing is not illegal, as long as you are buying the properties and selling them wholesale, as is, with out mis-representing the condition of the property or telling the new buyers something you know isn't true.
Here in Ohio, there was a group of people who were recently investigated by the FBU for illegal flipping. It consisted of buying properties and then getting false appraisals for an inflated value, and also lying on mortgage applications (saying the new buyer had downpayment money when they didn't) It is this type of "flipping" that is illegal.
Oh, and as Jim states, use the term wholesaling...not flipping, because flipping has such a negative connotation.
John
My guess, is that the title company that you have been talking to are the ones that tipped off the FBI. They may not have necessarily thought is was a flipping scheme but seemed fishy and wanted you checked out before they were too involved. Because anyone and/or all parties caught in a flipping scheme is likely to go to prison.
Because you were talking to them about turning properties around so quickly they were suspicious. That's what flipping schemers do.
They buy very low, do nothing to fix the house, get a phony appraisal, hire someone to pretend to buy the house at a double closing with a fraudulent loan officer and the mortgage company doesn't figure it out until they default on the mtg.
JimFL, I will erase flipping from my vocabulary. I now realize to many people,
this term is synonymous with mortgage fraud and overinflating the FMV of
properties. I emailed several N. Carolina appraisers. I explained that I was
going to be flipping/wholesaling properties and I asked about the pricing of their
services. In my emails to these appraisers, I included my contact information.
Hmabelit, I suspect that one of those appraisers contacted the FBI.
The next morning, I got the phone call from FBI Special Agent Mike Young
of the Charlotte Division...at least that is who he claimed to be.
He suggested that I look in the inside cover of any phone book and call
the FBI number listed there which is (704) 377-9200 and they can vouch
for him. I explained to the agent that I have already talked to a
couple of attorneys from with Browne, Flebotte, Wilson, and Horne in Durham
and they stated that they have worked with investors before who assign contracts
and double close.
The agent told me that the FBI has just prosecuted a man from NC and he
was sentenced to 10 years for flipping. They had been watching this man
for some time and they have evidence that the man was aware that what he was
doing was illegal. He knew that his investor did not have downpayment money.
The agent asked me where the investors would be getting the money to
purchase the properties that I assign to them. He suggested that I should
know where the investors will be getting them money to buy the properties
especially if they will get a loan from the bank. He stated that most
banks will not finance flip deals, and if I am aware they are going to get
loan from the bank, I could possibly go to jail as an accessory to the crime.
After assigning a contract to another investor, am I responsible for what he
does afterwards???
I became more uneasy and discouraged when I read newpaper article entitled
"FBI tightens cuffs on real estate Fraud"
See http://www.inman.com/inmannews.aspx?ID=42927 This article was mentioned
in a post her on the Creative Investor Forums.
He further explained that I "have to be licensed in order to assign
contracts to a real estate invester". He explained that "this is brokering
and I would be brokering without a license". He suggested that I contact
the N.C. Real Estate Commission and check with them. Yesterday I sent
the commission an email asking them if I needed to be licensed, but I
have not heard back from them yet. Tomorrow morning I will call them.
I understand how illegal "flipping" is done by buying properties and
then getting false appraisals for an inflated value and so forth.
Agent Young feels that wholesaling is sounds a lot like illegal flipping
and told me that he was warning me before I get into trouble.
Jwalko, I am aware of the problem that the Barberio's post and what they
are going through with the NC Attorney Generals office. My situation
reminded me of what happened to them.
Can someone send me documentation that proves that one does NOT have
to be licensed to wholesale real estate? And by the show of hands, who
has extensive wholesale experience? Do you work with an attorney when
closing, doing title searches, etc.
Thanks in advance...
Millionaire1
Millionaire1,
You asked:
"Can someone send me documentation that proves that one does NOT have
to be licensed to wholesale real estate?"
REPLY:
Sure, howevever, now would be a GREAT time to learn to research a little.
Take a look online for your states laws regarding brokering in RE.
See how they define 'broker'.
I'll just bet that it says something in there with the words "for another".
This means you are bringing two parties together to perform a transaction, and are getting paid for doing so.
NOT WHOLE DEALS!
When you wholesale, you enter into a contract to buy.
This makes you a principle in the transaction.
When you sell, either with a double close (where you are buyer, then seller), again, you are a principle, and NOT doing so 'for another'.
IF you ASSIGN your agreement, again, you are simply selling your position, for yourself, NOT 'for another'.
So, NO, a license is NOT needed.
I'd not rely on the re commission for advice, because frankly I've personally seen them be wrong before.........because they don't understand what you are doing.
Anything that is not a straight conventional sale, is out of the norm, and therefore confuses layman...........which most RE pros are, if they are not into creative REI in some way.
A confused mind ALWAYS says "NO!"........remember that.
So, check out your state laws, look up the definition of broker and brokering.
What you are seeking to do IS NOT THAT!
You also asked:
" And by the show of hands, who
has extensive wholesale experience?"
REPLY:
You won't see my hand, since i'm far away, but suffice it to say, I've done my fair share, and still do a few wholesale deals yearly to keep cash coming in big chunks once in a while.
Probably a few hundred wholesale deals over the last 6-8 years or so.
You then asked:
"Do you work with an attorney when
closing, doing title searches, etc."
REPLY:
YES! My attorney is a VERY important part (and well paid) of my team.
I use him to close all deals where buyers have financing or cash, title searches/insurance, short sale negotiations, agreement for deed/owner finance closings...........evictions if/when they get messy, and of course, the occassional civil suit. (We DO live in a very litigous society, so this WILL happen to you if your in the biz long enough doing enough.)
Do ALL RE attny's understand what we do?
NOPE!
Not by a LONG shot.
However, there are some, you just need to find them, and HIRE them when found.
My attny invests the same way I do, so we mesh well.
Anyway, just my two cents, keep the change,
Jim FL
Thanks in advance...
Millionaire1
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