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Do You Need a Real Estate License to Bid for Someone Else at Trustee Sale or Foreclosure Auction?

This is a very interesting question and you can’t necessarily get a straightforward answer by reading real estate licensing laws or statutes.  To clarify the question, there are people and companies that specialize in tracking foreclosure auctions and bidding for other investors.  These were especially popular and active after the real estate bust of 2008 until about 2013 when there were thousands of foreclosures happening everyday.  It became a full-time job to track foreclosures and bid on them.

In some cases, bidders or bidding companies might provide other services and besides just tracking and bidding on foreclosures, they would visit them, give their professional opinion of condition and value, assess title issues, and front the money to tie the property up prior to the full payment being due (they would pay a deposit and the investor would wire the remaining funds or deliver them in the form of a cashiers check to the foreclosure trustee; the investor would then reimburse the bidder for the initial deposit plus some type of bidding fee).

We are not referring to someone who is directly employed by a company or another person that just places the bid on behalf of that company or person.  While the difference might be slightly hazy, we are talking about bidders that generally have multiple clients and no direct employment with any one of them.

Sophisticated bidders bid on behalf of sophisticated investors and the reality is that in most cases, neither party wants or feels the need to have the state real estate commission involved.  Bidders don’t want to pay licensing fees, take continuing education classes, keep a filing system for every single property that was bid on successfully or unsuccessfully.  They don’t want or need MLS access and don’t want to deal with Realtors® claiming they are owed some type of commission and using a kangaroo court arbitration system to get it.

Investors don’t want third parties in their business conducting audits or seeing what they are bidding on, or to see higher costs of regulatory compliance passed on to them.  On top of that, even though state real estate commissions are tasked with protecting consumers, many feel that they are really designed to protect industry participants (Realtors®) and typically all or most of the commissioners are real estate brokers themselves that see off-MLS foreclosure transactions as a threat to their livelihoods.

So it comes as no surprise that unless the bidder is a direct employee of the investor, the real estate commission will generally attempt to require the bidder to be licensed and treat any bidding transaction like a normal sales transaction; which means they must keep copies of agency agreements, maintain and track deposits, maintain recordkeeping and be subject to audits.  Additionally, if the bidder is a salesperson or associate broker for a brokerage, then that opens another can of worms with regards to things like following advertising rules (like using the name of the brokerage on all advertising) and any service payments being made payable to the brokerage, not the bidder him or herself or the bidder’s entity.  While requiring bidders to be licensed is probably an overreach, you should be prepared for it to happen.

Here’s an interesting article about John Ray, one of the stars of reality show “Property Wars”, who was fined $10,000 for bidding on behalf of others at foreclosure auctions without a license and marketing his service at his website which was later taken down, called BidAZForeclosures.  Keep in mind that this infraction was COMPLETELY UNRELATED TO and had nothing to do with the bank fraud that “Property Wars” star Scott Menaged ended up receiving a 17 years prison term for.  In another Arizona case in the 2011 timeframe a consent order was reached with a licensed salesperson.

The real estate licensee was fined $4000, forced to complete 6 hours of continuing education, and forced to practice his real estate activities under stricter monitoring because he was bidding for other investors and receiving payments for this service directly ($350 to $1000 per property) and not through his broker.  He also ran a website promoting bidding on foreclosure properties that did not mention his brokerage and his broker said he did not know about.  The bidder argued that “from the time the hammer falls at the auction” up to the moment he hands off the receipt to the investors, he has an “equitable ownership interest in the property” and believes this exempted him from the licensing statutes.  Even though it has some merit as an argument, the real estate commission felt differently and reached an agreement with the bidder to sign a consent order in order to avoid the case going to hearing.

If you work for someone directly and they tell you: “As part of your employment duties, you need to go to the trustee sale and bid on this property with company funds on behalf of the company,” then you are most likely perfectly OK not being licensed.  The real estate commission generally can’t stop people from fulfilling company employment duties when their company is buying something and they are simply executing their job duties.  However, when you move away from this type of arrangement and start to function like a 3rd party bidder, you open yourself up to the possibility of an enforcement official at the state real estate commission investigating or pursuing an unlicensed activity infraction against you, especially if you advertise the service to others and bring a lot of attention to your bidding services.

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