Many real estate investors, and I mean tens of thousands of investors, operate without a license. For many years now, at least in Indiana, there has been tension between the investment community and realtors (now called brokers). That tension increased years ago, as the market suffered through the “Great Recession,” and it was tough to broker residential real estate deals. Brokers want to dominate the market, have invested time, money and effort to attain and maintain their licenses, and are subject to higher scrutiny fort having a license. Consequently, many brokers object to and even resent that investors operate without licenses. That is particularly true for transactions, where an investor never puts in cash or takes title to the real estate: the “flip” deals.
So, here’s the big question:
When does a real estate-based business model cross the line and trigger the obligation for the investor to operate under a broker’s license?
Clearly, despite what the best-intended investor might think or want to believe, certain activities involving real estate DO require a license. The question is what activities performed by whom. The answer to that question is partly in state statutory law and partly in case law. Because I only practice law in Indiana, this article is limited to Indiana’s statutory scheme. If you’re not operating in Indiana, please research the statutory law in your state for specifics. Better yet, ask a knowledgeable real estate attorney.
Indiana Code Title 25-34.1 contains the real estate licensing provisions, which are repeated in the Indiana Administrative Code at Title 876, Articles 1 through 4. In reading the statute, we start with some definitions:
“Commission” means the Indiana real estate commission.
“Real estate” means any right, title or interest in real property.
“Broker” means a person who: (A) for consideration, sells, buys, trades, exchanges, options, leases, rents, manages, lists, or appraises real estate or negotiates or offers to perform any of those acts; and (B) is acting in association with and under the auspices of a managing broker.
“License” means a broker license issued under this article which is not expired, suspended or revoked.
“Licensee” means a person who holds a license issued under this article. The term does not include a person who holds a real estate appraiser license or certificate issued under the real estate appraiser licensure and certification program established under IC 25-34.1-3-8.
“Managing broker” refers to a broker whom the commission holds responsible for the actions of licensees who are affiliated with the managing broker and who meets the requirements of IC 25-34.1-4-0.5.
Note that in 2014, the terminology used in the licensing statute changed. The old Code used terms like “broker-salesperson,” “principal broker,” “salesperson” and “broker.” The new Code updates these terms, but the key to understanding when a license is required is NOT found in these definitions. Rather, the key is found in the general definition of regulated activities and the exceptions to that definition.
Practicing Real Estate
The statute, in relevant parts, states that “no person shall, for consideration, sell, buy, trade, exchange, option, lease, rent, manage, list, or appraise real estate or negotiate or offer to perform any of those acts in Indiana or with respect to real estate situated in Indiana, without a license.” Importantly, this language tracks the definition of a “broker” and which was a key factor in a case discussed below in this article.
The exceptions to this general licensing requirement are where non-licensed investors operate. The statute DOES NOT apply to the following:
- acts of an attorney which constitute the practice of law;
- performance by a public official of acts authorized by law;
- acts of a receiver, executor, administrator, commissioner, trustee, or guardian, respecting real estate owned or leased by the person represented, performed pursuant to court order or a will;
- rental, for periods of less than thirty (30) days, of rooms, lodging, or other accommodations, by any commercial hotel, motel, tourist facility, or similar establishment which regularly furnishes such accommodations for consideration;
- rental of residential apartment units by an individual employed or supervised by a licensed broker;
- rental of apartment units which are owned and managed by a person whose only activities regulated by this article are in relation to a maximum of twelve (12) apartment units which are located on a single parcel of real estate or on contiguous parcels of real estate;
- referral of real estate business by a broker, salesperson, or referral company which is licensed under the laws of another state, to or from brokers and salespersons licensed by this state;
- acts performed by a person in relation to real estate owned by that person unless that person is licensed under this article, in which case the article does apply to him;
- acts performed by a regular, full-time, salaried employee of a person in relation to real estate owned or leased by that person unless the employee is licensed under this article, in which case the article does apply to him;
- conduct of a sale at public auction by a licensed auctioneer pursuant to Indiana Code 25-6.1;
- sale, lease, or other transfer of interests in cemetery lots; and
- acts of a broker or salesperson, who is licensed under the laws of another state, which are performed pursuant to, and under restrictions provided by, written permission that is granted by the commission in its sole discretion, except that such a person shall comply with the requirements of another section of this statute.
There are thousands of investors in Indiana who are in violation of this statute. Many investors want to believe or were told at a bootcamp or seminar that they do not need a license. Many other operate without regard to the requirements. In other words, there are bad apples that knowingly violate the licensing law, but that don’t care.
Unless you clearly fall into one of the twelve exceptions I have listed above, you need a license to engage in real estate transactions on behalf of others. Period. End of story. You can rationalize all you want, but no wish, hope or prayer will change this statute or your duty to obey the law. For many investors, however, it is important to obey the law, act responsibly, be a good citizen and act ethically in all real estate dealings. So, if you need a license, please go get it.
In a subsequent article, I will write about important case law that effectively creates another exception allowing an investor to conduct real estate business without a license.