Is Wholesaling Real Estate Legal In Puerto Rico?

Real estate wholesaling is a short-term business strategy that has become quite popular as the underlying strategic goals mesh exceptionally well with the current appreciating real estate market that developed during the pandemic.

Wholesaling is a great tool that can be used for commercial real estate but is mainly employed by wholesalers in the residential real estate market. These potential wholesale deals may include owner-occupied units, investment properties, or rental properties.

Real estate wholesalers act like any other middleman in an economy. However, instead of selling large quantities of goods at reduced prices (like a traditional middleman-wholesaler would), the deal is considered wholesale because the real estate wholesaler is not the end-buyer or final consumer.

The objective of real estate wholesaling is to –

• Buy properties that are distressed and with a valuation below market. The reason for the attractive price may mean that the unit is in foreclosure or being sold by highly motivated homeowners with cash flow problems. Social media, along with podcasts offer great digital tools to help wholesalers new to Puerto Rico’s market.
• Enter into a real estate contract or purchase and sale agreement with the seller that delineates the terms and conditions required to close the deal. This usually includes a modest, earnest money deposit held in escrow to show good faith.
• Find another buyer to whom a wholesaler can assign their equitable interest or right-to-purchase that has been awarded through the Doctrine of Equitable Conversion.

• Assign the wholesaler’s equitable interest to another buyer for a price higher than the original contract before the original contract closes. The difference in the original and assigned contract purchase price is considered the assignment fee.

Many first-time investors consider working and marketing wholesale properties to be one of the most viable entrance ramps into the real estate business.

Wholesaling also offers these benefits -

• An investment option without a tremendous upfront need for capital is especially helpful for first-time investors.
• Can build a home buyers list while learning the business from the inside out.
• Mitigates renovation risks associated with building/construction permits unknown or hidden defects, to name a few.
• It offers one of the quickest turnaround times for generating a profit in real estate.

Are you ready to learn about wholesaling real estate in Puerto Rico?

A Word About The Puerto Rico Real Estate Market

After experiencing rough economic waters for the past decade, Puerto Rico’s housing market is now strengthening, mostly due to a demand that exceeds the available supply. In Q2 -2021, the seasonally-adjusted price for a purchase-only home increased by 15.4%.

• What Do You Need To Know About Wholesaling Houses In Puerto Rico?
• Is Wholesaling Real Estate Legal In Puerto Rico?
• What Are The Wholesaling Laws In Puerto Rico?
• Do You Need A License To Wholesale Real Estate In Puerto Rico?
• Final Thoughts

What Do You Need To Know About Wholesaling Houses In Puerto Rico?

Founded by an expedition led by Christopher Columbus in 1493, the Commonwealth of Puerto Rico (PR) was further colonized a decade or so later by the Spaniards. Puerto Rico’s name translates to “Rich Port” in Spanish.

Puerto Rico, the Isle of Enchantment, is an island in the Caribbean Sea that is an unincorporated territory of the U.S. It includes the main island plus assorted smaller islands that include Culebra and Vieques.

Residents of Puerto Rico have been considered American citizens since 1917 and have the privilege of traveling from the island to the mainland at will, although their voting powers are limited. Its tropical location is about 1,000 miles from Miami, Florida, and is considered the smallest island nation within the Greater Antilles archipelago.

Puerto Rico includes 5,320 square miles, of which 3,420 are land and the balance water. It measures 100 miles at its longest east-west point and 40 miles from north to south and is bigger than Rhode Island or Delaware. The area is primarily mountainous, with coastal regions along the north and south shores. Puerto Rico’s highest elevation is 4,390 feet – Cerro de Punta.

The island had a 2020 population of nearly 3.3 million, which represents a net decrease of approximately 12% or a reduction of 439,000 residents.

Puerto Rico’s largest cities include its capital of San Juan –

Real Estate Trade Organizations In Puerto Rico

The following organizations are the larger professional organizations in Puerto Rico dedicated to the real estate profession, covering all real estate brokerages and real estate licensees working in Puerto Rico in the real estate marketplace. Each of these real estate professional associations is a member of the National Association of Realtors (NAR)

• The Puerto Rico Association of Realtors (PRAR)

The PR REALTORS Association includes more than 12,000 members, representing sales agents, property managers, appraisers, and brokers from all 89 municipalities in Puerto Rico. The PRAR is the voice for Puerto Rico real estate, with members who volunteer time to help ensure all residents have the opportunity to lead healthy and successful lives.

Puerto Rico’s Board of Real Estate Brokers, Salesperson, and Companies – the Department Of State (Departamento De Estado Junta Examindors)

The agency in Puerto Rico responsible for administering licenses and upholding real estate law is the Puerto Rico Board Brokers, Agents & Real Estate Companies in the Department of State. The licenses managed by this state agency are as follows –

• Real Estate Agent License (PR Title 20 Chapter 99A-3025-u). – the laws governing Puerto Rican real estate salespeople include 20-99A-3034.

• Real Estate Broker License (PR Title Chapter 99A 20-3025-g) – the laws governing Puerto Rican real estate brokers include 20-99A-3033.

• Real Estate Company (PR Title 20, Chapter 99A -3025-j) - the laws governing Puerto Rican real estate companies include 20-99A-3035.

Real Estate License Reciprocity (PR Title 20-99A-3043)

The following represents the Puerto Rico law regarding real estate license reciprocity -

Interestingly, Puerto Rico refers to a real estate purchase and sale agreement as a Promise Of Sales Contract in P.R. Laws tit. 20, § 3025 (f) –

Is Wholesaling Real Estate Legal In Puerto Rico?

Wholesaling real estate is perfectly legal in Puerto Rico when implemented correctly. Many real estate investors have generated significant profits wholesaling houses while staying compliant with local laws. The ultimate goal in wholesale Puerto Rican real estate is to avoid the actions that require a real estate license.

Further, Puerto Rico law notes that a real estate transaction is defined as follows (PR Title 20, Chapter 99A-3025-t) -

(t) Real estate transaction. — Any sales contract, promise to sell, option to buy or sell, exchange, leasing, auction, property management contract, or the offer, promotion or negotiation of the terms of a real estate sale, purchase-sale option, sales promise, lease, management or exchange located in or outside the Commonwealth of Puerto Rico, in which a real estate broker, salesperson, or company serves as intermediary.

The concept of wholesaling real estate has the potential to get a bit confusing. Wholesaling is lawful and does not need a real estate license if the wholesaler is the principal buyer or the principal seller in a transaction.

If you are selling a contract (by assigning the original contract to another buyer), you should be transparent and disclose that you hold the equitable right/interest to purchase the property.

In other words, the end buyers should know that you aren’t selling real property. You are selling a marketable asset - the right to purchase the property.

What Are The Wholesaling Laws In Puerto Rico?

Puerto Rican law is primarily based on the Spanish system of civil law and is quite different from laws more commonly found in the continental United States. Puerto Rico’s notarial system (which requires all notaries to be lawyers) resembles that which is used by other Latin American jurisdictions.

The use of a title company and the criteria of lenders may differ from the lower 48 contiguous states, from Los Angeles to the Washington DC area.

The only documents that are allowed to transfer Puerto Rico real property to another (i.e., selling, gifting, donating, etc.) are notarized deeds. At a bare minimum, the required documentation must be incorporated in a notary book that gives it validity according to Puerto Rico law.

Selling real estate in Puerto Rico requires the services of a real estate lawyer or law firm. It is imperative that the transaction is registered with the Registry of Property in Puerto Rico (Registro de la Propiedad).

This registry performs duties that resemble those typically done by an administrative court. The evaluation process (of acceptable registry documentation) is complex and includes responsibilities in these areas of law–

• Real Property Law
• Contract Law
• Zoning Law
• Mortgage Law
• Trusts & Agency Law
• Family/Divorce Law, among others.

Registering a property offers these crucial benefits as stated in the title clearance program policies -

a. Ownership of the property is credited and protected from third parties that resort to legal or other methods to try and make the property their own.
b. You can apply for loans or credit for improvements to the property at banks and financial institutions.
c. An increase in the value of property is more likely.
d. Facilitates the transfer of property in cases were sales are desirable.
e. Ensures that everyone recognizes who is the owner of the land and structure.
f. Reduces risk of another person taking ownership of the property. Not registering exposes you to the risk of having someone other than you appear as owner.
g. Provides protection by the courts.
h. Anyone that wishes to buy the property will have all necessary information to make a determination in this regard, thus facilitating its transfer.

Decisions made by the Registry of Property in Puerto Rico are appealed directly to the Court of Appeals of Puerto Rico.

To avoid legal issues while wholesaling, steer clear of violating the law. The law in Puerto Rico specifically notes that a real estate transaction is defined as follows (PR Title 20, Chapter 99A-3025-t) -

Remember, the provisions of PR 20-99A-3056 clarify those individuals who are exempt from this real estate license law.

The provisions of this chapter shall not apply:

(a) To lawyers in their professional attorney-client relationships with their clients.

(b) To trustees appointed according to the laws in force in Puerto Rico with regard to the assets of their principals.

(c) To executors, accountants, partitioners, and judicial administrators, with regard to the assets of the estate in his/her charge.

(d) To persons who act by designation of the courts or agencies of the federal or state Government.

(e) To the proprietors of real property located in or outside of Puerto Rico who sell or alienate their own real property, when they are not habitually engaged in the sale of real estate. The Board may establish the necessary standards, by regulation, to prevent this exception from being used for the exercise of the activities regulated by this chapter, without a license.

Do You Need A License To Wholesale Real Estate In Puerto Rico?

No, a real estate license is not required to wholesale real estate in Puerto Rico. It is vital to understand that a legal contract means there may be significant legal consequences for noncompliance. To stay within the legal lanes in Puerto Rico, consider these pro tips -

Ensure Contracts Or Agreements Are Valid & Allow For Assignments If Applicable

Real estate wholesaling is legal in Puerto Rico, although a contract may include an added provision that requires the assignment contract to be preapproved by the seller.

Include The Required Language In Real Estate Contracts

Wholesale deals differ from more traditional sales and even flipping houses. This is the primary reason why the contract’s language must be carefully constructed, transparent, and written without ambiguity. The requirements for contracts will differ based on local real estate customs.

Market & Sell Your Equitable Interest

The executed wholesale real estate contract awards equitable title – NOT title to the property. As such, it is critical to market the only asset you can sell without a real estate license – the right to purchase real property at agreed upon, detailed terms in the contract.

Exercise Transparency

When working in the real estate wholesaling business, it is critical to remain transparent. This should allow all parties to make the most educated decisions to meet their own objectives. There should be no question as to each role of each player in a wholesale real estate deal.

Available Exit Strategies For Puerto Rico Wholesalers

There are a few exit strategies for real estate investors wholesaling in Puerto Rico. The most commonly used techniques include –

• The Assignment Strategy - Assigning your equitable rights using an assignment of contract to another end buyer, likely selected from a curated list of potential buyers. Wholesalers earn an assignment fee.
• The Double Close Strategy - A double closing – which is two separate closings that happen back-to-back, offers wholesalers a viable exit. These are the relevant characteristics of a double close wholesaling exit strategy -
  • There are two separate sales transactions/closings for the same piece of real property.
  • The wholesaler is the principal buyer in the first closing and the principal seller in the subsequent closing to the end or cash buyer.
  • The title to the property actually passes through to all parties.
  • There are two sets of closing fees, which implies higher closing costs. But note, considering this type of exit strategy may offer the safest route for wholesalers because there is no question that the wholesaler is the principal seller. Remember, the provision of PR 20-99A-3056 (e) clarifies that proprietors of real estate are not required to be licensed.

Note: However, the Puerto Rico Board of Real Estate Brokers, Salespersons, and Companies has the authority to establish other standards to prevent the abuse of this provision of real estate law should it become necessary to regulate.

Final Thoughts

Real estate law protects consumers from unscrupulous individuals and helps prevent mal-intended people from taking advantage of the buyers, sellers, the housing market, and the real estate industry. Essentially, this type of legislation acts as a significant safety net for unsuspecting consumers.

When carried out within the letter of Puerto Rico’s law, real estate wholesaling can be an excellent real estate investment strategy. But, considering the potential consequences for mistakes (intentional or not), real estate wholesalers should approach wholesaling from the spirit of cooperation, prudency, and transparency.

Real estate investing offers lucrative opportunities if wholesalers act without violating Puerto Rico law. Like all real estate investing, real estate wholesalers must complete the wholesale process with professionalism and transparency. 

The legality of real estate wholesaling remains a hotly debated topic, so it is important for wholesalers in Puerto Rico to remain current with the relevant law.

But note, a wholesaler has every legal right to market and sell their equitable interest, defined as their ‘right to buy a property according to predetermined terms'.