Is Wholesaling Real Estate Legal In Pennsylvania?

Real estate wholesaling is an investment technique in which a real estate investor enters into a legally enforceable contract to buy a home but then sells their right to purchase the property, in accordance with the terms denoted within the contract and the legal concept known as the Doctrine of Equitable Conversion, which is defined as:

Source: Law Shelf

The law determines that the ‘equitable title’ has changed owners when the contract has been signed, with the legal title remaining until the deed is transferred. This is because the time that exists between two critical events: 

• The execution of a contract for the sale of real property
• The delivery of the deed and marketable title to the buyer

It is a time when the property’s ownership has hit a bit of a gray-legal area, during which the property exists in a state of limbo between– the seller and the buyer. This is because – during this specific time, the seller has possession (and use) of the real property for which a buyer has a contractual right to receive the property. As such, during this time, the real property is said to have dual ownership – legal ownership and equitable ownership between the two.

A real estate wholesaler’s ultimate objective is to enter into a purchase agreement with a seller for a price that is below market, like at a foreclosure auction, for instance. The reduced price of a home is often available when sellers are financially challenged or highly motivated to sell – for whatever reason they may have.

While many investors regard real estate wholesaling as a viable way to learn how to assess potential deals and to build a network of colleagues and an end buyers list, it also offers these benefits:

1. The possibility of investing without requiring significant upfront capital expenditures
2. Reduces the risks associated with rehabilitating a property – i.e., permits, unknown and hidden defects, etc.
3. Reduces the time required to close a deal when compared to the standard fix-to-flip investment models. 

• What Do You Need To Know About Wholesaling In Pennsylvania?
• Is Wholesaling Real Estate Legal In Pennsylvania?
• What Are The Wholesaling Laws In Pennsylvania?
• How Do I Legally Wholesale In Pennsylvania?
• Is There A License for Wholesaling In Pennsylvania?
• Do You Need A Real Estate License to Wholesale In Pennsylvania?
• Is Co-Wholesaling Real Estate Legal In Pennsylvania?
• Is Reverse Wholesaling Real Estate Legal In Pennsylvania?
• Pennsylvania Wholesale Real Estate Contract
• Final Thoughts

What Do You Need To Know About Wholesaling Houses In Pennsylvania?

The Commonwealth of Pennsylvania is the 5^th most populous state in the United States with a population that exceeds 12,800,000 – with nearly one-quarter of the state’s residents in two counties – Philadelphia County and Allegheny County.

Source: World Population Review

Pennsylvania was one of the original colony states, with its largest city – Philadelphia, the historic location of where the Declaration of Independence in 1776 was signed and the first seat of the US Government – until 1800. Pennsylvania’s largest cities include:

The following represents the larger trade & professional organizations in the Commonwealth of Pennsylvania that are specifically dedicated to the real estate profession. Each of these trade associations noted below is a member organization of the National Association of REALTORS (NAR) – 

• The Pennsylvania Association of REALTORS (PAR)

The PAR, located in Lemoyne, PA, is among the state’s largest real estate trade organizations that has more than 35,000 members representing the residential and commercial real estate markets in the Keystone State. Members of the Pennsylvania Association of REALTORS subscribe to the NAR’s Code of Ethics as well as its Standards of Practice.

• The Greater Philadelphia Association of REALTORS (GPAR)

The GPAR – the Greater Philadelphia Association of REALTORS, was established more than a century ago in 1908 and has grown to be among the most influential trade organizations in the greater Philadelphia real market. Since its inception as the Philadelphia Real Estate Brokers Association, the GPAR has been the voice for advocacy for professionals and all real estate owners.

• The REALTORS Association of Metropolitan Pittsburgh (RAMP)

RAMP - the REALTORS Association of Metropolitan Pittsburgh was originally developed in 1911 as the Pittsburgh Real Estate Board – a decade before state licensing was required for real estate professionals and each brokerage. With an initial membership of 30, RAMP now represents more than 2,500 real estate professionals in the residential and commercial markets in western Pennsylvania, offering advocacy, education, professional ethics, and industry events.

• The Greater Lehigh Valley REALTORS Association (GLVRA)

The Greater Lehigh Valley REALTORS Association is a professional real estate association that represents real estate interests and professionals in the Lehigh, Carbon, and Northampton Counties. GLVRA was founded when two former associations merged in 1996 and now has more than 2,500 professional real estate members.

• The Greater Erie Board of REALTORS, Inc. (GEBR)

Chartered nearly 100 years ago (1924) as the Real Estate Board of Erie, The GEBR serves the real estate community in the Erie County area (including Crawford County without Titusville) with more than 500 members.

The primary state agency responsible for administering and monitoring real estate licensing and activity in the state is the Real Estate Commission housed in the Pennsylvania Department of State’s (DOS) Professional Licensing Division. The (DOS) is responsible for the administration and maintenance in Pennsylvania.

Pennsylvania’s real estate law (Pennsylvania Code § 35 – State Real Estate Commission) covers a wide range of essential legal issues.

Read Also: Virtual Wholesaling - How To Flip Houses From Home

Is Wholesaling Real Estate Legal In Pennsylvania? 

Although Pennsylvania legislation broadly requires individuals who are a party to a purchase, sale, or exchange of real estate to hold a valid license –this legal requirement does not include those who hold an ownership in a real estate investment that they are trying – even if the ownership just occurred.  The laws that govern these matters are found in the Pennsylvania Real Estate Licensing and Registration Act.

So, yes, this very real and viable loophole will allow real estate wholesalers to operate legally in the Commonwealth of Pennsylvania under the following conditions:

• Without a license, if they live outside the legal boundaries of Philadelphia and do not choose to act in ways that can be perceived as needing a real estate license. [FYI - This is discussed in detail further in the narrative]
• With a license if within the legal boundaries of Philadelphia. 

The key to staying within the legal limits of those Pennsylvania (except Philadelphia) is to achieve your business objectives – of selling and then assigning the rights/obligations obtained by the terms of the purchase contract to another end buyer – without overstepping the boundaries of the actions and behaviors of what would require a real estate license in Pennsylvania. Pennsylvania code defines real estate as:

 Source: PA Code Definitions (§ 35.201 Definitions)

Most importantly, a wholesaler must avoid these actions that require a real estate license in Pennsylvania:

However, the above-noted requirements – with regard to the promotion of the sale/rental/lease or purchase of real estate do not apply to an individual/entity in a professional capacity that includes promotions, public relations, or advertising. [See PA § 35.201 (v)]

To wholesale real estate within the law in Pennsylvania, it is vital for you to have a full and complete understanding of what defines the role of a licensed broker. Wholesaling in Pennsylvania can be quite profitable to those investors who understand how to stay within bounds with regard to Pennsylvania law. 

Additionally, § 35.202 (Exclusion from Act) denotes those who are not required to comply with Pennsylvania law and license law as follows:

What Are The Wholesaling Laws In Pennsylvania?

Conceptually, the term real estate wholesaling does not have a precise or consistent legal definition, and all too often, one’s perception of wholesaling has stark differences, depending on who you ask. 

To legally wholesale properties in Pennsylvania, an investor must avoid not choose to act in a manner that would meet the Pennsylvania definition of a real estate broker, as follows:

Broker—An individual or entity holding either a standard or reciprocal license, that, for another and for a fee, commission or other valuable consideration, does one or more of the following: 

     (i)   Negotiates with or aids a person in locating or obtaining for purchase, lease or acquisition of interest in real estate.

     (ii)   Negotiates the listing, sale, purchase, exchange, lease, time share and similarly designated interests, financing or option for real estate.

     (iii)   Manages real estate.

     (iv)   Represents himself or itself as a real estate consultant, counsellor or house finder.

     (v)   Undertakes to promote the sale, exchange, purchase or rental of real estate. This subparagraph does not apply to an individual or entity whose main business is that of advertising, promotion or public relations.

     (vi)   Undertakes to perform a comparative market analysis.

     (vii)   Attempts to perform one of the actions listed in subparagraphs (i)—(vi).

Source: Pennsylvania Code

There is no specific legislation in Pennsylvania – except in the legal boundaries of the city of Philadelphia – this is discussed in detail in the section below.

How Do I Legally Wholesale In Pennsylvania?

Pennsylvania law – across the state but independent of the real estate in Philadelphia, requires the appropriate licensing of individuals who are involved in the:

• Purchase
• Sale
• Exchange of real estate as primary or investment property

However, this licensing requirement does not apply to those who are real estate investing or selling their own properties – even if the ownership is for an hour or a day.

Is There A License For Wholesaling In Pennsylvania?

Philadelphia, Pennsylvania’s Rules for Real Estate Wholesaling

According to the City of Philadelphia,

Source: City of Philadelphia

The exact definition, according to Chapter 9-5201, of a Residential Property Wholesaler is as follows:

Source: Philadelphia Code Chapter 9-5201(5)

However, a real estate wholesaler’s license is not required under these scenarios: 

• A public employee/official that is performing official business.
• A Pennsylvania licensed attorney or a licensed real estate professional acting within the confines of the scope of the PA license.
• A buyer who has the intention of renting the property.
• An investor who purchases a property with the intention of making improvements to increase its value.

The city provides an online real estate wholesaler application, plus requires the following to remain compliant with the Residential Property Wholesaler License Limits & Conditions:

Source: RPWLLC Limits & Conditions

Disclosure requirements (Philadelphia § 9-5205) for the Residential Property Wholesaler License include the following:

• Homeowners must sign the disclosure as evidence they were given the disclosure as required.
• Wholesalers are required to disclose to homeowners (at least three days before the offer is present) how to access resources to help determine the property’s fair market value – including the city’s Property Assessment Office’s website, plus any private tools that may be suggested by the Administrative Agency. Disclaimers are not permitted.
• Wholesalers are required to inform homeowners of their option to
  • Seek help by employing a licensed real estate agent
  • Seek legal counsel
  • Seek any other options deemed appropriate

Additionally, the wholesaler must provide evidence (by way of a Certificate of Insurance) for general liability, with a $1,000,000 minimum for each occurrence. Also, this includes multi-family & mixed-use buildings.

The consequences and penalties of violating this Philadelphia real estate wholesaling law are significant:

• If a wholesaler enters into an agreement of sale prior to being licensed and solicits business (§ 9-5201 (4)) this agreement may be rescinded at any time before the title transfers – at the solitary option of the seller/homeowner.
• Any violation is considered a Class III offense with penalties set forth by Philadelphia Code 1-109.

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

The qualified answer is no; however, a license would not be required if:

• Your actions do not rise to the level of that which defines a required real estate license in Pennsylvania.
• Your business is within the city of Philadelphia as this jurisdiction (The Philadelphia City Council) has set forth rules regarding real estate investment wholesalers.

Remember that the key to selling your equitable interest in an executed contract (rather than the property) allows for investors to legally wholesale real estate. But note, you will violate license law if you operate as a real estate broker or work in Philadelphia.

To legally wholesale properties in Pennsylvania, an investor must avoid not choose to act in a manner that would meet the Pennsylvania definition of a real estate broker, as follows:

Source: PA Code Definitions (§ 35.201 Definitions)

Real estate wholesalers can successfully navigate a wholesale real estate deal in Pennsylvania without a license; however, many wholesalers recognize that there may be advantages to obtaining a real estate license in the Keystone State. You are encouraged to seek legal advice (from a licensed attorney in a Pennsylvania law firm) in this matter to help you weigh the benefits and costs.

The primary state agency responsible for administering and monitoring real estate licensing and activity in the state is the Real Estate Commission housed in the Pennsylvania Department of State’s (DOS) Professional Licensing Division. The (DOS) is responsible for the administration and maintenance of the working real estate professionals in Pennsylvania.

In addition, Pennsylvania offers reciprocity for licensed real estate brokers and salespeople to these states:

• Arkansas
• Louisiana
• New York
• Georgia
• Maryland
• Massachusetts 

This means active real estate license holders in any of the above states may obtain a Pennsylvania real estate license within a matter of 3-6 weeks without the need for additional course requirements or examinations.

Is Co-Wholesaling Real Estate Legal In Pennsylvania? 

Co-wholesaling refers to real estate wholesaling as a team effort and is, therefore, legal if the participant investors stay within Pennsylvania’s legal limits.

The co-wholesaling transaction can be a one-time deal or be one of many in an ongoing joint venture through an executed joint venture agreement. It is critical that a joint venture partner be vetted to ensure you proactively protect your legal interests until the wholesale deal closes.

A co-wholesaling partnership is often a great way to close a real estate wholesale deal quickly because the existing relationship often brings two talents – a wholesaler who finds the property and another with a list of qualified end buyers.

If executed properly (or outside the City of Philadelphia), co-wholesaling is a legal practice.

Is Reverse Wholesaling Real Estate Legal In Pennsylvania?

The concept of reverse wholesaling is also a legal real estate strategy if, like co-wholesaling:

• Investors do not perform or act in a way that would require a real estate license
• The reverse wholesaling is outside Philadelphia city limits.

The primary difference between traditional wholesaling and reverse wholesaling is that the order in which the transaction steps are typically taken – is reversed! So instead of finding a property and then looking for a buyer who may want to buy it, a real estate wholesaler first has an end buyer and then looks for a property that meets their needs.

There are several viable exit strategies for Pennsylvania’s reverse real estate wholesalers.

• They can execute a Buy & Sell Exit Strategy
• They can execute a Double Closing – which refers to the process where the wholesaler buys and sells the same property on the same day – maybe even back-to-back closing. But remember, a double close can be more expensive as two closings mean two sets of closing fees.

The reverse wholesaling strategy generates a variety of benefits real estate wholesalers in Pennsylvania (not in Philly) from Lancaster to Harrisburg to Pittsburgh, as follows:

• It allows for the facilitation and building of long-term relationships with financial partners, ultimately streamlining the funding portion of the wholesale transaction.
• Builds long-term relationships with cash buyers and other investors with a serious interest in purchasing real estate in Pennsylvania.

Pennsylvania Wholesale Real Estate Contract

A legal real estate contract is a binding agreement that delineates the terms each party has agreed to perform (see bilateral contract). In a real estate transaction, the seller & the buyer would execute a legally enforceable contract in which each – the seller and the buyer are required to perform, according to the agreed-upon terms that have been set forth in writing between the parties.

The contract and its specific language is the document that provides a real estate wholesaler with the right to sell/assign their rights to another individual. A contract of sale is effective when both parties have signed (known as a fully executed contract) – acknowledging their acceptance of the terms defined in the agreement. The following is an example of a residential purchase agreement for Pennsylvania.

Download Free Wholesale Real Estate Contracts Here (PDF)

Source: E-Forms

Although beyond the scope of this narrative, it is important to note that there may be additional transfer taxes due in Pennsylvania with regard to the assignment of contracts. The Department of Revenue issued a Realty Transfer Tax Bulletin {2008-01} which aligned with the Rule in (61 PA.Code 91.170). The implication is that a wholesaler may be subject to double taxation – because when a contract is assigned to a business entity (before closing), the reality is that both the assignment and the deed are considered two separate and distinct transactions. 

The other important document used to complete a real estate wholesale transaction is the Assignment Contract – the document that legally transfers the Assignor’s rights/obligations (i.e., the real estate wholesaler) to another buyer – known as the Assignee. The Pennsylvania Statutes Title 13 Commercial Code § 2210 (b) - Assignment of Rights notes:

…all rights of seller/buyer can be assigned except in these instances:

• The assignment would materially change the duty of the other party
• The assignment would increase the risk/burden imposed on the other party
• The assignment would materially change the duty of other party
• The assignment would materially impair the chance of earning the expected performance

Source: Judicial Title

Final Thoughts

Real estate wholesalers in Pennsylvania – independent of the regulations established in the City of Brotherly Love (Philadelphia), can legally wholesale real estate if they avoid overstepping legal boundaries set forth by Pennsylvania license law.

To stay within legal limits, real estate wholesalers should follow these practical and proven transactional strategies:

• Always be completely transparent and appropriately disclose your role and intentions in the real estate transaction – disclose assignment fee and other relevant issues.
• Be certain that you, as a buyer, have a unilateral right to assign your equitable rights as a party to a legal contract of sale.
• Make sure relevant contingency provisions are written in clear, concise language that manages the expectations of all parties to the real estate deal.

Wholesaling real estate is a viable investment strategy and legal in Pennsylvania without a license (outside of Philadelphia) if the wholesaler stays within the legal lanes and guidelines established by Pennsylvania lawmakers.