Some investors “wholesale” properties in such a way as to avoid ever taking title themselves and in order to do this they assign the purchase agreements they have made with sellers to other buyers, prior to closing. Such investors avoid paying a second real estate excise tax (as would occur in a “double closing”). The investor’s objective is to profit on the difference between the price the property seller receives and the price the ultimate buyer pays. Such transactions generally are not practical if the investor’s customer requires conventional financing because today most institutional lenders will not lend on a deal in which the borrower’s name is not the name of the purchaser on the purchase contract.
However some such transactions may still occur when the investor’s customer uses his or her own cash or has private investors to finance the purchase. Such deals would then close with the investor receiving an assignment fee from the investor’s customer either in cash before the closing or out of the proceeds of closing, depending on the assignment agreement. A single real estate excise tax is paid by the seller, and the state is happy with this situation because only one closing occurred. Or is it?
A recent publication by the Department of Licensing Real Estate enforcement section suggests that investors who participate in such deals as described above risk having the Department take enforcement action against them for what the Department considers the unlicensed practice of real estate activities. An investor would likely ask, how can this be? The investor would say, I signed the agreement as purchaser and I was therefore a party to the purchase agreement, not an agent for someone else. The investor would point out that the real estate broker licensing law contains an exemption for a person who purchases or disposes of property for his or her own account and a buyer’s interest in a purchase agreement is property. All of this is true, but the Department’s recently stated view is that if a person obtains this interest in property from a seller with the intent of finding another buyer before closing the sale, then that person is putting transactions together for others which is within the definition of the activity of a broker. The Department’s view is that such an investor would be misusing the “own account” exemption in order to evade the licensing law.
How likely is it that the Department would prevail if it brought such a claim against an investor? It is difficult to predict the outcome with certainty. No Washington court case has gone so far. On the other hand, the real estate broker licensing law is what is called remedial legislation. Such laws are construed broadly by the courts in order to address the potential harms to the public that led to the enactment, here the dangers of unlicensed brokers participating in transactions.
What happens if the Department does prevail on its claim? There are no administrative penalties the Real Estate Commission can assess on its own that are clearly applicable to unlicensed practitioners of real estate. It is possible that the Director of the Real Estate Commission could issue a “cease and desist” order against an unlicensed practitioner and if the person failed to obey, the Director could sue in court for an injunction to require that the activity be stopped. It is also possible that the Director would refer such cases to the county prosecutors for the filing of criminal charges. Under the law, operating as a real estate broker without a license is a gross misdemeanor.
What can an investor who operates in this market do? Certainly the investor can consult his or her own legal advisor. Several courses of action appear to be available from the Department’s own statement. On its face the Department’s stated position addresses the situation in which no licensed broker is involved in the transaction and the transaction supposedly involves putting a deal together for someone else. The investor could as one alternative take title and then sell to his or her customer in a “double closing.” That would dispose of the claim that the investor was putting together a deal for someone else but it would expose the investor to the need as a seller of real estate to pay a second real estate excise tax. Another alternative would be to do a single closing but get a licensed broker or someone legally permitted to perform a broker’s activities such as a lawyer involved in the transaction. Still another alternative would be for the investor to obtain a broker’s license.
The foregoing is for instruction only and should not be considered as legal advice.
