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. Essentially, 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. A new Senate Bill signed by Governor Greg Abbott that takes effect September 1, 2017 seeks to clarify certain actions by a wholesaler that do 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.
Act of May 28, 2017, 85th Leg., R.S., 2017 TX S.B. 2212 (to be codified as Tex Occ. Code. § 1101.0045 and Tex. Prop. Code § 5.086).
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.
Tex. Occ. Code § 1101.004 (West 2017).
Acts described under section 1101.002(1)(A) include a person who: (1) “offers to sell, exchange, purchase or lease real estate,” (2) “lists or offers, attempts, or agrees to list real estate for sale, lease, or exchange,” and (3) “deals in options on real estate, including a lease to purchase or buying, selling, or offering to buy or sell options on real estate.” Senate Bill 2212 also amends the Texas Property Code to incorporate an equitable interest disclosure clause to section 5.086 of the Code that asserts:
[A] person selling an option or assigning an interest in a contract to purchase real property must disclose to any potential buyer that the person is selling only an option or assigning an interest in a contract and that the person does not have legal title to the real property.
Tex. Prop. Code § 5.086 (West 2017).
It seems 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 run afoul of 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, “123 Main Street For Sale. Great house in prime location. Only $50,000!” 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. Additionally, the 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 as follows: “Assignment contract offered for sale by wholesaler for real property at 123 Main Street. Have this wonderful contract assigned to you at the low price of $10,000 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.
Ideally, a wholesaler will steer clear of engaging in real estate brokerage 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. 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.
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