Equitable Interest In Real Estate – Learn How it Can Work for You

It happens about once every two to three weeks. We get a call from a Realtor® asking how we can be advertising a listed property. Often it is the listing agent who is calling. Sometimes they just start yelling that we are criminals and can’t offer the property for sale. Other times they sneak in as if they were a buyer and grill us about when we bought the property.  Then they go into their spiel of how we are frauds.

I believe a teacher at the local real estate school told the students that only the owner of a property can sell it. This is essentially true unless someone else has what is known as an “equitable interest” in the property. An equitable interest can take the form of a purchase and sale contract, an option contract, a contract for deed, a lease option contract or an approval letter for a short sale, to name a few.

Multiple billions of dollars of commercial real estate transactions are done by exercising options and by assignment of contracts. It is likely that a similar number of single family homes are also contracted for and sold using the above methods of controlling an equitable interest in the properties.

The equitable interest holder can advertise the property but not list it on the MLS® because he is not on title in the public record. For this discussion, we will call the contract holder an investor because he is re-selling the property instead of buying it himself – that’s why he is advertising it for sale!

Let’s assume the investor has a prospect call who agrees to sign a purchase and sale agreement. The investor signs a purchase and sale agreement as the seller.  The contract will contain a clause that stipulates the sale is contingent on his purchase of the property. In some cases the investor can assign his original purchase contract with the seller to the investor’s end-buyer. When this happens, the end-buyer actually closes by taking over the investor’s responsibility for the original contract.

The Assignment of Contract is shown on the HUD-1 closing statement as an assignment fee. This is not a commission a Realtor® would receive. This is important to understand because Realtors® think investors are earning commissions on the sale of the property. In fact, it has been estimated that over eleven billion dollars are lost in commissions to Realtors® each year because of investors doing the transactions as principals, or equitable interest holders in real estate transactions. There might be an opportunity for Realtors® to get on the investor bandwagon instead of complaining.

The major difference between investors and Realtors® is that Realtors® list and attempt to find buyers through their marketing efforts. Investors on the other hand buy properties, take a financial risk, and then sell them to buyers through their marketing efforts. Investors also rehab properties and transform neighborhoods where Realtors® do not.

Recently, a longtime investor approached me to explain about a short sale transaction he had completed. The deal went smoothly but a couple of months later two officers from the state Department of Business Regulation visited him at his home. They asked how he could advertise the property he sold because he didn’t own it and it was also listed in the MLS®. He has been in the business for almost 25 years but he was still stunned. He explained he had a purchase and sale contract from the homeowner.

The agents asked to see the contract and whatever disclosure documents he had given the homeowner. He produced the purchase and sale agreement from the transaction and the disclosure documents that he originally purchased from me. These are called Required Florida Documents and can be found at www.RequiredFLDocs.com. The agents reviewed the documents, photographed them, and told him he should be glad he did everything properly.

They also mentioned they were “hunting” for a rogue Realtor® who had showed the same short sale property in question to some potential buyers. While not saying exactly why they were looking for him, it is likely because he was accepting deposits on properties from buyers and not giving them back. This is why we will never make out checks to agents and are even very reluctant to make them out to the broker’s agency. Anyone can start a corporation or LLC just to collect deposit checks and then later disappear.

Unfortunately, South Florida has a very much deserved reputation for people taking other people’s money and not doing what they promised, or contracted to do. Be careful out there and don’t be afraid if a Realtor® screams at you about selling a listed property where you aren’t on title.  As long as you have an equitable interest, you rule!

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder