Is Wholesaling Real Estate Legal In New York?Jun 08, 2021
Wholesaling is simply a real estate investing technique that allows an investor to turn a profit by entering into a 'contract of sale' to buy real estate. This process requires an earnest money down-payment held in escrow. Once in contract, the buyer can then sell their right to purchase (known as equitable conversion) to an end buyer for a profit.
Often, the primary objective of a wholesaler is to enter in a purchase contract for real property, with a purchase price that is below market value – which may include a home in foreclosure or disarray.
When wholesaling real estate, the asset being sold is the buyer's contractual rights rather than the property itself.
While real estate as a wholesaling business is legal and offers a smart real estate investing technique to earn significant profits, the wholesale deal must be executed carefully with due diligence that weighs legalities appropriately and the anticipated outcomes.
- What Do You Need To Know About Wholesaling In New York?
- Is Wholesaling Real Estate Legal In New York?
- What Are The Wholesaling Laws In New York?
- Do You Need A Real Estate License To Wholesale In New York?
- Is Co-Wholesaling Real Estate Legal In New York?
- Is Reverse Wholesaling Real Estate Legal In NY?
- New York Wholesale Real Estate Contract
- Final Thoughts
What Do You Need To Know About Wholesaling In New York?
New York, the Empire State, one of the original thirteen United States colonies, was admitted as a state in 1788. New York's total area is approximately 54,550 square miles. Its population is 19,300,000 as of 2021-
Source: World Population Review
New York is the home of one of the most populous urban cities in the nation – the Big Apple, or New York City (NYC). NYC and surrounding counties make up about 42% of the state's total population, as follows –
Source: United States Census Bureau
The other largest cities in the Empire State are–
Source: New York Demographics
Seven of the largest cities are located on New York's Long Island, which reaches east from NYC for more than 100 miles to the Hamptons!
The following is a list of the largest trade and professional organizations in New York dedicated to real estate. Each of these associations is a member organization of the National Association of REALTORS (NAR) –
- The New York State Association of REALTORS (NYSAR)
Located in the capital, Albany, the NYSAR serves 60,000 real estate professionals across New York state. Members of NYSAR are known as Realtors and commit to following NAR's Code of Ethics. The NYSAR offers a variety of benefits that include legal representation, the state magazine, and education programs.
- The Manhattan Association of REALTORS (MANAR)
Founded in 2001, the MANAR is a nonprofit organization that supports real estate professionals working on the island of Manhattan. The Manhattan Association of Realtors manages the Manhattan MLS and is an organization that partners with the NYSAR and the NAR.
- The Long Island Board of REALTORS (LIBOR)
LIBOR serves nearly 30,000 real estate professionals throughout two counties on Long Island (Nassau and Suffolk) as well as Queens county, which is part of NYC. The Long Island Board of Realtors is recognized to be one of the largest local REALTOR chapters in the nation.
- The Buffalo Niagara Association of REALTORS (BNAR)
Founded in 1904, the BNAR offers membership benefits that help its members become ethical and successful professionals. The Buffalo-Niagara Association of Realtors serves western New York, offering many services and networking opportunities to licensees working in western NY.
- The Greater Capital Association of REALTORS (GCAR)
The GCAR is a real estate professional organization that represents 3,000 real estate professionals throughout the greater Albany region. The GCAR serves to unite the real estate profession in serving sellers and buyers with high standards of conduct.
The New York State Department of State (NYSDOS)
Established more than 200 years ago, the NY Dept of State manages real estate activities as follows-
- The Office of Business and Licensing Services, which oversees the Division of Licensing Services.
- This Division of Licensing Services handles all aspects of the real estate industry licensing in New York from their office in Albany.
Real Estate professionals working in New York can obtain three types of real estate licenses. According to New York Real Property Law Sec. 440 – these licenses include -
- A Real Estate Broker – "means any person, firm, limited liability company or corporation, who, for another and for a fee, commission or other valuable consideration, lists for sale, sells, at auction or otherwise, exchanges, buys or rents, or offers or attempts to negotiate a sale, at auction or otherwise, exchange, purchase or rental of an estate or interest in real estate, or collects or offers or attempts to collect rent for the use of real estate, or negotiates or offers or attempts to negotiate, a loan secured or to be secured by a mortgage, other than a residential mortgage loan, as defined in section five hundred ninety of the banking law, or other encumbrance upon or transfer of real estate, or is engaged in the business of a tenant relocator, or who, notwithstanding any other provision of law, performs any of the above stated functions with respect to the resale of condominium property originally sold pursuant to the provisions of the general business law governing real estate syndication offerings."
- An Associate Real Estate Broker – "means a licensed real estate broker who shall by choice elect to work under the name and supervision of another individual broker or another broker who is licensed under a partnership, trade name, limited liability company, or corporation. Such individual shall retain his or her license as a real estate broker as provided for in this article; provided, however, that the practice of real estate sales and brokerage by such individual as an associate broker shall be governed exclusively by the provisions of this article as they pertain to real estate salesmen."
- A Real Estate Salesman – "means a person associated with a licensed real estate broker to list for sale, sell or offer for sale, at auction or otherwise, to buy or offer to buy or to negotiate the purchase or sale or exchange of real estate," among other activities
According to Article 12-A of New York Real Property Law - No person (among other acceptable entities) shall engage in (or hold themselves out/act as if) they are licensed as a New York real estate broker or salesperson - without first obtaining a license required by state law. New York law notes that it is the responsibility of licensees to understand the state's license law!
Additionally. New York is known as an "Attorney Closing State." This means that a real estate closing must be performed by a New York State attorney in good standing with the NY Bar.
As a result, a real estate attorney familiar with wholesaling real estate in New York is a great resource for legal advice (and is required anyway!) to ensure the wholesale real estate deal goes as planned and remains within the legal limits set forth by New York law.
Is Wholesaling Real Estate Legal In New York?
Yes, it is lawful to wholesale real estate in New York if the transaction stays within the legal boundaries set forth by New York law. A contract's assignability is delineated by the contract's intent. This means that a party to a contract must look to the contract's language to determine if it permits an assignment.
Without an explicit provision that prohibits an assignment, the rights and duties under a typical real estate contract - that which does not involve someone's confidence, skill, or trust, or confidence, may be assigned without the expressed consent of the contract's other party, which would be, in this case, the seller.
It is relevant to note that an assignment is considered invalid if the assignment materially changes the duties/responsibilities of the contract's other party. (UCC § 2-210 (2) – Assignment of Rights)
Previously, real estate wholesalers in New York would complete the contract by indicating that "Jane Doe and/or assigns" was the purchaser. This technique was used until the mid-2000s mortgage crisis when lenders began objecting to its use in REO real estate contracts.
Real estate wholesalers must be vigilant and avoid marketing the property under contract as if they were the actual owners of the property. NY law only allows homeowners or licensed real estate professionals to legally market the sale of a property. (NYS NYCRR §175.25 Advertising).
A wholesaler can market what they are selling – the right to buy the property through an assignment of contract!
In addition, a real estate wholesaler may find they have run afoul of New York law when their actions meet the definition of 'brokering' in New York, a defined professional behavior wherein which a licensed professional earns a fee (aka – the real estate commission) by bringing parties together.
The fundamental difference (and that which to avoid) is that it is illegal for real estate wholesalers to act for others – for a fee, rather than acting for themselves as a party who has an asset - a legal interest in a contract of sale.
What Are The Wholesaling Laws In New York?
The term 'wholesaling' does not have a precise legal definition and often has different meanings, depending on the person asked.
To wholesale properties in New York, one must avoid acting – by way of actions, as a real estate broker, which requires a license by NY state law. The reality is, there is no specific legislation in New York that references real estate wholesaling.
According to the NY State Department of State, Article 12-A of New York's Real Property Law notes that anyone who, for a fee and on behalf of another–
- Negotiates a sale or the exchange and/or rental of real estate in a New York real estate market,
- Collects rents,
- Negotiates a commercial loan (with a mortgage) – must be licensed in New York as a real estate broker.
One of the most common ways a real estate wholesaler may cross a legal boundary (especially on their first deal!) is to advertise the property for sale. NY law defines advertising as–
Source: Thomson Reuters Westlaw
This same statute also denotes that only a real estate broker (not an associate broker or any other licensed real estate agent or unlicensed individual) is authorized to publish advertisements. Associate brokers and salespeople may only place an ad with the expressed approval of their supervising broker. (19CRR – NY 175.25 (b,1))Additionally, a real estate broker must obtain authorization from the property owners prior to placing any type of advertising. (19CRR – NY 175.25 (b,2,i))
The penalties for violating New York's license law can be found in Article 12-A Real Property Law – 442-e.
The Secretary of State may investigate a business or business practices of any person or real estate brokerage or licensee who is holding or applying for a NY real estate license – if they conclude that the investigation is warranted. Licensees (or applicants for a license) are required to comply with requests made by the Secretary of State to furnish relevant information. (12-A 442-E (5))
New York's Secretary of State may impose a fine that does not exceed $150 for the individual's first violation, $500 for the 2nd violation, and $1,000 for the 3rd and subsequent violations. The attorney general, working with the Secretary of State, may start an action in a court seeking a judgment against the unlicensed person equal to the fine imposed. (12-A 442-E (8))
For those who violate NY Law as a misdemeanor, all courts within authorized jurisdictions are empowered -
- To hear, try, and determine the status of the crimes, without indictment, and, if applicable,
- To impose punishment prescribed by law. (12-A 442-E (1))
For those violations that rise beyond a misdemeanor and are criminal in nature, the New York Attorney General (AG) has the authority to prosecute those violations; upon conviction, the AG must provide a detailed report to the NY Department of State. (12-A 442-E (2))
Penalties can be recovered by the aggrieved party. If the violator has received compensation/commission, the recovery can range from the amount of money received to a maximum of four times the amount of money received. (12-A 442-E (3))
Do You Need A Real Estate License To Wholesale In New York?
No – a real estate investor who chooses to wholesale an investment property will NOT need a real estate license if the wholesaler's actions fall outside the definition of the activities that require a real estate license in New York.
Real estate licensees in New York working to close a real estate transaction must comply with the rules and regulations as denoted in NY Real Estate License Law Section 440 – Real Property (RPP).
To wholesale real estate in New York, an individual must enter into a contract of sale in New York as a principal buyer with the option to sell their rights and obligations (under the purchase agreement) to another buyer. Wholesalers often create a viable buyers list over time. The end buyer, through an assignment, buys the real estate wholesaler's equitable interest in the purchase contract.
It is helpful for real estate wholesalers to become knowledgeable regarding the laws and regulations in the Empire State. However, New York requires no formal assessment other than remaining within the legal limits set forth by New York law.
Many investors successfully wholesaling real estate in New York ultimately conclude that it is prudent to obtain their real estate license as a way to improve their understanding of the state's requirements. Additionally, a licensee has access to the local Multiple Listing Service, a great source for investment rental property leads located in the target real estate market.
The following states share licensing reciprocity for real estate professionals in New York -
Is Co-Wholesaling Real Estate Legal In New York?
Co-wholesaling refers to a transaction where one real estate wholesaler works with another wholesaler to complete a real estate investment – as a wholesale team.
Co-wholesaling, which resembles its sister strategy - wholesaling, is a real estate investment technique that is legal if real estate wholesalers comply with New York state law.
Real estate wholesalers walk a fine line to avoid the actions required by those who hold a real estate license. To ensure you stay to meet the legal requirements in New York, consider these suggestions-
- Become familiar with NY real estate law, including required disclosures and disclaimers.
- Be certain to use industry-acceptable disclosures.
- Use a joint venture agreement – which reduces each wholesaler's obligations to writing between those who wish to do business together without formalizing a partnership as a new legal entity.
Is Reverse Wholesaling Real Estate Legal In NY?
Reverse wholesaling can be accomplished lawfully if old and new investors – who are parties to the contract, stay within the laws established by the state of New York.
The primary difference between traditional wholesaling and reverse wholesaling is that reverse wholesaling changes the order in which an old or new investor completes the wholesale transaction. Reverse wholesalers first find an end buyer – which is preferably one of the cash buyers available and then find the property that meets that buyer's requirements.
A reverse wholesaler can opt for one of three exit strategies –
- Negotiating an assignment clause in the contract – be certain the contract has an assignability clause within. A vigilant seller's attorney in New York may prohibit assignments without the expressed written permission of the seller.
- Execute a Double Closing - requires a real estate wholesaler to close on the purchase first. The same day the new owner then sells the property to another buyer. Note that this exit strategy requires the wholesaler to pay closing costs or bank, loan, and title company fees.
- Execute a Buy/Sell Strategy
Using the reverse wholesaling strategy offers several benefits, as follows –
- Builds long-term relationships with financial partners and private money lenders, which ultimately streamlines the lending process for wholesalers in New York.
- Builds long-term relationships with cash buyers and other investors ready to buy.
New York Wholesale Real Estate Contract
A contract is a legally enforceable document that defines the real estate purchase/sale's terms. It also provides each party the right to buy/sell real property to another person. A purchase agreement includes, in part –
- The property's legal description.
- The earnest money that the purchaser has given.
- Any personal items (i.e., furniture or appliances) to be included.
- The financial terms to complete the sale.
Source: NY State MLS
Source: Judicial Title
Generally speaking, a contract is assignable – by default- unless the contract's language expressly prohibits its use or requires the seller's approval.
An assignment contract is a legal document that transfers both the rights & the obligations of a purchaser (aka - the assignor) under one contract of sale to another buyer (aka - the assignee).
Most often, the assignee is a cash buyer who closes the deal and then and compensates you, the assignor, for managing and putting the real estate deal together. New York law is silent regarding the details about contract assignments in real estate.
As with anything in the real estate investing realm, no single aspect leads to certain success. However, having a true understanding of how a real estate assignment of contract works is vital to success.
Investors must be prudent and transparent when wholesaling real estate to ensure they stay within New York law. A well-written contract of sale by a seasoned attorney is not only required but the best way to avoid any potential legal issues.
New York real estate offers wholesalers a wide variety of investment options, from several large cities to rural areas, lakefront, and oceanfront properties.
*Disclosure: Real Estate Skills is not a law firm and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs