Real Estate Wholesaling will soon have a Required Disclosure
Mon., Aug. 29, 2022 (PHOENIX, Ariz.) - The Arizona Department of Real Estate (ADRE) receives numerous calls and complaints from the public and real estate professionals related to the practice of unlicensed activity and wholesaling.
Specifically and over the past few years, the practice of wholesaling property has generated complaints about deceptive sales tactics, predatory contracts and clouding title to properties. Many have seen the signs and received the unsolicited phone calls from individuals and companies offering to buy homes.
Individuals engaged in wholesaling are not required to hold a real estate license if they are not engaged in real estate brokerage activities under Arizona law, i.e., representing a buyer or seller in a transaction for compensation. Wholesalers do not represent the buyer or seller in a wholesale transaction.
Real estate wholesaling occurs when an individual or entity enters into a contract with a property owner and subsequently markets and sells their contractual interest in the property before closing through an assignment of that contract to another party for a fee. Assigning a contract is a way for a wholesale buyer to transfer their right to purchase or sell the property to another individual or entity.
Should the property owner decline to sell the property per the ter
ms of the contract, the wholesale buyer may record a lien or cloud the title - called a lis pendens - after filing a lawsuit on the property.
That said, a wholesale buyer cannot hold a transaction or property in limbo because they are not able to find a buyer. Rather, a wholesale buyer is the named buyer on the contract and, if that wholesale buyer fails to find a buyer and assign the contract by close of escrow, the wholesale buyer must complete the transaction per the terms of the contract or risk breaching the contract.
On September 24, 2022, a new law (HB2747: wholesale real estate buyers; disclosure) will go into effect in Arizona, requiring real estate wholesale sellers and buyers to disclose in writing the fact that they are acting as a wholesale buyer or seller in any residential real property transaction.
- Disclosure will be required for a wholesale buyer when the individual or entity is entering into a purchase contract for residential real property as the buyer and assigns that same contract to another person or entity.
- Disclosure will be required for a wholesale seller when an individual or entity enters into a purchase contract for residential real property as the seller, who does not hold legal title to that real property and who then assigns the same contract to another person or entity.
- Allows a seller to cancel the contract for sale at any time prior to the close of escrow without penalty and retain any earnest money paid by the wholesale buyer if the wholesale buyer violates the disclosure requirement.
- Allows the buyer to cancel the contract for sale at any time prior to the close of escrow without penalty if the wholesale seller violates the disclosure requirement.
- Requires the buyer to be refunded all earnest money paid, if the buyer cancels the contract for the wholesale seller violating the disclosure requirement.
- The law requires this disclosure to occur in writing and before entering into a binding agreement with another party.
- Real estate licensees engaged in wholesaling must remember that disclosure of the fact that they hold a real estate license is also required, under Arizona Administrative Code R4-28-1101(E). Specifically, a real estate salesperson or broker shall not act directly or indirectly in a transaction without informing the other parties in the transaction, in writing and before the parties of a present or prospective interest or conflict in the transaction, including that the, (1) salesperson or broker has a license and is acting as a principal.
With this new law, Arizona joins other states in addressing the growing trend of wholesaling. Arizona’s approach in requiring wholesalers to disclose their interest in the property, so the homeowner can make an informed decision, serves to increase transparency to buyers and sellers that enter into wholesale real estate transactions.
ADRE will continue to remain involved in conversations occurring within the industry and at the capitol on consumer protection concerns related to real estate. The Department reminds the public to file complaints for the Department to investigate if you believe a violation of these disclosure provisions or any rule or law are occurring.
(Image Source: Oklahoma Real Estate Commission)