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As other states, cities crack down, Kansas City cash-for-home buyers go unregulated

Kansas City Star logo Kansas City Star 12/17/2021 Kevin Hardy and Eric Adler, The Kansas City Star

Dec. 17—Doug Shafer took all the classes. He passed the test. And every two years, he must show proof of continuing education and request that Missouri renew his license to sell homes.

Yet many of the people who knock on doors, send postcards and hang up signs looking to buy houses in Kansas City face none of those requirements.

"They're practicing real estate without a license," said Shafer, a local real estate agent of 31 years. "It's like putting your toe right up to the line of illegal transactions."

Shafer and other agents say the city and state should do more to regulate real estate wholesalers, who often target poorer neighborhoods as they hunt for properties they can flip for a profit. In many cases, wholesalers don't actually buy homes; they get them under contract and sell the contract to another investor for a profit.

And unlike real estate agents, who are regulated by a state board, wholesalers often evade any government oversight.

Earlier this week, The Star reported on a massive land grab that is remaking the city's East Side. Investors, including wholesalers, have bought up many homes, leaving some residents to feel that the city's largely Black neighborhoods are once again being exploited.

Officials at Kansas City Hall said Thursday they are exploring new rules for wholesalers.

"This is certainly an option we are considering," said city spokeswoman Maggie Green. "We are researching the legal feasibility of regulations for real estate speculators right now and hope to have more info on next steps soon."

Other cities and states have recently passed laws aimed at regulating wholesalers.

In a law that took effect Nov. 1, Oklahoma began requiring that real estate wholesalers be licensed like Realtors. Called the "Predatory Real Estate Wholesaler Act," that law came on the heels of public complaints about wholesalers using misleading sales tactics to coerce buyers into low-ball contracts.

To help prevent wholesalers from taking advantage of homeowners, Atlanta's city council in November 2020 passed an ordinance making it "unlawful for any person or entity within the corporate limits of the city to commit the offense of commercial harassment," or to use "predatory tactics."

Philadelphia that same month also passed a law requiring wholesalers to be licensed. It also mandates that homeowners are made aware of the fair market value of their homes before entering into contracts.

Philadelphia City Councilman Allan Domb said residents, realty agencies, city organizations and advocacy groups alerted them to individuals who had signed contracts to wholesalers to sell their homes from $25,000 to $30,000. Within a month or two, those sellers would see their homes resell for $75,000 to $100,000 with little to no work completed.

"We felt that the homeowners who sold these homes didn't understand the value of their homes and the wealth — which was really theirs — was being taken from their families," he said. "We knew that wasn't right."

Like Kansas City, Philadelphia is dotted with signs that say things like "Cash for Your House." Domb said most wholesalers "do a good job" there, but a few were taking advantage of residents.

"We have generational wealth in a lot of the homes in Philadelphia. We didn't want those families to lose that generational wealth," he said. "We wanted it to stay with the family.

"We'd be happy to share the legislation with any member of the council in Kansas City."

Housing advocates and some real estate agents see more regulations of wholesalers as one way to protect neighborhoods. Oftentimes, wholesalers are the ones who move homes from family ownership into the hands of investors — a major challenge on the East Side, where a disproportionate number of properties are owned by outside interests.

"What we see on the ground every day is the damage they are doing," said Colleen Hernandez, a consultant who was once chief executive officer of the Kansas City Neighborhood Alliance. "They just drive the prices up. And they're not actually improving the housing stock."

She said a simple licensure requirement could make a difference for poorer neighborhoods on the East Side where those speculators are especially active.

"I like that idea, because then there's a code of conduct they have to follow," she said. "There's rules to the game and there's recourse if they violate them."

Will Kansas, Missouri laws change?

Earlier this year, the Kansas Real Estate Commission pushed a bill that would have required wholesalers to face the same licensure requirements as real estate agents.

"We see this as a consumer protection bill," said Erik Wisner, executive director of the commission. "We get complaints that these individuals are essentially advertising and selling property that they don't own."

While that legislation didn't pass this year, Wisner said the agency would introduce a similar bill in the upcoming legislative session.

"They are claiming they are selling property that they own — which they don't," he said. "They never really take possession of the property."

The Kansas bill would not levee any fines, but would allow the commission to issue cease and desist orders, a power commissions in numerous other states have, but not Kansas.

A real estate license, he said, would require wholesalers to abide by minimum obligations, such as having a real estate broker supervise one's activities and complying with advertising requirements. It would also allow consumers to make complaints, which would be investigated by the real estate commission.

"We want them to either get a license or stop what they're doing," Wisner said.

The Kansas City Regional Association of Realtors is working with Kansas regulators to get the legislation passed, said Alex Goering, who chairs the association's Kansas advocacy committee.

The association is also working with the Missouri state association to explore a possible law change there, said Goering, a broker and president of the Heartland MLS, the central database that tracks most home sales in the region.

"The issue of individuals or companies engaging in the unlicensed practice of real estate is a growing concern as it can place sellers at a distinct disadvantage," Goering said in a statement.

Missouri statute says those who sell, list and buy properties for other parties must be licensed as a real estate salesperson or broker.

Wholesalers say by buying and selling contracts, they are not actually buying properties. But real estate agents say that's a distinction with little difference. Wholesalers market their businesses like agents and they market homes they have under contract on Facebook sites, email listservs and with investors they know.

The Missouri Real Estate Commission, which regulates the industry, has the power to suspend or revoke licenses of agents.

At times, the commission will fine individuals who are found practicing real estate without a license. But industry experts say there's little enforcement of those who are wholesaling home contracts.

Officials with the state commission did not answer questions from The Star.

The way Kansas City broker Chris Lengquist sees it, the state already has the laws on the books saying those who are buying and selling must be licensed.

"I would like the state of Missouri to spend more time enforcing the law," he said. "I just don't believe there's enough enforcement of nailing these wholesalers."

A spokesperson for Missouri Attorney General Eric Schmitt said the office has not confronted the issue. The agency's consumer protection division would need individual complaints before deciding whether the Missouri Merchandising Practices Act, the state's consumer protection law, has any applicability, the spokesperson said.

Likewise, the issue doesn't appear to be a high priority among lawmakers in Jefferson City.

Several legislators whose districts include Kansas City's East Side told The Star they hadn't given much thought to the issue. Crime, affordable housing and new development are bigger concerns, lawmakers said.

"Over here in this part of the city what we are more concerned with is the number of vacant, abandoned and neglected properties," said Ingrid Burnett, a state representative who lives in the Historic Northeast section of Kansas City.

After agents across the state complained about wholesalers, the Missouri REALTORS association held discussions last legislative session on the issue but came up with no clear answers, said lobbyist Sam Licklider.

"We are looking at it," he said. "I don't know that there is a solution, but it can be problematic."

Licklider and others said some wholesalers have earned a reputation for walking away from contracts if they are unable to sell them to another buyer in a short manner of time. Sometimes, that's because they are asking too much. Other times, the home may need more work than investors want to take on.

"Then the seller has to start all over again," he said. "That's not right. That's a bad deal, because a lot of these properties are smaller properties, they are owned by folks who don't have a lot of money and it's clearly the largest investment they've got."

'Regulation is coming, and it's coming fast'

Recent legislation across the country has wholesalers and investors expecting more regulations on the industry in the coming years.

"It seems like every time I turn around, there is another law passed cracking down on wholesaling in real estate," YouTube host Jerry Norton, who teaches how to flip contracts online, told his followers in October. "Regulation is coming, and it's coming fast."

On his YouTube channel, "Flipping Mastery TV," Norton teaches others how to find properties, get them under contract for under market value and flip them for a profit. He rejects the idea that wholesalers are taking advantage of sellers. Most of the homes they purchase, he said, are unfit for the retail marketplace because of their conditions.

"What an insult to humanity to think that a seller is so incapable of making decisions for himself. If the seller is smart enough to buy a property, he is smart enough to sell a property," he said. "And if he thinks he can get more for his house, he will.

"It's asinine to think that a wholesaler forces or coerces a homeowner to sell against his will. . . No one is putting a gun to the seller's head and saying sell me your property at 50% of its current value or else."

But with almost no barriers to entry, it's easy for inexperienced or bad actors to flood the marketplace. And sellers have little way of knowing who's behind the "We Buy Houses" signs in their neighborhoods or the calls or text messages they receive with unsolicited offers to buy.

"I'd say probably half are legitimate buyers and the other half of people took a seminar last week," said Kim Tucker, a licensed broker and the executive director of the Mid-America Association of Real Estate Investors.

When she wholesales a house, Tucker said she's upfront to sellers about what she is doing and what her plans are for the property. That ensures the seller isn't surprised to see the house land in someone else's hands or back on the market in a matter of weeks.

But she knows many others don't disclose their plans or let deals fall apart at the last minute because they can't find another investor who wants to buy.

Still, she worries too much local regulation could lead more metro investors to dump their properties to large investors like out-of-state conglomerates.

"I kind of don't like those people either because I'm a legitimate buyer," she said. "If they're going to do wholesaling, we want them to do it honestly and legally. They're screwing it up for everybody."

Real estate isn't unique in having middlemen like wholesalers, said Daniel Reedy, a local real estate broker who works with investors.

"It's not the wholesaling," he said, noting wholesalers are a major part of most industries. "It's the people doing the wholesaling."

Local and out-of-state investors often want to own real estate as part of a larger investment portfolio. But they don't want the hassle of scouring home listings and negotiating contracts. So wholesalers are useful in finding inventory and matching it with those investors.

Reedy wholesales himself, but he said he has a pool of investors ready to buy. He knows what sorts of properties and price ranges they want. So, he's not entering into contracts only to walk away from them. Sellers often approach him about buying their homes. In those cases, he said he will explain the benefits of listing on the market compared to selling to a cash buyer.

"I'm not necessarily your best option," he will tell them.

He said the first and most important thing licensed agents learn in real estate courses is their moral, legal and fiduciary duties to the buyers and sellers they represent. An unlicensed wholesaler has none of those obligations, he said.

Reedy isn't against new licensure requirements for wholesaling. But he's not convinced it will filter out all the bad actors in the industry either.

"It's like Chicago outlawing guns. Well, how many guns are in Chicago? A bajillion," he said. There will "still be somebody getting screwed by somebody somewhere. But hopefully not as bad."

This story was originally published December 17, 2021 11:00 AM.

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