Change is coming to the wholesale real estate industry. From Philadelphia to Atlanta, new regulations are being implemented that require real estate wholesalers to change the way they operate. So what does this shift in the industry mean for real estate investors and wholesalers?
A Bit of Background
For years, webinars, seminars, and industry events touted wholesaling as the secret ticket for new investors to succeed in real estate. While sometimes villainized, wholesalers help their communities by offering sellers who do not have the time or resources to undergo a traditional sale a solution to quickly offload an unwanted property.
Wholesaling is attracting the attention of regulators when bad actors, either intentionally or unintentionally, take advantage of sellers in distress. Because they are not required to complete any formal training and operate under little to no regulation, unethical wholesalers have had considerable freedom with little recourse which has led to continued scrutiny in recent years for questionable business dealings.
Real estate agents, on the other hand, must be licensed and as such, agree to work under strict regulation and must adhere to ethical standards as a result. Of course, the two are not mutually exclusive. Many wholesalers are also licensed professionals well equipped to provide solutions for vulnerable sellers and often self-regulate through internal training, processes, and procedures.
Some states have gone so far as to issue advisories to the public about predatory practices. Take Colorado for example – who warned citizens about wholesalers targeting long-term homeowners, often over 50, who may be unaware of the true market value of their home and vulnerable to misleading practices and information. The state is urging residents to check and see if individuals who approach them about selling their homes are licensed real estate professionals.
A New Day
States across the country are implementing new laws, many initiated by the real estate agent community, to regulate wholesaling professionals. Now, more than ever, it’s imperative to understand the legal requirements in your market to avoid heavy fines and other consequences.
Here are some notable examples of the new regulation reality:
A revision to the Illinois Real Estate License Act was initiated by the Illinois Association of Realtors, part of the National Association of Realtors (NAR). The change requires wholesalers, defined as anyone who wholesales more than one deal per year, to have a broker’s license and be subject to the rules and regulation of the Illinois Department of Financial and Professional Regulation. Failure to do so can result in a $25,000 fine.
Big metros like Philadelphia are also requiring a license in an effort to crack down on wholesalers who they believe are taking advantage of naïve property owners in up-and-coming neighborhoods. While not as rigorous as a formal real estate license, the new legislation requires a fee, specific disclosures and adherence to a strict code of ethics and was endorsed by the Greater Philadelphia Association of Realtors.
“The industry is often most active in our city’s rapidly gentrifying neighborhoods, where longtime homeowners may not appreciate how much their home is worth to out-of-town investors,” stated nonprofit community attorney Michael Froehlich, at a recent Philadelphia City Council hearing.
The issue of gentrification and the role of wholesalers is not unique to Philly. Other cities around the country are dealing with the same dynamic. A recent report in Atlanta found homeowners in gentrifying neighborhoods are selling for less than their properties are worth.
For residents living in these neighborhoods, pressure from potential investors has only continued to mount. Incessant phone calls, letters, and inquiries pressuring homeowners to sell led the city of Atlanta to pass an ordinance prohibiting commercial harassment from wholesalers.
In yet another example earlier this year, Oklahoma proposed a new bill called the Predatory Real Estate Wholesaler Prohibition Act to attempt to make wholesaling and assigning contracts without a real estate license illegal. While the bill ultimately failed, it could be reintroduced and is just another indication of the changing climate for the wholesaling industry.
Make the Most of the Change
While disruption in the industry might feel daunting to some, change is inevitable. But by staying informed of what is happening in different markets across the country, you can prepare yourself for the future. New regulation presents new challenges for investors and wholesalers alike, but with it also comes new opportunity. Investors working to improve their communities while also pursuing their own goals of financial independence are in a unique position to step up, embrace the change, and refuse to allow bad actors to define our industry.