Unlicensed Real Estate Investors Beware!

The more time I spend with real estate investors, the more I appreciate the variety and creativity of their real estate transactions.  However, one thing I hear often concerns me: unlicensed real estate investors “brokering” a transaction for a fee.  In the real estate world, transactions with real estate brokers[1] are far from unusual.  This is only noteworthy with investors because many investors do not hold real estate licenses.  Because the investor is unlicensed, the law will generally void the investor’s ability to get paid a brokering fee – no matter what the contract says. 

Let me give an example.  Suppose Nick (a real estate investor) enters into a transaction whereby he introduces the Seller of an unlisted property to a Buyer.  Nick helps the Buyer and Seller negotiate the price and assists in the execution of the necessary contracts.  Because of his work, the Buyer and Seller agree to pay Nick $10,000 at the closing and put it in writing.  The closing occurs.  However, the Buyer and Seller do not pay Nick.  Frustrated, Nick calls his attorney to see if he can recover the $10,000.  He receives very bad news. Because he is not a licensed real estate broker, the law will not enforce his contract nor allow him to recover for his time.

At first this seems unfair.  However, suppose the issue was not real estate, but medicine.  Suppose Jane, an unlicensed physician, and a Patient enter into a contract for the treatment of an illness.  Jane treats the patient and heals the illness.  However, when Jane desires to be paid, the patient refuses.  Because Jane is not a licensed physician, the law will not enforce her contract to be paid – no matter whether Jane healed the patient or not. 

In the same way, the law requires real estate brokers to be licensed. Unlicensed individuals that perform real estate brokering services enter into contracts that the law will not enforce.  In fact, even if an unlicensed individual is paid, there would be a good case to require that individual to pay back the fee received.  An individual performs real estate brokering services when he assists in the sale, purchase, exchange, renting, lease, or option for any real estate for a fee.[2]

There is one[3] notable exception to this rule.  Those who act as referral agents only can earn a fee.  A “referral agent” is defined as one who (1) is not involved in negotiations, execution of documents or property management; (2) earns a fee on three transactions or less per year; and (3) does not charge an advance fee.  These “referral agents” fall into a narrow exception to the rule as stated above.

Unlicensed real estate investors should take a great pause before “brokering” a transaction.  The simplest way to avoid the effect of this law is to acquire and maintain a real estate license. 

Disclaimer: The information contained in this article is for informational purposes only and is not legal advice or a substitute for legal counsel. It does not constitute advertising or solicitation. The information in this article may not reflect the most current legal developments; accordingly, this article is not guaranteed to be perfect, and should not be considered an indication of future results.