Kentucky's Real Estate Wholesaling Law: Understanding The New Regulations

Introduction

The real estate industry in Kentucky has undergone a significant change with the introduction of House Bill 62, signed by the Governor on March 23, 2023.

This bill amends the definition of "real estate brokerage" and brings wholesalers within the purview of real estate licensing regulations.

In this blog post, we will discuss the implications of House Bill 62 and analyze how these new regulations will affect wholesalers working in Kentucky.

What Is Real Estate Wholesaling?

Wholesaling in real estate involves finding distressed or undervalued properties at below-market prices and assigning or quickly selling the contract to another investor for a profit.

The wholesaler acts as a middleman, connecting property sellers with buyers, often rehabbers or landlords, interested in purchasing the property at a higher price than the wholesaler's contracted amount.

Wholesaling is a popular strategy for generating cash flow in real estate investing, as it allows investors to avoid the risks and responsibilities associated with property ownership.

House Bill 62 and Wholesaling Regulations

House Bill 62 brings wholesalers under the definition of "real estate brokerage" in Kentucky.

Specifically, it includes "advertising for sale an equitable interest in a contract for the purchase of real property between a property owner and a prospective purchaser."

This means wholesalers are now subject to the same advertising regulations that apply to licensed real estate professionals.

Before this bill, wholesalers could market their interest in a contract without needing a real estate license, but they were restricted from marketing the property itself.

Implications for Wholesalers in Kentucky

With the enactment of House Bill 62, wholesalers in Kentucky face new requirements and considerations.

As of now, to advertise for the sale of a wholesale contract, wholesalers must either obtain a real estate sales associate or broker license or engage a licensed broker company to advertise on their behalf.

Independent wholesalers who are not licensed as brokers may need to acquire a new license and split fees with a broker until they become eligible for a broker license.

On the other hand, individuals who are already licensed or planning to become licensed may find opportunities to explore non-traditional uses of their real estate license, such as engaging in wholesaling.

Alternative Wholesaling Strategies

While House Bill 62 imposes stricter regulations on wholesaling in Kentucky, there are still alternative strategies that wholesalers can explore to conduct their business within the confines of the law.

Let's take a look at a couple of such strategies:

1)Transactional Funding:

One strategy that wholesalers can consider is utilizing transactional funding. With this approach, wholesalers secure funding from a third party, typically a hard money lender, to close on the property themselves.

Once they have acquired ownership of the property, they can immediately conduct another closing with their end buyer, selling the property to them at a higher price.

This method allows wholesalers to bypass the need for advertising their interest in the wholesale contract, as they become the owner of the property before selling it to the end buyer.

2) LLC Purchase and Sale:

Another option for wholesalers is to purchase the property in the name of an LLC (Limited Liability Company) and then sell the LLC itself prior to closing.

By transferring ownership of the LLC to a new buyer, that buyer can attend the closing in place of the original wholesaler.

This strategy can be an effective way to transfer the property without directly marketing the wholesale contract, as the focus is on selling the ownership of the LLC.

The Importance of Obtaining a Real Estate License:

While these alternative strategies may provide wholesalers with opportunities to continue their business under the new regulations, it is essential to emphasize the benefits of acquiring a real estate license.

Becoming a licensed real estate professional offers several advantages, including:

Compliance with Regulations: By obtaining a real estate license, wholesalers can ensure full compliance with the law, eliminating any ambiguity or potential legal issues.
Expanded Opportunities: Having a real estate license opens doors to a wider range of real estate activities beyond wholesaling. Licensed professionals can engage in traditional real estate transactions, such as buying and selling properties on their own behalf, representing clients, or acting as a licensed real estate broker.
Enhanced Credibility: Holding a real estate license provides wholesalers with increased credibility in the industry. It demonstrates their commitment to professionalism and ethical conduct, which can attract more buyers and sellers to their business.

Conclusion

While House Bill 62 introduces stricter regulations for wholesalers in Kentucky, there are alternative strategies available to continue wholesaling operations legally.

Utilizing transactional funding or structuring deals through an LLC purchase and sale can help wholesalers navigate the revised legal landscape.

However, it is crucial to remember that obtaining a real estate license remains a prudent choice. Being licensed not only ensures compliance but also offers expanded opportunities and enhanced credibility in the real estate industry.

Wholesalers should carefully consider their options and adapt their strategies to align with the new regulations while also exploring the potential benefits of becoming licensed real estate professionals.

Written by:

David Frizzell

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