Is Wholesaling Real Estate Legal In Maryland?

While real estate wholesaling is not an entirely new idea, it is a relatively new phrase within the mainstream real estate community. 

Wholesaling houses and other real estate is the process by which a real estate investor agrees to purchase real property as follows –

• By placing an earnest money deposit in an escrow account when signing a purchase contract,
• And then selling the rights (and obligations) delineated in the contract of this real estate deal to a new buyer – often referred to as the end buyer.

Established wholesalers often have a curated buyers list of ‘ready and willing’ potential buyers through wholesale properties and transactions previously accomplished.

A buyer’s ability to sell their rights in a contract of sale is allowed under what is referenced in the real estate investing business as the Doctrine of Equitable Conversion.

Source – quimbee.com

A real estate wholesaler in the wholesaling business seeks to purchase real estate being sold by motivated sellers. Motivated sellers often discount sales prices which then allows a wholesaler to earn a ‘wholesale or assignment fee.’ The assignment fee varies and depends on the difference between the two sale prices of these real estate transactions. Note, though, that the “profit” from the wholesale deal is determined by subtracting transactional expenses from the revenue.

Wholesaling real estate differs from flipping houses. Fix and Flip refers to the strategy of re-selling investment properties after improving them - to the next owner by updating all or part of the home to make it more desirable and appealing.

Part of the appeal to real estate wholesalers is that wholesaling requires minimal capital when compared to other real estate investment strategies.

But, before you begin, read on to know what you are doing!

• What Do You Need To Know About Wholesaling Properties In Maryland?
• Is Wholesaling Real Estate Legal In Maryland?
• What Are The Wholesaling Laws In Maryland?
• Do You Need A Real Estate License To Wholesale In Maryland?
• What Are The Penalties For Wholesaling Without A License In Maryland?
• Is Double Closing Legal In Maryland?
• Maryland Wholesale Real Estate Contracts
• Final Thoughts

What Do You Need To Know About Wholesaling Properties In Maryland? 

The state of Maryland is in the U.S. mid-Atlantic region. Its overall area exceeds 12,400,000 square miles. It was the seventh state admitted to the Union in 1788 - originally named to honor King Charles’ wife – Queen Mary. While it is among the smallest states in terms of size, it is also the 19th most densely populated state.

Source – someka.net

The elevation in the state varies from sea level - where it meets the Atlantic Ocean to its highest elevation at Hoye Crest @ 2,250 Feet Above Sea Level. 

Hoye Crest is only available on foot and is located near the Maryland/West Virginia border.

The population of Maryland as of 2021 is just above 6,000,000.

Source – worldpopulationreview.com

Maryland is home to the Chesapeake Bay – the largest estuary (a partially enclosed body of coastal waters with a connection to the open sea) in the nation. The Chesapeake Bay is an important economic and ecological aspect of Maryland, with more than 150 rivers/streams from six states flowing through its 65,000 square mile drainage basin.

These are the ten largest cities in Maryland -

Source – www.maryland-demographics.com

Interestingly, Maryland’s state capital (which once served as the federal administrative US capital) – in Annapolis doesn’t even crack the top ten list of largest cities.

The most prominent real estate trade & professional organizations in Maryland are noted below. Each of these associations is a member of the National Association of REALTORS (NAR) –

• Maryland Association of REALTORS (MAR)

Headquartered in the state’s capital of Annapolis, the Maryland Association of REALTORS is the state-level trade association for real estate professionals. The MAR seeks to support professionals to work ethically (and successfully) with the public across the real estate market. The MAR’s professional membership is approximately 27,000.

• Greater Capital Area Association of REALTORS (GCAAR)

With more than 10,000 members, the GCAAR is recognized to be one of the largest non-state REALTOR associations across the nation. Members include real estate professionals from Montgomery County in Maryland and Washington, DC. The GCAAR seeks to act as the voice of local real estate and to promote/protect the rights of private property owners.

• Greater Baltimore Board of REALTORS (GBB)

Founded in 1858, the GBB holds the distinction of being the country’s first association dedicated to the real estate profession. The GBB’s membership is approximately 5,000 members strong, representing all facets of the real estate business. The GBB offers training and workshops and is a strong advocate of regulatory issues.

• Anne Arundel County Association of REALTORS (AACAR)

Established in the early 1940s, the AACAR now serves and supports more than 3,000 real estate professionals in the Chesapeake Bay/Central Maryland area. The Anne Arundel County Association of REALTORS advocates to advance policies in support of public and private interests.

• Southern Maryland Association of REALTORS (SMAR)

Established in the early 1970s, the SMAR serves nearly 2,000 real estate professionals in the southern portion of the state, making it southern Maryland’s most influential trade organization in the real estate business.  SMAR’s mission is to help communities in southern Maryland to thrive.

The state real estate laws that govern the real estate industry and the legality of actions in Maryland are noted in the Maryland Real Estate Brokers Act.

Maryland Real Estate Commission

Maryland Real Estate Commission (MREC), housed within the Maryland Department of Labor, administers the licensing processes for real estate professionals. Its powers and authority are delineated in the Maryland Real Estate Brokers Act – Title 17, more specifically, in §17–202.

The qualifications to earn a two-year real estate license in Maryland are noted in the state laws in this provision - §17–303.

However, it is also noted that MREC has the power to waive licensing requirements if the individual meets the following criteria, as stated below in §17–3A–02. The reciprocal licensee must conduct Maryland business with an affiliated licensed broker.

But note, the real estate license earned from another state must have similar licensing requirements to that of Maryland. Currently, Maryland has signed a reciprocity agreement with these states for other licensed real estate agents -  

• Pennsylvania Reciprocity Agreement
• Oklahoma Reciprocity Agreement

Is Wholesaling Real Estate Legal In Maryland? 

Yes, it is legal to wholesale real estate in Maryland if the real estate wholesaler stays within the legal boundaries dictated by Maryland law.

However, if a real wholesaler performs actions that are defined as that requiring a real estate license –independent of the intentions that may have existed with regard to an assignment, they may find themselves staring down the barrel of legal action.

To avoid wholesaling illegally in the state of Maryland, it is essential for wholesalers to have a full understanding of the actions that require a real estate license if they are to avoid breaking Maryland law by brokering real estate without the mandatory license. This is discussed next.

Success Story: How Roxy Wholesaled 8 Houses & Made $45k Within 90 Days!

What Are The Wholesaling Laws In Maryland?

The key to wholesaling real estate in Maryland legally is to accomplish your wholesaling goal without acting in a way that requires a real estate license in Maryland. As noted in § 17-301 (a,1) -

According to the Maryland Real Estate Brokers Act, (§17–101 (i)),

(i) “Licensed real estate broker” means, unless the context requires otherwise, a real estate broker who is licensed by the Commission to provide real estate brokerage services.

Real estate brokerage services are defined in §17–101 (l 1-6) –

For the sake of clarity, §17–101 (m 1,2) notes that real estate is defined as follows –

Link to § 11A-101

However, §17–102 reveals those instances when the licensing requirements found in Maryland, Title 17 – Business Occupations & Professionals do NOT apply –

This is further delineated in §17–301(b), as follow

In addition, according to §17–302 (a), these are the instances when an individual is not required to hold a real estate license in Maryland –

• If they sell six or fewer – in a calendar year - of unimproved lots in which the individual has ownership
• If they subdivide or sell property that has been unimproved and owned for at least ten years.

The law further explains how time and ownership is measured (§17–302 (b, c) with regard to this provision -

The Protection for Homeowners in Foreclosure Act (PHIFA) in Maryland

The Protection of Homeowners in Foreclosure Act applies to those times when a homeowner’s current mortgage loan is 60 days delinquent or more.  The PHIFA sets forth the guidelines that dictate foreclosure consulting services offered to homeowners in serious default. ANYONE engaging with a homeowner facing a mortgage delinquency of at least 60 days must follow specific rules when working with those homeowners. 

This may be perceived to include real estate wholesalers, so tread carefully. 

The PHIFA is essentially in place to protect homeowners who work with ‘foreclosure consultants’ – which is defined as someone who is representing a homeowner (BY ANY MEANS) to perform (or offer to perform) activities which include, in part,

• Stopping or delaying foreclosure, etc.
• Arranging the property’s sale to another party in lieu of foreclosure.
• Purchase (or receive a purchase option) within 20 days of the advertised foreclosure sale, among others.

If your activities include working with homeowners facing foreclosure, a real estate wholesaler may be considered a foreclosure consultant and thus subject to the PHIFA statute.

Do You Need A Real Estate License To Wholesale In Maryland?

No, a real estate wholesaler does not need a real estate license in Maryland if their wholesaling actions do not rise to the level of those actions that require a Maryland real estate broker/salesperson.

The key to remaining within Maryland’s legal limits is to avoid any actions that would be perceived as ‘providing real estate brokerage services’ as defined in §17–101 (l 1-6) –

“Provide real estate brokerage services” means to engage in any of the following activities:

(1)  for consideration, providing any of the following services for another person:

             (i)selling, buying, exchanging, or leasing any real estate; or

             (ii)collecting rent for the use of any real estate;

(2) for consideration, assisting another person to locate or obtain for purchase or lease any residential real estate;

(3) engaging regularly in a business in real estate or leases or options on real estate;

(4) engaging in a business the primary purpose of which is promoting the sale of real estate through a listing in a publication issued primarily for the promotion of real estate sales;

(5) engaging in a business that subdivides land that is located in any state and sells the divided lots; or

(6) for consideration, serving as a consultant regarding any activity set forth in items (1) through (5) of this subsection

In addition, consider these prudent ideas when real estate wholesaling in Maryland –

• Be transparent – keep the contract clear and concise.
• Be honest – manage the seller’s expectations and let them know what to expect moving forward.
• Don’t market the property – Market and Sell your right to purchase the property.
• Understand how real estate licensees view real estate wholesalers and act accordingly.
• Consider consulting a legal expert when working with any legally enforceable documents.

What Are The Penalties For Wholesaling Without A License In Maryland?

In Maryland, real estate wholesalers must NOT perform actions that would require a real estate license. As noted previously, this includes a host of activities that fall under the category of ‘Real Estate Brokerage Services.’

Advertising or marketing is an effective way to market a home. However, there are advertising rules to follow to stay on the legal side of the law. One of the areas where real estate wholesalers must remain vigilant and stay within Maryland’s license law is in the area of advertising. Maryland’s guidance has been developed to try to avoid consumer confusion.

Source – mdrealtor.org 

You can unintentionally overstep legal boundaries in real estate as a wholesaler by advertising a property for sale if –

• The wholesaler has no legal ownership in the property being advertised, or,
• The advertiser does not hold a valid, unencumbered Maryland real estate license - with the owner's authorization!

MREC has a host of rules regarding advertising. Here is an example –

MREC provides a checklist with regards to advertising which applies to licensed real estate professionals.

The consequences and penalties for violating Title 17 of the Maryland Code are found in §17–613.

Source – code.findlaw.com

The above applies to these legal provisions –

According to § 17-613 (c 1-3), -

• For the first violation, a $5,000 maximum fine
• For the second violation, a $15,000 maximum fine or two years imprisonment – or both!
• For the third violation, a $25,000 maximum fine or three years imprisonment – or both!

Is Double Closing Legal In Maryland?

The closing, which is also known as settlement, can take place in a number of places, depending on the state and state laws. A real estate closing is the time when paperwork is executed and ownership (or title) is transferred to the new owner.

A double closing is one of the more popular real estate investing exit strategies, along with the assignment of contract strategy. Essentially, a double closing is simply two closings that typically occur back-to-back – with the ownership of the property changing hands TWICE!

• The first closing is between the seller and the wholesaler (or buyer)
• The second closing is between the wholesaler (now the seller) and a new end buyer

A double closing offers real estate wholesalers a safe and legal track to the transaction’s close because the wholesaler was indeed the buyer in the real estate deal and acting as a principal, as evidenced by the first closing. As the owner of the property at the time of the second closing, the licensing rules no longer apply to owners who sell their own property.

Pro Tip: Comparatively speaking, the additional safety offered by using the double closing exit strategy tends to be more costly than the assignment exit strategy, simply because there are two sets of closing costs.

Maryland Wholesale Real Estate Contracts 

Maryland Purchase Agreement & Maryland Real Estate Assignment Contract

A purchase agreement or a contract of sale is the most important document in the wholesale transaction. The purchase agreement details the specific terms of the wholesale transaction – in writing and legally enforceable.

The purchase agreement includes standard information – like the parties to the deal, a property description, and a sale price; however, contracts are tailored to meet the needs of each party to the contract with no limit to provisions, unless the provisions reference illegal acts.

Maryland law provides for the buyer of real property to select the title company or settlement real estate attorney.

An assignment contract is a legal document that transfers the wholesaler’s (now known as the Assignor) rights and obligations to an end buyer, who is often a cash buyer (known as the Assignee).

In January 2020, the Maryland REALTOR Residential Contract of Sale undertook a number of revisions. The latest version of this Maryland real estate contract, as well as a standard assignment contract, is shown below. 

FREE Downloadable Wholesale Real Estate Contracts (Click Here)

Source

Source

Here's a detailed video walkthrough of the Maryland Residential Purchase Contract by a local real estate broker:

A copy of the Maryland Residential Property Disclosure & Disclaimer Statement is also available.

Legal Challenges to Maryland’s Real Estate Assignment Contract Law

In a legal case involving real estate contract assignments Pines Pl vs. Berkley Trace LLC, the highest court in Maryland ruled that the obligations in a contract do NOT automatically transfer when the contract is assigned UNLESS THE ASSIGNMENT SPECIFICALLY STATES THIS. (2013)

Source – BTLG.us

Prudent wholesalers can meet this legal requirement with a compliant assignment contract.

Final Thoughts

Many real estate wholesalers begin with distressed properties as these are – in a typical market, available to be purchased below market value. Even basic resource sites like Craigslist or Zillow can help refine a search to locate an investment or rental property to wholesale. Sellers are typically motivated and often glad to have found someone to take the property off their hands.

An essential thing to remember is that a real estate wholesaler needs to market the rights/obligations and not the property! A well-written contract and transparent negotiations help manage everyone’s expectations and help make the wholesale deal close smoothly.