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If you’re currently dabbling in the real estate market, you may be familiar with the term “wholesaling.” For those who have never heard of the term in this context, continue reading to learn more. In the real estate industry, a wholesaler is someone who contracts with a seller to buy a property and then, while still under contract with the seller, assigns the contract to another buyer for a higher price. Simply stated, a wholesaler is a middleman that hopes to profit on the spread between the contract price with the seller and the purchase price in an assignment contract with a buyer. A wholesaler’s actions are very similar to a real estate broker and may require a real estate license if certain procedures are not strictly followed.
Texas Governor, Greg Abbott, signed a Senate Bill into effect on September 1, 2017, to clarify certain actions by a wholesaler that does not require a real estate license. Senate Bill 2212 amends Chapter 1101 of the Occupations Code (Commonly referred to as the Texas Real Estate Licensing Act) by clarifying when an unlicensed person may sell or offer to sell real estate options or interests.
Section 1101.0045 of the code states that:
(a) A person may acquire an option or an interest in a contract to purchase real property and then sell or offer to sell the option or assign or offer to assign the contract without holding a license issued under this chapter if the person:
does not use the option or contract to purchase to engage in real estate brokerage; and
discloses the nature of the equitable interest to any potential buyer.
(b) A person selling or offering to sell an option or assigning or offering to assign an interest in a contract to purchase real property without disclosing the nature of that interest to a potential buyer is engaging in real estate brokerage.
It is widely understood that a wholesaler may not engage in real estate brokerage without a license. As of January 2, 2016, Texas’ Occupation Code defines when a person is and is not engaged in real estate brokerage.
(a) A person is engaged in real estate brokerage if the person, with the expectation of receiving valuable consideration, directly or indirectly performs or offers, attempts, or agrees to perform for another person any act described by Section 1101.002(1), as a part of a transaction or as an entire transaction.
It appears that wholesalers that make full disclosure that they are only selling an assignment contract related to a property at every stage of their marketing process and contracting phase will stay safely within the guidelines to avoid licensure requirements. However, wholesalers that attempt to market the underlying real property by offering the property for sale will likely contradict the law.
Many wholesalers will be tempted to run advertisements that describe the real property for sale at a certain price. For example, a wholesaler may post an ad online that says, “500 Lone Star Street For Sale. Gorgeous house in a prime location. Hurry! This one won’t last long! Only $175,000!” When prospective purchasers call on the ad or enter into the contracting phase, the wholesaler is not forthcoming with the fact that he or she only has an interest in the property via an earnest money contract with a seller. Furthermore, this advertisement offers the underlying real property for sale which clearly requires a real estate license issued by the Texas Real Estate Commission. Tex. Occ. Code § 1101.351 (West 2017).
In contrast, a wholesaler’s advertisement that might be in compliance with the law may read something like this: “Assignment contract offered for sale by wholesaler for real property at 500 Lone Star Street. Have this amazing contract assigned to you at the low price of $50,000 payable to wholesaler.” Note that this advertisement makes full disclosure that a wholesaler is offering an assignment contract in compliance with the Texas Property Code. Also, the advertisement does not offer the underlying real property for sale, but instead offers the assignment contract for sale only.
Usually, a wholesaler will steer clear of engaging in the real estate brokerage business and will fully disclose that he or she is only assigning the contract to the assignee with the expectation that the assignee will now assume all of the contractual obligations and rights. A wholesaler who sells or offers to sell only real estate options or interests like assignments and discloses the nature of the equitable interest to any potential buyer will likely remain in compliance with the law. However, failure to disclose the nature of the interest or offering the underlying real property for sale means that the wholesaler is engaging in real estate brokerage and may be subject to civil and criminal liability.
Remember, it is a fine line when wholesaling real estate in Texas. You must be forthright and transparent in revealing your interest in the transaction and the exact nature of what you’re selling to a buyer. Before engaging in such a business opportunity, it’s prudent to consult with an experienced real estate attorney.
I built my law practice on the premise of being a life raft in a sea of sharks. I want to be an advocate for those that have been wronged and are too intimidated to seek help. My firm is here to explore your options, guide you through your legal journey, and give you that safe space to ask questions! There’s no such thing as a stupid question…Only the ones you don’t ask. So, my question to my clients is not “do you have any questions?” But rather “what questions do you have?”
As always, the Kazi Law Firm is standing by to help you in your time of need. Don’t hesitate to contact us today. We specialize in real estate law, landlord-tenant disputes, immigration, and wills & estate planning. Family is at the core of our practice. Just as we treat our family with respect and understanding, we treat yours. Come join the Kazi Law Firm family today!
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