Licensee Investors, Listen Up – How Not to Handle a Deal

Agent, Boston, Investing, Rehab, Wholesaling on June 2nd, 2015 Comments Off on Licensee Investors, Listen Up – How Not to Handle a Deal

Sometimes it is difficult being both a licensed real estate agent, as well as a potential buyer / investor for certain properties.

One of my consulting clients who recently was undergoing classes to obtain his real estate license, shared with me a case study that’s in his study materials, of a listing agent who was sued for illegally purchasing an 8-unit building at a discount.

It started with the list agent doing a listing presentation for a seller for an 8-unit building the seller wanted to sell, where he did his best to substantiate a lower price point that what the market could possibly bear, persuading them to list at this “bargain” or “firesale” price.  The agent then did not enter it into the MLS.    After the Listing Agreement was signed, the listing agent then told the seller that HE would be interested in buying it for that price.  They entered into an purchase contract, and then the agent bought the property.  The seller afterwards felt that he had been “conned” into selling for a lower price than what he could have gotten for it, and that it was not fairly marketed.  The agent & broker attempted to pass it on to their E&O company to settle the suit, where E&O rejected it, due to how they are not responsible for any claims where one or both parties has a financial interest in a transaction.

Result?  I don’t know – surprisingly that was left out of the answer book, but my guess is that Broker & Agent had to pay MUCHO $$ out of pocket to make that seller happy.

“How is this different than what we do, as investors?  Isn’t this the same thing?”

A resounding NO is how I’ll respond to that, for a couple reasons.  And mind you – while I’m sharing my opinions below, and what I will fight for, I’m NOT an attorney, just a measly, scum of the earth real estate broker (primarily a buyer) in the Boston area.  In short – Don’t use this blog as legal advice.

1.  INTENT (starts with your Marketing!)

Granted, this is a weak argument.  But important nonetheless.  What is your Intent, when that seller picks up the phone to call you?  Or even before that – what did your marketing suggest?  If you are trying to get leads as a listing agent, and NOT as a buyer, and you’re sending out “I want to buy your house” letters OR “Call me to List Your Home” letters, with NO licensed agency disclosure on them – yep, you’re in serious trouble.  As is your broker.  And you should probably stop now until you talk to them.

HOWEVER – what if you’re sending “I want to Buy Your House” letters to a seller, because you’re legitimately looking to buy their home, build value by helping them through whatever challenges they are facing, and fixing it up and reselling it for a profit?  Well first, – as a licensee – it’s your duty to check first if they are not already represented by a real estate agent.  If not, then when you make first contact with them, you NEED to disclose if you have a license, and if so, what your intent is.

“Mr. Smith, thank you for calling on my letter.  Before I gather the information I need, I need to let you know I’m a licensed real estate professional in the state of ___, but I’m speaking with you today in the capacity of an interested buyer, not as a licensee.  Do you have any questions on that?”

It IS also the law in Massachusetts at least, that if a buyer with a license is purchasing a property, but not in the capacity of a licensee – it STILL must be disclosed in the purchase contract “Buyer is  a licensed real estate professional.”

 

Lastly on Intent — and here we get to the “isn’t Wholesaling Illegal?” argument you can find on a bunch of websites — What if you either ARE  a licensee, sending out “I want to Buy Your Home” mailers, and your intent is to NEVER buy their home, but to “flip” it to an end buyer?  OR – if you’re sending out “Let me List Your Property” postcards, but your Intent is IS or COULD BE to end up being the purchaser?    Brings me to my next topic:

2.  DISCLOSURE

In a parallel universe, what the listing agent COULD have done in the case study:

–  On the call from the seller noting they wanted to list their 8-unit building, immediately think, “Huh, I may be interested in that.”

–  On that same call with the seller:  “Mr. Smith, thanks for the opportunity to present you with a market analysis for your rental building.  But under full disclosure, I must let you know I may also be interested in purchasing it.  Would you be open to discussing price & terms with me, knowing I’m a licensed real estate professional in ___ state?  Or would you rather hire your own broker and/or attorney to represent you before we talk further?”

–  Seller has the option to either get their own representation through another office, or speak with their attorney first before proceeding with pricing, etc.

A quick Note on MLS:

In my constant efforts to be unpopular with my fellow RE agent colleagues (ha), I’m going to make the argument – contrary to popular belief – that a property DOES NOT need to, nor can it be to the full benefit of every seller, to be put up on MLS all the time.  I’ve encountered plenty of sellers – both as a buyer, but also as a licensee at a listing appointment – that would rather NOT have a bunch of tire kicker buyers filing through, disrupting both their lives or their tenants’ lives, especially with having to prep the home before each showing.  I’ve seen embarrassed looks on my sellers’ faces, who may have a hoarding issue, and do not want their home being shown to the public.  I’ve also encountered sellers that are a bit too embarrassed they cannot afford to keep their home in a higher end community, and don’t want it as public they are selling, until it happens, so that their neighbors don’t see it all over the internet.

Going further – I may make the argument that a licensee can better service these particular sellers, or ones in need of a “quick” close (up against foreclosure auction), by NOT listing it on MLS and bringing the property to their own private network of buyers on their own terms, be it a private or one-time group showing.

 

But – if the agent themselves is serving as the buyer, this must be disclosed UP FRONT and as soon as it is known.  Just like everything.  Disclose, disclose, disclose.  Licensed or not.

If you’re an unlicensed “wholesaler”, marketing for sellers that you intend on assigning the contract or “flipping” to an end investor, know that you need to TELL the seller that, and how you make money.  Let THEM decide if they want to work with you.  Conversely, if you’re an unlicensed buyer that goes  into a property with THE INTENT of buying & fixing it up, you obviously present yourself as the principal buyer on the transaction.  In this case – so long as you intend and have the means to close, but then choose to assign or sell the deal to another buyer, at that point you need to ensure your contract is assignable, and let the seller know what is happening and give them the new party’s contact information.

 

I realize this post will most likely be met with a lot of skepticism, but since this question comes up so much on forums and now, in real estate licensing classes, I wanted to give my perspective as both a managing broker and as an investor.  It IS possible to be both, if you do it correctly.

To Your Success, and Happy Investing!

 

 

 

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