In Part 1 of this article, I wrote about Indiana’s licensing laws and described the circumstances when the law does and does not require you to hold a license. In this Part II, I will explain:
- The consequences of doing real estate transactions without a license in violation of Indiana law.
- A case law exception to the licensing requirement.
The Consequences of Operating Without a License
If you operate without a license and are found to be in violation of the licensing statute, you are not entitled to collect your fee or commission. Our Indiana courts have made it clear, in multiple appellate decisions, that you are not entitled to collect your fee or commission without a license. So, if you land that $1,500,000,000 commercial deal and plan on “flipping” it to a group of other investors, walking away with a huge finder’s fee, you might not get to collect that fee.
In a 1993 case, the Indiana Court of Appeals faced a situation in which an unlicensed “bird dog” sued for a “finder’s fee,” having matched a buyer and seller together. It would seem that the licensing statute prohibited the collection of a fee by an unlicensed person under these facts. However, that investor claimed that he had not “brokered” a real estate deal, as defined by the Indiana statute. Rather, he contended that he merely introduced a buyer to a seller, and let those two parties negotiate the transaction.
In this 1993 case, the investor referenced the predecessor statute to the current licensing statute. Under the 1951 Indiana Code, an investor needed a license in order to “sell, buy, trade, exchange, option, lease, rent, manage, list, or appraise real estate or negotiate or offer to perform any of those acts,” or “procure any prospects.” After 1951, the phrase “procuring of prospects” was deleted from the licensing statutes, meaning the law had some new meaning.
On appeal, the Court of Appeals concluded that the Indiana General Assembly must have intended to permit the “procuring of prospects” in Indiana without a license. Why else would the legislature have deleted that language from the licensing requirements?
So, the question then becomes… What constitutes “procuring of prospects?”
In simple terms, if a “bird dog” provides or offers services beyond merely the “procuring of prospects,” then the “bird dog” is assisting in the negotiations of the transaction and needs a license, the Court of Appeals reasoned. Reading all the case law and the statutes together, the rule seems to be this: You can introduce buyers to sellers and collect a fee, without a license; but as soon as you assist in the negotiations or provide other services listed in the statute (selling, buying, exchanging, etc.), you need a license. The challenge is in those cases in the gray area. This rule of law is not easy to apply to real life fact scenarios, because most “bird dogs” do more than merely “finding” buyers and matching them with sellers. Most “bird dogs” are not merely “finders” and should not be collecting a “finder’s fee” without a license.
Attention Business Brokers
Finally, the impact of the licensing statute has some broad and unintended consequences. For example, the licensing statute applies to transactions concerning the sale of a business, in which real estate is involved. There is case law in Indiana holding that a business broker needs a real estate license in order to sell a business (presumably in an asset sale and not a stock sale), whenever the sale includes the transfer of an interest in real estate. Some lawyers contend that this rule of law would include the assignment of a lease, but the case law is unclear on that issue. The courts have clearly stated that it does not matter how minute the real estate assets are in relation to the other business assets being sold. If the business is being sold for $20 Million and the sale involves $10,000 of real estate, the business broker needs a license or a licensee needs to be involved in that portion of the transaction.
The application to real estate transactions is often not clear, because investors are creative folks. The law is rigid and inflexible, and it often requires analysis and legal training to determine whether an investor has crossed the line and created a business model that runs afoul of the licensing statute. So, please consider consulting with an experienced and knowledgeable real estate attorney, if you are engaging in questionable real estate deals.