By Mark B. Zinman| Zona Law
Every few months, we get questions from wholesalers about whether they are required to be licensed. The traditional argument was that wholesalers are not required to be licensed as they have an interest in the real estate transaction. They are putting their own money into the transaction to buy the property and then assign their interest to another person. In addition, they have a personal stake in the transaction and have something to lose. Because of this, they are not governed by the Department of Real Estate and haven’t had any laws directly on point. However, that changed this legislative session.
Even though the full legislative session is not over, and some bills will still be passed (including the legislative budget) one bill has been signed into law and it affects AZREIA members. HB2747 was signed into law by Governor Ducey. This bill, which is now codified into law as ARS 44-5101, requires certain disclosures of persons who are acting as wholesalers. There are a few important things to take from this new law as seen below:
- This applies to people who are working as wholesale buyers and wholesale sellers. You are a wholesale buyer if you enter into a purchase contract to buy a property and then assign it to another person. You are a wholesale seller if you sell or transfer interest in real property that you do not own.
- Second, it doesn’t matter how many transactions you have done in a year. If you have done one sale or purchase under the definition above, you are a wholesaler.
- Before you enter into a binding agreement, you must disclose that you are acting as a wholesale buyer or wholesale seller, and if you are a seller, you must also disclose that you only own an equitable interest in the property and that you may not be able to transfer title. The law doesn’t address whether it’s sufficient if it’s in the purchase contract, or if it must be in a separate contract. Logically, it would appear to satisfy the language and intent of the statute if your purchase/sales contract explicitly have this language.
- If a wholesale seller does not disclose this information prior to entering into the contract, the buyer can cancel, and get their earnest money, up until the closing, regardless of what the contract provides.
- If a wholesale buyer does not disclose this information, the seller can cancel the contract and get any earnest money paid by the wholesale buyer, regardless of what the contract provides.
- This only applies to property with less than five dwelling units.
The law doesn’t address the situation where you do sign a contract with the intent to close on it but later change your mind. That factual situation could cause people problems. Therefore, if there is any chance that you may be a wholesaler, it’s better to disclose it.
This disclosure requirement is not a significant amount of regulation, and it is easy to comply with. What is important, however, is that it is the first step in regulating wholesalers. It is unclear whether there is more to come in future years.