The topic of real estate wholesaling and the law is not a new one. Conduct a Google search or spend some time browsing related videos on YouTube and you’ll discover a wide range of opinions and advice.
Wholesaling, the process of assigning purchase contracts, has long been touted as a compelling option for new investors looking to win in real estate investing. As the industry has grown, so has the impact of bad actors who may take advantage of distressed sellers. While real estate as a practice is regulated and agents are required to be licensed, wholesaling has not had these same requirements. That is, up until now.
The industry is changing, in part due to pressure from community members who want wholesalers to be held to similar ethical standards as real estate agents to prevent any shady dealings. New regulations have recently entered the scene in Philadelphia that require real estate wholesalers in our city to change the way they operate.
As of January 19th of this year, Philadelphia will require a residential property wholesaler license in an effort to crack down on wholesalers who the city believes are taking advantage of naïve property owners in up-and-coming neighborhoods. While not as rigorous as a formal real estate license, the new, unanimously-passed legislation requires a $200 fee to obtain the license, disclosures, a background check, and adherence to a strict code of ethics. Unlike a formal real estate license, the new regulation does not require wholesalers to take professional classes or pass exams.
“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 city believes wholesalers have been “exploiting under-informed property owners” by falsifying information, misrepresenting values, and in effect, deceiving homeowners in an effort to make a quick profit.
The new legislation, endorsed by the Greater Philadelphia Association of Realtors, stipulates that wholesalers who have violated ethics laws or been convicted of fraud within six years of their application are disqualified from obtaining a license.
Wholesalers will be prohibited from “knowingly making false promises, untruthfully advertising or engaging in any conduct which demonstrates bad faith, dishonesty or untrustworthiness in the course of soliciting residential property,” according to the bill.
The new law “includes provisions aimed at giving sellers more information, more time to consider a sale, and more opportunities to get information from the city or real estate professionals,” according to a recent editorial in the Philadelphia Inquirer. This could include referring homeowners to resources to assess the fair value of properties, such as the Philadelphia Office of Property Assessment’s website. It also establishes a “do not solicit list” for property owners who do not want to be approached.
City councilmember Allan Domb noted that “any agreement of sale entered into by a Residential Property Wholesaler who was not licensed at the time of the solicitation may be rescinded at any time prior to the transfer of the title.” Any unlicensed wholesalers who violate this new law will face a Class 3 offense and be subject to fines.
“By curbing the worst abuses in the residential wholesaling industry, this bill will ensure homeowners get a fair price for their property and help families build intergenerational wealth,” said Froehlich noted.
How to Get A Real Estate License
If you’re interested in obtaining a full real estate license, beyond the new residential property wholesaler license, you can visit the Pennsylvania Association of Realtors® to review the steps required. It’s possible to complete the training and become a licensed agent in just weeks or months.
While it isn’t required to have a real estate license to wholesale in Philadelphia, having one can help boost your credibility with sellers and provide you with the training needed to ensure you are acting ethically.
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 Philadelphia, 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.