As any experienced real estate investor knows, real estate is serious business, and it must be treated as such. Much of the training in the market today leads the new investor to believe that with motivation and desire, a prepackaged set of contracts and very limited knowledge picked up in a weekend seminar they can go and build a huge wealth portfolio with no money, no credit, and no previous business experience. This type of training approach has led many investors into dangerous legal ground, where the consequences of their actions could be very serious, even to the extent of shutting down their business activities.

It is very important that anyone wishing to practice real estate investing as either a way to actively build an investment portfolio of investment properties or as a way to earn spendable income, understand thoroughly the laws governing the various aspects of real estate investing.

The best way we’ve found for the investor to become versed in these laws is to take the local real estate licensing course. Typically this licensing course includes a thorough overview of the appropriate regulations and laws governing real estate transactions. Additionally, the student will be exposed to very important topics such as fair housing, lending guidelines, and so forth. Without this type of knowledge and exposure, the investor is missing what may well be the most important part of the investor’s knowledge toolkit.

Across the country, many real estate commissions and attorney general offices are closely monitoring the real estate investment segment of the real estate market. One of the key items they are watching for is the practice of real estate brokerage by unlicensed individuals, which violates not only real estate commission rules, but in many if not all cases, may also violate state statutes. For example, in North Carolina, the general statutes include a statute known as Real Estate License Law which requires individuals brokering real estate transactions hold an active real estate license issued by the North Carolina Real Estate Commission. Indeed, if the Commission proves an investor is conducting unlicensed activity requiring a license, the court can issue an injunction requiring the unlicensed person or organization to stop. Failure to comply can result in punishment for contempt of court, including fines or even imprisonment!

Perhaps the most common way real estate investors violate license law by practicing unlicensed brokerage is through the use of contract assignments, often referred to as “flipping”. Although contract assignments are generally acceptable for any type of contract, the way the investor approaches the use of a contract assignment and the intent of the investor in doing so, may result in the inappropriate action.

Let’s assume an investor enters into a contract with a seller of real property for the purchase of said property. The investor then decides to assign his contract to another buyer for a fee. Basically the investor is selling his contractual rights to buy the property under a given set of terms and conditions. The investor is NOT brokering a relationship between the seller of the real property and the new buyer of the property. Instead he is simply selling his rights to buy the property under a specific set of terms and conditions. These rights are personal property and not real estate. Note that the contract must not specify that it is non-assignable in which case the conveyance of the contract to another party is prohibited. Where many investors go astray is that they use contract assignments to effectively get around being licensed. In other words, their intent is to find a seller and ultimately hook that seller up with another buyer, effectively brokering the relationship between the two. In most cases we’ve run into, especially with beginning investors, the investor is not only conveying his contractual rights but is facilitating communications, and even assisting the two parties (the seller and the end buyer) in concluding the transaction. Often this is done by the investor to help ensure the deal goes through as typically assignment fees are not paid until and unless the transaction is consummated. In this situation, the investor has clearly begun brokering the transaction, and unless the investor is licensed to do so, he is engaged in unlicensed brokerage.

As we’ve taught courses on investing, we’ve heard many complaints by investors that they should not have to be licensed to invest in real estate. Indeed, in most if not all states, it is not necessary to hold a real estate license to invest in real estate. Perhaps the confusion results from the fact that investors who simply look to use assignments to make money in real estate are not in fact investing in real estate. They do not take title to real property, they make no investment into real property, nor do they in many cases intend to do so. Hence the investor enters into a gray area at best, and breaks the law at worst.

We recommend to anyone that intends to invest in real estate, not only by buying and holding property but also by assigning contracts to others, consider obtaining an active real estate license. By doing so, the investor is going to fully understand the right way to conduct real estate transactions and will be recognized as a professional in the industry. Yes, it takes diligent effort to obtain a license and to stay on top of educational requirements and laws and regulations to remain licensed, but it also ensures that you’re doing things the right way. Many investors argue that having a license creates barriers when dealing with sellers since they must disclose their licensee status. We believe this to simply be untrue. Yes, it may limit an investor from conducting a transaction exactly as some ‘get rich quick course’ taught it, but if it does, then the investor should never conduct a transaction in that way to begin with. Holding an active license has many benefits and few actual drawbacks, with the drawbacks in our opinion not even being worthy of mention.

If you’re serious about real estate investing, take time to learn the ropes, and even if you don’t get licensed, take the licensing course, learn the rules of real estate, and ensure that your actions comply fully therewith. You’ll not only be protecting your business but you’ll be ensuring that you invest the right way!

This article has been reprinted with permission of Key Business Institute, Inc.

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