Avoid Brokering Without a License

There is a prominent real estate huckster selling coaching on the internet. I’ve attended several of his free webinars. I am angered at the misinformation he spews around to lure in unsuspecting newbies.

One of his more outrageous claims is that you do not need a real estate license to find a buyer for someone else’s property. His claim is that you sign a contract as a buyer to buy a property from a seller. As a principal party to the contract, you do not need a license to assign that contract to an unrelated 3rd party buyer. So far, this is true.

Then he commits a fatal error. He advises you to put a clause in the contract that nullifies your duty to perform as a buyer and substitutes a duty to locate a 3rd party buyer. If you cannot find a 3rd party buyer, then the contract is cancelled and your earnest money deposit is returned to you. He says you must have an earnest money deposit as an exchange of consideration to create a binding contract.

Legal information is not legal advice. Both he and I are not providing legal advice. His legal information is wrong.

1. Earnest money deposit is called “deposit” and not “consideration“, because it is not consideration. To have a binding contract, there must be an equitable exchange of consideration or the promise of an equitable exchange. When you buy a car, you sign a purchase contract, pay the money and receive the keys and the title to the car. That is an equitable exchange of consideration. Real estate contracts involve the promise of an equitable exchange of consideration. For example, as a buyer, I promise to deliver $100,000 to the closing table on a certain date and as seller, you promise to deliver clear marketable title to the property. That is a promise of an equitable exchange of consideration. It means that the exchange of consideration is equal in the eyes of the principal parties to the contract, according to their own informed perspective of the transaction.

An earnest money deposit is not consideration, because it has no relation to the value of property and both parties have a claim on the deposit until the contract is concluded. Also, a seller can provide the earnest money deposit, instead of the buyer, as an inducement to the buyer to agree to strict terms, such as specific performance. If the seller then decides not to perform the sale (perhaps the value of the property has increased), then the buyer keeps the earnest money deposit as compensation for the risk. An earnest money deposit is not required for a binding contract, unless the contract specifically states that it is required. Only the (promise of an) equitable exchange of consideration creates a binding contract.

2. Converting your duty to perform as a buyer into a duty to find a 3rd party buyer is exactly equivalent to a listing agreement with a real estate broker. The broker has no duty to buy the property, has a duty to market the property to locate a ready, willing, and able buyer, and has no investment at risk for forfeiture to the seller for failure to find a buyer. If you have no duty to perform as a buyer, then you are acting as a broker and you must be legally credentialed. The huckster claims that he has tested his clause in court, but that cannot be a court of competent jurisdiction over real estate law. You cannot use contingency clauses for immaterial matters (unrelated to the specific transaction) to escape your duty to perform as a buyer or as a seller. You can use a finance contingency (finding a 3rd party lender), but you cannot use a “subject to finding a 3rd party buyer/assignee” contingency to escape your duty to perform on the contract.

Many states have enacted “good faith” laws that require the parties to a contract to perform their duties in good faith towards the completion of the contract. If you want to cancel the contract due to an unsatisfied contingency, then it must be a material issue to the transaction. It cannot be an immaterial external issue unrelated to your capacity to perform as a principal party. If you cancel the contract on an inspection contingency, then you must disapprove of something material regarding the property that you found during inspection.

If you want to represent a seller and find a buyer for his property without a broker’s license, then you’ll need to obtain a limited power of attorney to act on behalf of the seller and a personal services contract to get paid by the seller. Talk to your attorney about how to arrange the legal contracts for such a relationship.

3. Another piece of legal misinformation spewed by the huckster is that an option contract provides “equitable interest” in the property that allows the buyer to sell the property. This is flat out wrong. According to the US Bankruptcy Court, an unexercised option provides no equitable interest in the property. The Optionee only has the authority to sell (assign) the option contract, not to sell the property itself. The option contract must explicitly grant the authority to possess, or to repair, or to show or advertise the property. An option contract usually has an escrowed purchase and sale agreement signed and notarized only by the seller (and other related conveyance documents are notarized and escrowed). (Some option contracts provide for ripening directly into a purchase and sale agreement.) When the option is assigned, the assignee will then exercise the option, sign the purchase and sale agreement as the buyer, and then close the transaction. The purchase and sale agreement controls the actual conveyance of the property, and it is not executed until the option contract is exercised.

Many real estate brokers do not understand contract law. They do not know that an unaccepted offer can be withdrawn at any time prior to acceptance. Many investors will submit offers on several properties and when one offer is accepted, they immediately submit a notice of withdrawal on all of the other offers. The listing brokers are upset about the withdrawal and claim that the offer stands until it expires or is countered or is declined; wrong.

If there is concurrent acceptance of multiple offers, then the investor must decide which offer to keep and then exercise a contingency clause to cancel the other offers or assign the other offers to other buyers. A financing contingency is usually the best way to cancel, because the investor is probably unable to obtain concurrently multiple loans on multiple properties.

I do not recommend the “shotgun approach” of submitting offers on multiple properties that you are not even sure that they are good investments. You are wasting your time and the seller’s time by submitting offers that you haven’t even pre-qualified as likely prospects. The properties are only suspects. Also, what goes around comes around, which means that you’ll create a bad reputation for yourself as an investor that makes frivolous offers without the least bit of pre-qualification or research. A seller will ask the listing broker about your reputation and capacity, and when the broker explains that your offers are not serious, your offer is dead. So, take some time to research the neighborhood and the market, make offers only on properties that you would be thrilled to own at the right price, and don’t be a pain in the butt.

I would suggest that instead of spending thousands of dollars to learn incorrect legal information (and spending many more thousands of dollars sitting in the defendant’s chair), that you spend two or three hundred dollars to attend some real estate broker classes that are taught by real estate attorneys. You’ll get accurate information, you’ll network with real estate professionals, and you’ll soon be a real estate investor working with professionals.