Wholesaling seminars and workshops are common throughout the country and have made their way into New York as well.  As a result, many enthusiastic and ambitious entrepreneurs have begun contacting our office looking for guidance on making their first wholesale deal happen in New York.  

Let’s start by setting the scene for a typical New York real estate transaction. First and foremost, New York is an attorney state. That means that the preparation of deeds, mortgages, assignments, satisfactions, leases or “any other instruments affecting real estate” are acts only permitted for admitted attorneys. This is codified in the New York Judiciary Law (N.Y. Jud. Law §§ 484). This means that unlike in other states (where attorneys may not be needed for a real estate transaction , you need a real estate lawyer in New York to represent you in a real estate transaction.

The process usually begins with an offer from the buyer to the seller. This offer is often typed up on a form (MLS FORM, other form, any writing that formalizes the basic terms of the offer).  The terms such as purchase price, contract down payment, buyer’s and seller’s names and addresses along with their attorneys and real estate agents are placed in the offer sheet.

Once the offer is accepted, either it is directly forwarded to the Seller’s attorney or another (cleaner) version of the offer called the Deal Sheet is sent. The idea is to use the document to assist the Seller’s attorney in preparing the contract.

Typically, the Seller’s attorney is tasked with drafting the Contract of Sale and riders thereto and the Buyer’s attorney is tasked with reviewing the contract of sale, negotiating and making changes, and adding any riders or addenda for additional provisions that protect the client.  Once the changes have been agreed to, the buyer signs first and submits a contract down payment (not to be confused with a downpayment required by a lender, the subject of which is a whole different article). Then the half-signed contract and dowpayment are transmitted by the buyer’s attorney to the seller’s attorney and the parties wait for the seller to sign the contract.

Once signed the contract is deemed fully executed and a copy of the fully executed contract is disseminated to both seller and buyer. From this point on parties are “in contract”.

Q: I’ve done thousands of wholesale transactions outside of New York, and have developed a form contract that I use to sign up clients. Why can’t I use this in New York?

A: Since NY is an attorney state, it would be the unauthorized practice of law for a non-attorney to draft “any instruments that affect real estate”. Furthermore, since the process described above is widely accepted by NY lawyers, a real estate transaction will need to be consummated in that fashion in order for all parties to be adequately protected.

Q: I use a title company (outside of New York) who handles all my wholesaling needs. They draft the contract, hold the escrow, do the requisite title work, and have the parties over to close the deal. Why can’t we just use a title company in New York?

A: The answer is similar to the above. Title companies do not handle real estate transactions from the contract perspective. They often do not have attorneys working for them. The principal role of title companies in New York is to prepare a title report for the purchaser’s attorney review and assist with title clearance (along with the Seller’s attorney – who is customarily and contractually in charge of clearing title), and ultimately to insure title for the purchasing party by issuing a title insurance policy. Annunziata & Asllani, LLP uses reputable and experienced title companies in order to effectively and efficiently close wholesale transactions.

Q: What is the Contract Downpayment? I thought the ultimate buyer puts up the downpayment? Do I as the wholesaler still have to put up a downpayment with the seller?

A: Generally, YES. The wholesaler is always the “B” party to the ABC transaction (where A is the seller and C is the ultimate buyer). Therefore, there are two contracts to think about: 1) the “A-B” contract between Seller and Wholesaler and, 2) the “B-C” assignment contract between the wholesaler and the ultimate buyer. Basic contract theory dictates that for a contract to be valid, there must be actual consideration. That is what is meant by the contract downpayment. In order for you to have a valid AB contract you must have some downpayment given to the Seller. This comes from you as the wholesaler. This contract deposit stays with the Seller’s attorney in escrow until closing. Next you obtain a downpayment from your ultimate buyer which stays with our firm in escrow until closing. Both those contract deposits become credits to the seller at closing and are adjusted for accordingly in the closing statement.

Side Note: We recommend that as a wholesaler you always seek to negotiate the smallest possible downpayment with your seller. The standard for contract downpayments in New York is 10% of the purchase price. Often times 5% is acceptable. If possible, seek to have your contract downpayment be 5% or lower. This reduces your wholesale risk in the event the deal doesn’t go through.

Side note to the side note: A word about contract privity. In essence once the A-B contract is fully executed you are bound by that contract. Your non-performance is an event of default where you stand to lose your contract downpayment as liquidated damages. Your assignment of contract is a separate contract between you and the ultimate buyer. The ultimate buyer (at least arguably) has no “privity” – that is enforceable contractual rights against the Seller in the A-B contract (without a novation). In the event the B-C transaction goes bust, the A-B transaction must still conclude. Therefore, follow the advice of the Side Note.

Q: Is wholesaling legal in New York?

A: This is a very common question. Wholesaling can take different definitions depending on who you ask. As far as our firm is concerned, we define wholesaling as the act of either 1) assigning a contract in which you (the wholesaler) are the contract vendee over to a ultimate purchaser for an assignment fee, or 2) purchasing a property and then selling it instantly to an ultimate purchaser for a higher price in a double closing. Neither of those two scenarios is per se illegal from a contractual perspective. The waters start getting murky when the wholesaler starts acting as a real estate broker/salesperson (a profession which requires licensing in New York). The other dangerous practice is the lack of transparency.

The Real Property Law section 440 defines broker as follows:

Whenever used in this article “real estate broker” means any person, firm, limited liability company or corporation, who, for another and for a fee, commission or other valuable consideration, lists for sale, sells, at auction or otherwise, exchanges, buys or rents, or offers or attempts to negotiate a sale, at auction or otherwise, exchange, purchase or rental of an estate or interest in real estate, or collects or offers or attempts to collect rent for the use of real estate, or negotiates or offers or attempts to negotiate, a loan secured or to be secured by a mortgage, other than a residential mortgage loan, as defined in §590 of the Banking Law, or other incumbrance upon or transfer of real estate, or is engaged in the business of a tenant relocator, or who, notwithstanding any other provision of law, performs any of the above stated functions with respect to the resale of condominium property originally sold pursuant to the provisions of the General Business Law governing real estate syndication offerings.

Just to reiterate – If you wish to sell your interest in the contract you have acquired, you can do so legally. Practice transparency in all aspects of the transaction:

1. Let the seller know who you are and what you do (chances are they will find out anyway, when we ask for assignment clauses in their contract);
2. Let the ultimate buyer know who you are and what you do (they will find out anyway, when they run title and see you are not the owner)
3. Do not violate licensing laws. If you are not a licensed broker/salesperson in New York, don’t hold yourself out as one. Be extremely transparent in how you present yourself to your buyers. Remember to let them know you do NOT own the property, but simply a contractual right to buy the property. Remember, you don’t own the property, so you can’t go and place it on Zillow as “for sale by owner”. You cannot create listings and blast email them to your contact list. Be transparent and thorough in acquiring your ultimate buyer.

Q: What if I am licensed as a broker/salesperson? Can I still wholesale?

A: Sure. Transparency will keep you above water. You are required by law to disclose your license to any party that you conduct business with. Furthermore, you are required to disclose your license AND interest in the property (a contractual right to buy is an interest in the property) to all parties in the transaction.

Q: I have broker contacts who are offering me a fee for me to bring them buyers for their property that they are marketing. It’s a wholesale deal. Is this legal? Can I accept payment? Is this a finder’s fee?

A: First, ask yourself who you are to this transaction. Keep things simple. You are simply an outsider to the transaction with some contacts who might be interested in buying this property. So you are now going to ask those contacts if they wish to purchase property that you do not own or have any interest in. You are in effect arranging/negotiating the sale of real property. STOP HERE – do you have a broker/salesperson license? If NO then what you are doing is practicing without a proper license. If you want to be a broker, and get paid for your services, get your broker license. Also, keep in mind that Real Property Law section 442 specifically states that no broker can pay part of any fee he collects to an unlicensed person for help/aid in selling property. Section 442-e of the RPL sets out a nice list of consequences for violating the law including a misdemeanor charge triable in court.

Annunziata & Asllani, LLP, are experienced real estate attorneys who can help structure the transaction appropriately and legally so closing can be done smoothly. Contact us today for a free consultation.

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The items below apply to both sales and purchases:

1. Local gold – find an agent that knows and specializes in your neighborhood, or the neighborhood(s) where you are looking to purchase. Yes, nana’s friend’ son Bobby who lives and works in New Jersey sure is a nice kid, but how is he an expert of real estate sales in Nassau County, New York? He simply isn’t. Find yourself someone who works in the area and is familiar with it. Ask friends and family for a referral, look online, in the local newspapers, and drive around to see what “for sale” signs are posted around that neighborhood. Local agents are always a better choice. They can tell you more about neighborhood real estate trends, values, neighborhood traits, schools and even what watering hole has the 99 cent wings on Wednesday night.

2. Consider a REALTOR and look at their specialty– every real estate agent in NY has to adhere to state licensing requirements, however REALTORs (with capital R), have taken the extra step of being members of the National Association of Realtors and adhere to their code of ethics. When looking at REALTORS make sure you look at their designation. Below are some samples:
a. ABR – Accredited Buyer Representatives
b. CRE – Counselor of Real Estate
c. CRS – Certified Residential Specialist
Take a look at their website for more information. www.Realtor.com. Use these designations to your advantage.
3. Check out their reviews – Look online – Google, Yelp, Zillow, Redfin, Trulia etc, all have rating systems for real estate agents. Make sure you take the time to read some of them and see their experience with the person. You’re not only looking for their performance in their field but also their customer service. The agent might be a superstar, but what good is he to you if he doesn’t answer his calls? Speak to people that have dealt with this agent in the past and vet their experience.

Sales:
1. Take a look at current listings – if you find an agent that you might be interested in hiring, look up their current listings. Check out their open houses and go to them. Take note of how the agent interacts with potential buyers, what their setup and staging looks like; what their printed ads look like and whether they are informative and knowledgeable of the property.

2. Ask for their statistics – Agents should be able to quote their performance. How many houses did they sell; how much did they sell for; how much wiggle room was there on the asking price;; how long did it take to sell;

3. Ask for their strategies – how will they advertise the property; where will they advertise; what information goes into each listing; how many open houses will they hold; will they take pictures; what websites do they use to list the property; ask them to show you samples of previous listings;

4. Multiple interviews – before selecting the agent you will use, interview at least three. Make sure that you note their pros and cons so that you can make an informed decision as to whom to use.

5. Have your attorney look up the brokerage agreement before signing an exclusive. Our firm often reviews and negotiates brokerage agreements for our clients who are selling real estate.

Purchases:
1. Questions, questions, questions – if you are a first time buyer, make sure you ask your agent if they’ve worked with first time homebuyers before. Set your expectations in terms of communication and availability to see properties.

2. Scope out their negotiating skills – ask them to give you a list of homes that they have recently helped buy and find out about the listing price and ultimately the sale price.

3. Find out whether they know about local trends like whether the fire department siren that goes off in the middle of the night can rattle your windows, or where the best elementary school is, or even commute times and parking availability. Your agent should be a great resource.

4. Think of going with an exclusive buyer’s agent – these folks simply don’t represent sellers; they are on the buy side only. So you know they’re not just showing you listings on which they have exclusives or otherwise benefit them or their company.

If after all your hard work at researching and trying to find someone, you’re still not sure whether you’ve found “the one”, give us a call at Annunziata & Asllani, LLP and we will make sure to provide a few referrals of real estate agents that we work with on an ongoing basis and who deliver consistent results.

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SURVEY INSPECTION – this is a situation where an old survey exists (could be as recent as 1 year but as old as 50-60 years), and that survey is “updated” by a “visual inspection”. Basically, a layman (read: not licensed surveyor), goes out to the premises, old survey in hand, and makes a good old college try attempt at figuring out whether any changes to the premises have been made since the date of the old survey. Then a report is prepared and sent to the title company insuring the transaction. The title company reads the survey and the “inspection report” and makes any exceptions in its Title Report, Schedule B accordingly. Since the layman who does the inspection does not use any tools to measure, the only thing that can be derived from the report is the removal or addition of structures that are visible to the naked eye. So, the title company will take broad exceptions in order to protect their interest and the buyer will get a false sense of insurance. Furthermore, to make matters worse, the old survey is NOT certified to the current purchaser, so outside of the title company, the purchaser has no direct recourse against the professional surveyor. NOTE: Survey’s updated by laymen through a “visual inspection” are not permitted to be used for title insurance purposes by the New York Department of Insurance.
One common misconception is the role of the lender and their survey requirements. Most lenders that require surveys as part of their underwriting will accept a survey updated by “visual inspection”. Not to say that they don’t understand the risk involved in not having a new survey certified to them, but to accommodate a very large portion of the practice who utilizes survey inspections regularly, they agree to accept it.
What about those lenders that do not require a survey at all? A little known fact (perhaps) is that lenders in New York residential transactions (1-4 family properties), get automatic survey coverage in the policy jacket of their title insurance policy (ALTA 2006 version, as modified by the NY Standard Endorsement, replaced the previously often-provided NY Survey Endorsement) simply by virtue of the owner executing a survey affidavit (I swear that since I’ve lived here and based on my survey there have been no changes to my property). Therefore, the lender still gets coverage in its title insurance policy, even if no survey is read in at all. This of course does not equally apply to the purchaser. If there is no survey, the title company will take exception to “any state of facts that an accurate survey would show”. That means that if the buyer experiences a post-closing title issue related to a survey matter, and files a claim through its title company, chances are pretty good that it will be denied by virtue of that exception.
The adage here is simple. For a transaction that for many is one of the largest financial transactions of their life, saving 600-1000 and foregoing a survey or obtaining a less desirable survey inspection (75-150), simply doesn’t make much sense from a diligence perspective. The purchaser is making an investment and it makes sense to protect that investment from as many angles as possible. At Annunziata & Asllani we recommend all our homebuyers to obtain a new survey, and we discuss with them the potential pitfalls of not getting one. Give us a call today to discuss your transaction in detail.

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While this type of transaction sounds like a good way to make a quick buck, its execution needs to be carefully timed and calculated, the legalities weighed, and the outcomes diligently predicted and anticipated. An attorney familiar with the structures of a wholesale transaction is instrumental in making sure that the transaction goes smoothly.

The assignment method

The first method to wholesaling, is the assignment of contract. This is where the investor has signed a contract with a seller of property for the purchase of property at the price of X. The investor then finds an ultimate buyer of the property to whom he assigns the right to purchase under the contract for a higher price then X.  Below we discuss some considerations of this method.

For the assignment of a contract, the first step is to have an assignability clause, which is in itself a pretty difficult task. Most standard contracts (or riders added by diligent seller’s attorneys) in New York, prohibit the assignment of a contract without the explicit and written permission of the seller. This is designed to prevent the quick and savvy investor from simply buying at a low price and selling it to someone higher behind the seller’s back. Though there are methods to structure the deal which may allow some wiggle room in this area, most of transactions will likely have this prohibition. Therefore, the first step is to negotiate the assignability clause within the contract itself.

A second consideration is that of financing. Though technically possible, having financing on either the initial contract or the ultimate buyer contract, will likely throw a monkey wrench into an already difficult process. Therefore, it is probably best for the investor to structure the deal as a cash transaction and sell to an all-cash ultimate-buyer. The rule of thumb is not to enter into a contract that you cannot close yourself and hope that your ultimate buyer comes through. In the event the ultimate buyer’s financing falls through, the investor would remain liable to the seller for closing the transaction and risk his contract down payment if he does not perform. The only remedy the investor has is to go after the non-performing ultimate buyer, which can drag on and be unfruitful therefore causing a loss for the investor.

There is one benefit, to the assignment process, as viewed from the investors perspective, in that the investor does not pay RPT NYC transfer tax on the assignment (for 5 boroughs only).

The double closing

The second method is that of the double closing. This is where the investor purchases the property and closes on it (the A-B contract) , while also having been in contract to sell same (the B-C contract). Typically, on the same day as the closing of the A-B contract, the investor will close the B-C contract and sell the property to the ultimate buyer. Some special timing issues and considerations must be carefully weighed when considering the double closing as an option.

First, doing a double closing forces the real estate investor to actually having to close on the A-B transaction and therefore paying whatever closing costs are associated with it (title, survey, mansion tax [if over $1 Million], etc.). Secondly, the timing of closing must be handled with care as the investor will most likely need transitional or hard money financing to complete the A-B transaction and therefore  will need to quickly close on the B-C transaction to avoid paying any unnecessary interest on their transitional or hard money loan. Therefore, the savvy investor must monitor the bot the A-B transaction and the B-C transaction carefully to ensure all title issues are taken care of and that each transaction can close on the same day, or very shortly thereafter.

The possible benefit to a double closing over an assignment, is that in an assignment the investor may not be able to hide the “bump-up” in price or the profit he makes by assigning the contract, whereas in a double closing he may be able to do so with ease.

For either type of transaction, it behooves the savvy investor to consult with an attorney experienced in wholesaling transactions so that he can ensure that the deal gets done quickly, carefully and properly. Here at Annunziata & Asllani, we pride ourselves in providing superb legal services to real estate purchasers, sellers, investors and developers on numerous residential and commercial transactions including those that may have an assignment or double closing feature.

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Most recently, the current FinCEN GTO extended the effective period from February 2017 until August 22, 2017. Furthermore, the GTO expanded its reach, by including residential properties in the boroughs of NYC where the purchase price was $1.5 Million or more. Manhattan remained at $3 Million or more. You may find the actual order by clicking here.

The basic purpose behind the order is to weed out possible money-laundering operations where large amounts of cash are used to purchase real estate by multi-layered entities who seek to hide their true beneficial ownership.

Below we detail some of the requirements and applications of FinCEN in today’s real estate transactions.

·         The information required by the GTO is supposed to be collected by the title company insuring the transaction. Together with their underwriter, the title company is called the “covered business”. They utilize IRS form 8300 to obtain and report the information.

·         In order for a transaction to qualify ALL the following must be true:

1.      Property must be residential (this is defined as 1-4 family properties, including cooperative units and condominium units). Commercial properties and 5+ Multifamily properties are excluded.

2.      Property must be in one of the 5 Boroughs of NYC (Kings [Brooklyn], Queens, Richmond, Bronx or New York [Manhattan])

3.      The purchase price must be $1.5 Million or more, if the property is in Kings, Queens, Richmond or Bronx Counties. The purchase price must be $3 Million or more, if the property is in New York county [Manhattan]. If the transaction qualifies, the reporting agent will collect and report detailed information about every instrument (certified/business or personal check, or money order) that was used in the transaction. NOTE: Wire transfers can be considered exempt from FinCEN reporting if they meet certain criteria.

4.      The purchase must be made without any loan or similar financing. NOTE: If the purchaser secures private financing, it may not exempt the transaction from FinCEN reporting, unless the lender is considered a U.S. financial Institution, with their own anti-money laundering policy.

5.      The purchaser must be an entity such as a LLC, Corporation, Partnership etc. Individual purchasers are exempt. The reporting agent shall obtain the names and Social Security Numbers, or Tax Identification Numbers of every beneficial owner that is an individual and that owns more than 25% of the equity interests in the purchasing entity.

The new FinCEN regulations may present hurdles or slow down the process of purchasing property in New York, so prospective purchasers are advised to obtain legal representation proficient in handling FinCEN issues. Here at Annunziata & Asllani, having been closed numerous FinCEN eligible transactions, we are able to guide our clients through the FinCEN process, early in the transaction, so they can take the necessary steps to be prepared for complying with the requirements of FinCEN. We also love to guide our Real Estate professionals, on the subject of FincCEN, so they may properly structure their transactions from the start. Give us a call today to discuss your potential transaction.

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