Real estate investing is an ever-growing business in the Houston area and wholesaling seems to be a popular way for many investors to get their feet wet. We conduct multiple consultations with budding real estate investors each month. In this blog we will provide you with some of the information we discuss with new investors who come to us wanting to ensure they are legally prepared to dive into the wholesaling business. They sound like smart investors already, don’t they?
What does it really mean to be a real estate wholesaler? A real estate wholesaler is someone who enters into a purchase contract with a property owner and then assigns the purchase contract to another buyer for a higher price or an assignment fee. The wholesaler has an equitable interest in the property and it is that equitable interest they are marketing and selling. The wholesaler is selling the purchase contract, NOT THE PROPERTY.
**Some wholesalers seek to “double close” the transaction, which is a topic for another day***
Why are you making a big deal out of marketing the contract and not the property? Isn’t the property what the Assignee really buying? No, the Assignee (person buying the wholesaler’s purchase contract) is not buying the property from the wholesaler because the wholesaler does not own the property. The wholesaler has only entered into a purchase contract with the owner and can only offer to sell and sell what he owns – his right to purchase the property subject to the terms and conditions of the contract. It’s as simple as one can only sell what one owns. While this might sound like an attorney just being picky with words, what we are trying to avoid is the real estate wholesaler violating the law by performing acts that constitute real estate brokerage without a license.
The Texas Real Estate Licensing Act defines Broker as a person who, in exchange for some form of valuable consideration, performs certain acts with regards to real estate. Two of those acts are selling and offering to sell real estate. So, an investor that offers to sell real estate that they do not own is performing one of the listed acts and must be licensed.
In 2017, the law was amended to clarify that an unlicensed person may acquire an option or an interest in a contract to purchase real property and then sell, offer to sell, or assign the real estate option or contract. See Section 1101.0045 of the Act. These are the acts a wholesaler performs, or can perform, so it is important to know the difference.
Must I disclose to my buyer that I am a wholesaler? YES. The Act goes on to state that a person that does not disclose the nature of their interest to a potential buyer is engaging in real estate brokerage services. Additionally, the Texas Property Code Section 5.086 requires the wholesaler to make the disclosure prior to entering into a contract with any potential buyer. Specifically, that disclosure must state that:
If you are a wholesaler, you must make it clear in all advertisements and assignment contracts that what is being offered is your interest in the contract and that you do not own the property.
Can I use this contract I got from ____________? You fill in the blank and we’ve heard it. The answer is usually “maybe.” Real estate documents are readily available online, given out in real estate classes, provided by coaches at investor group meetings, passed along from investor to investor, and numerous other places. Please be weary of these documents.
Wholesalers must ensure that they enter into a favorable purchase contract with the seller because the purchase contract is what the wholesaler is assigning to the end buyer. The wholesaler wants to ensure the ability to assign the contract is preserved. Without this, the wholesaler might not be able to accomplish their ultimate goal of assigning the contract and will either be stuck with breaching the contract or buying the property themselves. The wholesaler must also have a valid assignment contract with the end buyer that contains all the necessary terms and disclosures. There are numerous terms that must be contained in the purchase and assignment contracts but that is outside the scope of this blog.
We recommend all investors have their contracts, no matter the source or author, drafted or reviewed by an attorney prior to finding their first deal. The real estate investment business is fast paced so you want to be ready to act immediately upon finding that great deal!!
We understand the nature of the real estate investment business and pride ourselves in providing RELIABLE. RESPONSIVE. RESULTS! To set-up a consultation to discuss your questions regarding real estate wholesaling, please call Banahan & Martinez, PLLC at (281) 394-3122 or email firstname.lastname@example.org.
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