New city law aims to crack down on real estate ‘wholesalers,’ seen as exploiting underinformed property owners

Philadelphia City Council unanimously passed legislation Thursday cracking down on quick-moving real-estate intermediaries known as “wholesalers,” who are seen by some as exploiting underinformed property owners in neighborhoods with rapidly accelerating land values.

Under the law, such speculators who secure real estate for themselves with the aim of selling it for a quick profit would be required to obtain a license and adhere to ethics constraints similar to those binding state-accredited real estate agents.

Licensed wholesalers would be barred, for example, from making “false promises” to sellers or misleading them about the value of their properties.

A spokesperson for the National Association of Realtors said he was not aware of any other state or city in the country that had moved to regulate wholesalers in this way.

“With the passage of this bill, Philadelphia will establish fair rules and expectations for wholesalers buying and selling homes in our communities,” said Councilmember Allan Domb, the legislation’s lead sponsor, whose own real estate interests made him known, for a time, as the “Condo King.”

The law, set to go into effect two months after passage, is a response to those who quickly profit in long-disadvantaged neighborhoods, where property values are often higher than owners realize.

The Inquirer has reported on how wholesalers snap up real estate on the cheap so they can resell it for big profits to developers without the constraints that come with a real estate license.

Among wholesalers’ most frequent targets are the heirs of deceased property owners, who are often a generation or more removed from their late relatives’ real estate and often unaware of its value, The Inquirer has reported.

“The industry is often most active in our city’s rapidly gentrifying neighborhoods, where longtime homeowners may not appreciate how much their home is worth to out-of-town investors,” Michael Froehlich, a lawyer at the nonprofit group Community Legal Services, said at Thursday’s City Council hearing. The new regulations “would curb the most predatory and out-of-control tactics of residential property wholesalers.”

Others, however, were less sure it would have much of an impact.

Real estate investor Joseph Spina, whose citywide portfolio of more than 400 properties includes some acquired from wholesalers, said officials will likely struggle to enforce the rules in an industry that operates largely in the shadows.

For example, because wholesalers regularly avoid actually buying properties outright — instead collecting generous “assignment fees” for transferring negotiated purchase rights to buyers without putting their names on a deed — a great number of deals can occur out of sight from regulators.

The bill also does not appear to cover empty lots in residential neighborhoods, which are at least as attractive to developers served by wholesalers as parcels with buildings on them.

“It’s well-intentioned, but difficult to police,” Spina said. “Once they invent a new set of rules, these wholesalers and assignors will come up with a workaround.”

Wholesalers have typically operated without a state real estate license, placing them largely outside the reach of rules that bar agents and brokers from making claims about a transaction that they know — or ought to know — are untrue.

Although Pennsylvania law broadly requires those involved in the “purchase or sale or exchange of real estate” to be licensed, the requirement does not apply to people who own properties they sell — even if they have owned them for less than a day. This loophole lets wholesalers take advantage of property owners.

Wholesalers thrive, in part, because they charge developers significantly less for real estate than what they’d pay on the open market where licensed real-estate agents, with their cut conventionally capped at 6%, seek the highest possible prices for clients.

On the losing end are sellers who agree to deals without fully knowing what their properties are worth.

“All homeowners deserve market value for their homes and everyone deserves to work with the knowledge they need in order to make the right decision about their financial future,” Domb said.

The legislation requires wholesalers to pay a $200 licensing fee and to disclose all companies in which they hold an ownership interest. Wholesalers who have been convicted of fraud or who have violated ethics laws within six years of their application are disqualified from getting licensed.

Wholesalers can lose their license if they violate a code of ethics stating they may not “knowingly make any substantial misrepresentations, make any false promises, untruthfully advertise, or engage in any conduct which demonstrates bad faith, dishonesty, untrustworthiness, or incompetency.”

At least three days before concluding a purchase, licensed wholesalers also must present sellers with a disclosure explaining how they might independently research their property’s value and informing them of their option to hire a lawyer or state-accredited real estate agent to help with the transaction.

The law also establishes a “do dot solicit list” for property owners who have expressed a desire to not be approached to sell or rent their real property.

The legislation was endorsed by Greater Philadelphia Association of Realtors, whose members have had to compete with until-now unlicensed wholesalers who are unbeholden to the professional standards they must follow.

Philadelphia real estate agent Michael F. Doyle Jr., who had been monitoring efforts in the city to regulate wholesalers, said the law would “level the playing field.”

“You have this whole subculture of real estate activity that is not beholden to certain ethics and certain laws,” he said. “They don’t have to adhere to ethical Realtor standards we all agree to work by.”

That sentiment was not shared, however, by real estate broker Judith Robinson, who is active in some of the North Philadelphia neighborhoods most targeted by predatory buyers.

Before Thursday’s vote, she urged councilmembers to reject the legislation, arguing that elevating wholesalers to the status of license-holders without requiring them to take professional classes or pass exams, as real estate agents must, would only embolden them to further victimize disadvantaged neighborhoods.

“Let’s do something that’s really going to help the Black community — the gentrifying Black community,” she said. “This is a sham here and you need to be more respectful of people who really are practicing professionals.”

The Philadelphia Inquirer is one of more than 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push toward economic justice. See all of our reporting at brokeinphilly.org.