The Consequences of Not Having a Real Estate License

In an earlier post, 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 article, I explore the consequences of doing a deal without a license in violation of Indiana law. A SIMILAR ANALYSIS WILL APPLY IN VIRTUALLY EVERY STATE IN THE NATION. SO, PLEASE RESEARCH YOUR STATE’S LAWS.

What if you have done a deal without a license and trouble arrives? 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, you land that $12,000,000 commercial deal and plan on “flipping” it to another investor, walking away with a huge finder’s fee. You have no license. Then trouble arrives. Do you get your commission? Maybe.

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. At first glance, it would seem that the licensing statute prohibited the collection of a fee by an unlicensed person. This plaintiff cleverly argued that he had not “brokered” a real estate deal, as defined by the statute. He claimed that he merely introduced a buyer to a seller, and let those two negotiate the transaction. His lawyer referenced the predecessor statute to the current licensing statute. Under the 1951, Indiana Code, you 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. 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? However, once 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 reasoned.

Reading all the case law and the statutes together, the rule seems simple: You can introduce buyers to sellers and collect a fee, without a license; but the second you assist in the negotiations or provide other services listed in the statute (selling, buying, exchanging, etc.), you need a license. Applying this rule to real life fact scenarios is not simple or easy. Most “bird dogs” go far beyond merely “finding” buyers and matching them with sellers. Most “bird dogs” are not merely “finders” and should not be collecting a “finders fee” without a license.

One last comment on these requirements concerns 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, rather than a stock sale), whenever the sale includes the transfer of an interest in real estate. Arguably, that 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.

Call it “unfair.” Call it “unreasonable.” Call it “really tough love.” The Indiana real estate licensing statute is what it is, whether you want to ignore it and violate, or not. I urge you to read the statute and make sure that you are not violating it. You just might lose that big fee or commission, because you were unwilling to follow the law and get your license. If you have doubt about your own real estate-related activities and whether or not you need a license, feel free to contact this author for a consultation.

As always, Good luck and Happy Real Estate Investing.

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