Is Birddogging Illegal In NC?
Can someone please clarify for me if birddogging is illegal in North Carolina? I downloaded a copy of NC real estate laws from the NCRE Commission's website, but all it says in there on the topic is that it's illegal for a licensed agent to pay referral fees, birddogging fees, etc. I have written to the commission on the subject but haven't received a response as of yet. I'm very interested in becoming a birddog for private investors in my area and have researched quite a bit on the process. Now I'm ready to begin but I read on another website's forum that it's illegal to birddog here regardless of whether it's for agents or private investors. Since basically all I'm doing is passing along detailed information about properties to interested investors and not actually involving myself in the transaction, I don't feel I'm violating any laws but would rather be safe than sorry. Any assistance would be greatly appreciated.
What makes you think that it is illegal?
You are passing on your rights or information on a property. You would just need to make sure you give proper disclosures like if you are a real estate agent, etc.
Here are copies of the emails exchanged between myself and the NCRE:
To Whom It May Concern:
I have questions regarding the legality of referral fees, also known as "bird-dogging". In your online study guide of NC real estate laws it states "..no licensee may pay a finder's fee, referral fee, "bird dog" fee or similar compensation to an unlicensed person." However, what if the person paying the referral fee is a private investor and not a licensee? For instance, I spend quite a bit of time researching properties for sale both online and at the courthouse as I am a beginning real estate investor myself. I have a network of friends and associates who are also investors. When I find a property that doesn't interest me personally but may interest others, I pass the information along to them. I don't "list" the properties or solicit business, I don't write contracts and sometimes I don't even bother contacting the seller unless there's some information I need that I don't already have to help me decide whether or not I want the property. When I give the other investors the information it's up to them to contact the owner and arrange the transaction. Basically all I am doing is giving them a sheet of paper with the owner's name and address, property description and financial information along with any other miscellaneous information I come across. I don't usually charge a fee to my friends for the referrals, but recently someone suggested I should so that the time I spend researching is not wasted. However, an investment website I was on stated that kind of activity is illegal in NC. Since I'm not involved directly in the transaction but simply providing a referral, is it illegal for me to be compensated for my time? Or would passing along this type of information to an acquaintance and receiving a fee require a real estate license? Your assistance in this matter would be greatly appreciated as I have no desire to violate any state laws. Thank you.
Their Response
Your inquiry to the North Carolina Real Estate Commission concerning compensation of unlicensed persons for brokerage services has been referred to me for a response.
You are correct in that licensees are specifically prohibited from paying unlicensed persons for acts done in violation of the Real Estate License Law and Commission rules. See N.C.G.S. 93A-6(a)(9). However, that particular prohibition is a small part of a larger regulatory process. N.C.G.S. 93A-1 makes acting as a broker or salesperson without a valid license unlawful. The courts of North Carolina have interpreted and applied that statute in a variety of situations since the 1957 effective date of Chapter 93A, N.C.G.S. The Real Estate License Law prohibits anyone, licensed or not, paying compensation to any person or firm for brokerage services in North Carolina when the provider of such services is not properly licensed at the time the services are performed.
In your email you describe your involvement in locating real properties that may be for sale. Your characterization of your conduct is neither conclusive or dispositive of whether particular acts undertaken for compensation constitute real estate brokerage or require a license.
Clearly under North Carolina case law, "referring" a prospective purchaser to a prospective seller with the expectation or receipt of compensation for that referral is a brokerage service in this state. The person making the referral must be licensed when doing so and comply with the Real Estate License Law and Commission rules. It would be illegal to be compensated for the services you describe. If you truly want to provide such services for free with no economic benefit or expectation whatsoever, no license would be necessary.
If you have further questions, please contact me directly.
Blackwell M. Brogden, Jr.
Chief Deputy Legal Counsel
N.C. Real Estate Commission
Thank you for your response and cooperation in this matter. Although it is disappointing to hear the referral service is illegal without a license, I feel better knowing what I can and cannot do with regards to the law. If I decide to pursue getting licensed as a broker in order to perform these services, am I allowed to decide upon receiving a flat fee for my compensation or is it required to be a certain percentage like most agents obtain for their fee?
In order to clear up any confusion you may have about these questions, it is my goal to become a real estate
investor rather than an agent. Upon researching the investment field via the internet, I discovered the business of "bird-dogging" or "scouting" for properties and receiving a fee from other investors for the leads as a way to "learn as I earn". Basically the process is to help me learn about investing while I still receive an income. I read such a business is legal in some states but not in others and that's why I chose to contact you directly. I don't want to violate any laws just to be able to fulfill a goal, although I am determined to be involved in some aspect of the real estate profession as it has been a long-time dream of mine.
Another option I have considered is what's referred to as a "wholesaler" where I would put a property under
contract at one price, then either assign or sell at a higher price in order to obtain a profit. Are there any laws against this? I have reviewed the NC Association of Realtor's Standard Form 2T and it says "if assigned by agreement" then the contract is assignable. What form is necessary for the assignment to be valid and how do I obtain such form?
Also, online there's mention of "double escrows" or "simultaneous closings" where the title transfers take place within minutes of each other. For example, I take title from the original seller then turn around and pass title to the final buyer/investor on the same day. Is this legal in NC?
I apologize if I'm overwhelming you with questions, but this is something I've always wanted to do and I would rather do it the right way-ethically and legally-rather than risk breaking the law. There's an abundance of information on the internet and in books about the real estate business, but I'm not sure how much of it I can actually use since it's not state-specific. Your assistance would be greatly appreciated.
Their Response
There is a lot of misinformation available on the Internet addressing how to get rich quick in real estate. Most of it is flawed, through subtle misrepresentations, dramatic understatement of risk, espousing blatantly illegal conduct, or even outright false statements.
If you obtain a broker license in North Carolina, how you charge for brokerage services, by the hour, with a flat fee, or on a percentage basis, is simply a matter of contract between you and your client.
You next mention wanting to be a "wholesaler" of real estate. Many people also describe this business person as a "flipper". In most cases both terms have become euphemisms for someone engaged in loan fraud.
Certainly the old stock market adage, "buy low, sell high", applies to real estate as well though generally a purchaser must invest time, money or effort for the property to appreciate. Re-zoning is a fairly common method of increasing value over a short term. And one of the deceptive truths in the "get rich quick" litany is buying a property at less than fair market value from an owner in financial distress or ignorance of the true value, then re-selling at a fair market value. That is harder to find than it seems and why most practitioners end up committing criminal acts to get a re-sale.
The "double escrows" and "simultaneous closings" are not mentioned in the REALTOR form materials or any of the Commission materials, so I do not know in what context you are discussing these practices. I do know that such practices can be abused, for instance closing the first deal on paper without really collecting any funds since the only money any where near the deal is brought by the buyer in the second sale. That type of situation can send both the closing attorney and the "wholesaler" to jail in just about any state of the Union.
Turning to the "assignment" issue, this is another legal topic that is frequently misrepresented in the "get rich quick" literature. The abuse of what can under limited circumstances be a legal method of doing business has
been so great that the United States Department of Housing and Urban Development has prohibited the use of FHA loans in such transactions under most circumstances. Further, where an appraiser is estimating value of the subject property for lending purposes, he or she is supposed to take account the assignment in a method that, if applied correctly, will reach an opinion of value much closer to the sales price between the original seller and the "flipper" trying to assign the contract rather than the sales price (which then eliminates the second buyer's, or victim's, ability to get a loan) at the inflated price of the deal as assigned.
The issue of whether some one trying the "assignment" business model you discuss violates the Real Estate License Law also arises. While persons and firms dealing on their own account are exempt from licensing, the net effect of the documents used or recommended by many promoters of this business method incur no financial liability or obligation on the "flipper" whatsoever. In such circumstances, the "wholesaler" or "flipper" is not dealing on their own account, they are just bringing together a buyer and seller for compensation, which is real estate brokerage. The Commission and the North Carolina Attorney General have been suing such operators for several years now to halt such practices.
Another point is that the only way most of the schemes work is that the wholesaler makes misrepresentations to either seller or buyer to get these deals to work. Such conduct violates Chapter 75, N.C.G.S.., which is enforced by the Attorney General.
If you are considering becoming an investor and dealing on your own account, we can only recommend that you first consult with a competent real estate attorney about the multiple issues confronting you as you devise a business plan that will not violate state or federal law.
Blackwell M. Brogden, Jr.
Chief Deputy Legal Counsel
N.C. Real Estate Commission