Is Wholesaling Real Estate Legal In Tennessee?Aug 10, 2021
Real estate wholesaling is an investment technique in which the investor enters into a purchase contract to buy real property (which could be residential or commercial) that is typically priced below market value, typically due to the motivations of property owners, like an impending foreclosure, etc.
A wholesaler, effectively acting as a middleman, finds another buyer (usually from a curated or established potential buyers list). The final buyer is usually referred to as the end buyer who is legally assigned the right to purchase the property in question at a typically higher price than the original purchase price. The difference in sale prices is the wholesaler’s gross profit.
The legal concept that permits a real estate wholesale deal to move forward within legal boundaries is better known in legal circles as the Doctrine of Equitable Conversion, which delineates the difference between legal & equitable owners -
Source – RealEstateDefinition.com
The principle of Equitable Conversion denotes that the ‘equitable title’ of the subject property has effectively changed owners when the contract is signed. Legal title remains with the property owners, with their security interest converting to personal property from that of real property.
Although the contracted buyer does not hold legal title to the property, they do have control of the property’s ultimate disposition. This is because the contracted buyer now has equitable interest or title, which creates the wholesaler’s legal right to assign their contractual rights to another, who is often a cash buyer.
When wholesaling real estate through an assignment of contract, it is critical to note that a wholesaler can ONLY sell their legal rights delineated in the executed contract – they cannot sell or market the property – this is a critical distinction.
Real estate investors will find that wholesaling is legal and a great way to get your feet wet in real estate. A wholesaler must be vigilant to ensure that the wholesale deal is executed with appropriate due diligence – characterized by an analysis that effectively weighs the legalities against anticipated outcomes.
Successful wholesalers understand the power of this revenue-building technique using investment properties – which can be done without significant capital.
It begins by understanding the rules of the real estate wholesale game in Tennessee. Let’s begin.
- What Do You Need To Know About Wholesaling Houses In Tennessee?
- Is Wholesaling Real Estate Legal In Tennessee?
- What Are The Wholesaling Laws In Tennessee?
- Do You Need A License To Wholesale Real Estate In Tennessee?
- Is Co-Wholesaling Real Estate Legal In Tennessee?
- Is Reverse Wholesaling Real Estate Legal In Tennessee?
- Tennessee Wholesale Contract
- Final Thoughts
What Do You Need To Know About Wholesaling Houses In Tennessee?
Tennessee was originally annexed to North Carolina before its admission into the union in 1796.
Source – TN Realtors
Its area exceeds 42,000 square miles and is home to almost 7,000,000 residents, translating to about a 9% increase in residents (560,000+) from the last 2010 census.
Source – University of Tennessee - Knoxville
The state’s nickname is The Volunteer State. It refers to scores of state residents who have volunteered to serve in wars and conflicts. Tennessee is home to one of the most-visited U.S. national parks - the Great Smoky Mountains National Park.
Source – NationsOnline.org
The Great Smoky Mountains are a part of the Blue Ridge Mountains, which is a part of the larger Appalachian Mountain Chain that runs from north to south along the eastern part of the U.S.
The highest point in the state park is known as Clingmans Dome – at 6,643 feet above sea level.
The five largest cities in Tennessee include –
Source – World Population Review
Nashville is the largest city and state capital. With more than 678,000 residents, Nashville ranks as the 23rd most populous city in the nation.
Tennessee Real Estate Statistics
According to Zillow’s latest statistics, the median home price in Tennessee (May 2021) is $226,456 – a jump of nearly 13% year over year –
Source - Zillow
These are the larger trade and professional organizations in the state dedicated to the real estate profession. Each of these associations is a member of the National Association of REALTORS (NAR) –
|● TN REALTORS – The Tennessee Association of REALTORS
With more than 31,000 members throughout the state of Tennessee, the Tennessee Association of REALTORS provides its members with some of the most impressive benefits for real estate professionals. Members have access to networking opportunities, professional development/educational offerings, plus a robust legislative voice – at the state and federal levels.
● The Greater Nashville REALTORS (GNR)
Founded in 1891, the GNR serves real estate professionals in and around the greater Nashville area. The GNR offers members the tools required to become successful realtors, including professional development/education options, a legislative voice to speak at all levels of government, networking events/opportunities, and a mandatory Code of Ethics.
● Memphis Area Association of REALTORS (MAAR)
Recognized among the state’s largest real estate trade organizations, the MAAR has been serving the real estate community, with more than 4,000 real estate professionals representing numerous specialties. Founded more than 100 years ago (1910), the Memphis Area Association of REALTORS maintains the area’s MLS, with more than 9,000 listings at any one point in time.
Established in 1912, the KAAR serves more than 3,500 real estate professionals covering all sectors of real estate, including residential, management, commercial properties, and appraisal services. The Knoxville Area Association of REALTORS serves a twelve-county area and offers licensees numerous benefits from professional development to a legal hotline, among others.
● Bristol-TN-VA Association of REALTORS (BTVAR)
The BTVAR was established in the late 1940s to serve the real estate interests of the communities in Northeast Tennessee, along with Southwest Virginia.
Housed within the Tennessee Department of Commerce and Insurance is the Tennessee Real Estate Commission (TREC).
The Tennessee Real Estate Broker License Act of 1973 is the primary legislation in the state. It has been designed to protect consumers, homeowners, and the general public from irresponsible/unscrupulous individuals in the real estate industry. (Bus. Brokerage Centre v. Dixon, 874. W.2d 1, 3 (Tenn. 1994))
Is Wholesaling Real Estate Legal In Tennessee?
Yes. Wholesaling real estate in Tennessee is legal if wholesalers vigilantly navigate the transaction without acting in a way that requires a real estate license.
This can be accomplished by having a good working knowledge of the market, the relevant laws, and anything else required to avoid actions requiring a Tennessee real estate license. [For further details on Tennessee’s laws, see the next Section]
When wholesaling real property, the real estate wholesaler attains equitable ownership by signing a contract. This designation permits the equitable owner to market the property if they avoid those actions requiring a license. Equitable ownership sets forth one’s right to assign (or, in essence, sell) the real estate contract.
The reality is that wholesaling is more about marketing than it is about buying & selling real property. Of course, it is important to understand real estate valuations, the laws & customary rules to avoid overstepping Tennessee’s legal boundaries.
Considerations for Wholesaling Real Estate in Tennessee
- According to the TN REALTORS, any residential or commercial purchase agreement is assignable unless otherwise stipulated within the contract. The purchase agreement issued by the Tennessee REALTORS®is assignable unless a contract provision has been added that speaks to the contrary.
Note: If the assignee does not close – the original buyer must close and complete the transaction.
- Signing a contract without any intention to close sets up an illegal situation known as ‘fraud by inducement.’ Fraud in the inducement is also known as contract fraud. It happens when one contract party enters the contract using deceit to persuade the other to make decisions against their interests.
In other words, one party must have been proactively misled (meaning the other party was aware of their actions) about facts that were used to make relevant decisions. Fraud by Inducement negates one of the contract’s validity requirements – the meeting of the minds mandate.
From this perspective, wholesaling is considered legal - and it is important to remain on top of current and changing laws that impact the Tennessee real estate market.
What Are The Wholesaling Laws In Tennessee?
The Tennessee Code Title 62 – Professions, Businesses, and Trades – Chapter 13 include the rules that oversee the activities of real estate licensees in Tennessee. Title 62 Chapter 13 is also known as the Tennessee Real Estate Broker License Act of 1973.
To legally wholesale real estate in Tennessee, wholesalers must ensure their actions do not require a real estate license as noted by law.
Within the Tennessee Real Estate Broker License Act (TREBLA),
Source - Tenn. Code § 62-13-102 4(A)
Source - Tenn. Code § 62-13-102 4(B)
For clarification purposes, Tenn. Code § 62-13-102 (14), Tennessee’s definition of real estate is as follows –
Tennessee real estate law notes that a single act can identify a broker -
Source - Tenn. Code § 62-13-103 (a)
Here the Tennessee code notes that practicing real estate without a license constitutes a violation of the law.
Source – Tenn. Code § 62-13-103 (b)
It is also essential to understand those exemptions related to Tennessee’s real estate laws.
Source - Section 62-13-104 (1,2)
With regard to real estate wholesalers in Tennessee, the most relevant provision is that a real estate owner does NOT need a license when selling or renting their seller-owned property. (Refer to Section 62-13-104- a-1-a)
The penalties for violating Tennessee’s license law are noted in Tenn. Code § 62-13-110.
As noted in section (b) above, the state of Tennessee can level treble damages, which a court of law determines. Treble damages are punitive and are awarded based on the defendant’s/violator’s intent or level of willfulness and can be as high as three times the actual cost of damage inflicted.
Do You Need A License To Wholesale Real Estate In Tennessee?
In a word, no.
Currently, real estate investors using the wholesaling business strategy do not need a real estate license to wholesale real estate in Tennessee. Although many real estate wholesaling professionals often choose to become a licensed real estate agent or, at the very least, seek to build and maintain relationships with licensees in the area.
Recent Tennessee Legislation Which May Impact Real Estate Wholesalers
According to the Tennessee REALTORS legal counsel, a 2021 ruling from the Knoxville Court of Appeals (Toryiana Lousia SOTA et al. v. Presidential Properties, LLC, et al.) may significantly impact real estate wholesaling rules in Tennessee moving forward.
In this legal case, an individual had entered into contracts on properties and advertised/offered these properties for sale on his website with a written disclaimer indicating they were not a licensed real estate agent, but before they had closed and taken legal title to the property. Both the trial and appellate court concluded that the activity violated the RE Broker’s License Act in Tennessee. Effectively, the appeals court in Knoxville held that selling property that the seller does not own in exchange for ‘valuable consideration’ requires a real estate broker’s license in the state of Tennessee.
Source – Cornell Law
The main lesson here is to avoid publicly advertising property that you do not own unless you have a real estate license and the seller’s consent.
Until this issue is ironed out in Tennessee legal circles, real estate wholesalers should keep a watchful eye on all relevant news that may lead to a revision to Tennessee law that impacts the methods and legality of Tennessee real estate wholesaling.
Head’s UP – Illinois recently passed legislation that requires a real estate license for anyone who wholesales (be it - real estate and land contracts) more than one property over twelve months.
Source – IDRE
Is Co-Wholesaling Real Estate Legal In Tennessee?
Yes, co-wholesaling is legal in Tennessee. Co-wholesaling refers to a real estate wholesale transaction in which real estate wholesalers join efforts – and work together towards a common professional objective.
Co-wholesaling resembles traditional wholesaling, which means that both are legal if each of the participating real estate wholesalers complies with Tennessee real estate law.
Real estate wholesalers walk a fine (moving) line, which makes it tricky to avoid the actions required by those who hold a real estate license. This is especially true if you neglect to stay current with license law in Tennessee. Consider these helpful suggestions-
- Become familiar with Tennessee real estate law.
- Use industry-acceptable disclosures and forms.
Pro-Tip for Co-Wholesalers - Use a joint venture agreement. This legal document is a written agreement formalizing the obligations and expectations of each wholesaler involved.
Is Reverse Wholesaling Real Estate Legal In Tennessee?
Yes, it is legal to reverse wholesale real estate in the state of Tennessee.
Reverse wholesaling is a legal investment strategy if real estate wholesalers ensure they remain within the legal limits set forth by Tennessee’s legislative bodies. The reverse wholesaling strategy can be applied to any type of property, like a multi-unit or rental property.
The fundamental difference between the more traditional wholesale deal and reverse wholesaling is that reverse wholesaling reverses the order in which the wholesale deal is completed. Reverse real estate wholesalers first have the final, end buyer – more often than not, a cash buyer with specific requirements.
Real estate wholesalers typically opt for one of these closing/exit strategies; however, take the time to ensure the contract of sale has an assignability clause.
- Execute a Double Closing Strategy- requires a real estate wholesaler to close on the purchase first. The same day the new owner then sells the property to another buyer.
- Execute a Wholetailing strategy
Reverse wholesaling offers investors these benefits -
- The opportunity to establish long-term relationships with private money lenders, ultimately streamlining the lending process.
- Builds long-term relationships with cash buyers and other active investors ready to buy.
The fundamental benefit of reverse wholesaling primarily involves increased efficiency. Before finding a property, having a buyer in place helps save a wholesaler’s most valuable commodity – time, which ultimately translates to profits!
Tennessee Wholesale Contract
Real estate wholesalers in Tennessee should ensure that the specifics and provisions of their wholesale contracts are as unambiguous as possible to avoid issues throughout the real estate investment. Because the contract of sale in a wholesale transaction centrally controls the wholesale deal, it is a critical component of the investor’s wholesaling strategy – especially when it comes time to close. Consider including these relevant items -
- The Parties involved
- A Description of the Property – the address and legal description
- The Purchase Price & Financial Terms
- Earnest Money Requirements
- Fixtures/Property Included In Purchase
- Property Condition – a general description at the time of sale
- Inspection Contingencies, if applicable
- Lead paint Disclosure
- The Type of Deed – clarifies how the title is passed.
- The Parties Responsible for Closing Costs, etc.
Real estate wholesalers are encouraged to utilize (and customize) forms approved for use by its largest trade organization in the state. To mitigate risk, a wholesaler is advised to seek legal advice from an experienced real estate attorney who specializes in legally managing wholesale properties and real estate transactions.
Source – NETAR.US
The Assignment Of Contract
An assignment contract is a legal document that has the capacity to transfer both the rights & the obligations of the contracted purchaser (who is now known as the assignor) under one contract of sale to another buyer (who is now known as the assignee).
Source – Judicial Title
Generally speaking, a contract or sale/purchase agreement is assignable – by default- unless the contract's language expressly disallows an assignment or the contract requires approval from the seller. According to the TN REALTORS, purchase agreements for any real estate deals – including wholesale transactions, are assignable unless otherwise detailed within the contract.
But, remember, if the assignee (or end buyer) – does not close, the wholesaler (who was the original buyer) must complete the transaction.
The legality of real estate wholesaling is a hotly debated topic. Those who oppose real estate wholesaling have often mistakenly viewed the strategic intentions of wholesale real estate investing – which is to market the ‘right to buy the property’ and not the property itself.
This cannot be overstated – each real estate wholesaler must do their due diligence to determine the exact placement of legal boundaries set forth by Tennessee law. If you comply with the law, real estate wholesaling is not only legal; it can be quite lucrative.
*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