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Written by Nikki Salgat, Esq., General Counsel

For the past few years, the real estate investing strategy referred to as “wholesaling” has been on the rise and, as a result, complaints regarding wholesaling increased.   

What is wholesaling and why have complaints increased? Wholesaling is when an individual or entity enters into a sales contract with a seller of real property and assigns their interest in that contract to a third party, often referred to as an end-buyer. Notably, upon entering into a sales contract, a wholesaler obtains equitable title, which is the interest retained by a person who has contracted to purchase a property but has not yet closed the transaction. This is different than legal title, which is actual ownership of the real property. 

A few reasons complaints have increased of late are lack of disclosure of a wholesaler’s status which was previously not legally required, predatory wholesalers, an increased number of defaults/cancellations by wholesalers, and a lack of knowledge or understanding of the wholesaling business. 

In April, Governor Ducey signed HB 2747 which requires that wholesalers disclose their wholesaler status in writing PRIOR to entering into a binding agreement. This new law takes effect on September 24, 2022.   

So, let’s break down the new law by first discussing what it hopes to achieve. As mentioned above, Sellers were becoming increasingly frustrated, and many believed they were being taken advantage of, when they learned that a wholesale buyer was assigning their equitable interest in the property to an end-buyer and profiting from that assignment at close of escrow. Additionally, many wholesalers do not intend to purchase the property if they are unable to assign their contractual rights, even if that means forfeiting their earnest money deposit. As such, wholesalers may be more likely to default when compared to a traditional buyer that has no intention of trying to assign their equitable interest. This new law will allow sellers to make an informed decision as to whether they want to enter into a sales contract with a wholesaler.  

New law:  A.R.S.§ 44-5101 

Before the parties enter into any binding agreement: 

1. A wholesale buyer of residential real property shall disclose in writing to the seller that the buyer is a wholesale buyer. 

2. A wholesale seller of residential real property shall disclose in writing to the buyer that the seller is a wholesale seller that holds an equitable interest in the real property and that the wholesale seller may not be able to convey title to the property.   

B. Notwithstanding any other provisions contained in the contract for sale, if a wholesale buyer violates this section, the seller may cancel the contract for sale at any time prior to the close of escrow without penalty and may retain any earnest money paid by the wholesale buyer. 

C. Notwithstanding any other provisions contained in the contract for sale, if a wholesale seller violates this section, the buyer may cancel the contract for sale at any time prior to the close of escrow without penalty and shall be refunded all earnest money paid by the buyer.   

D. For the purposes of this section: 

1. “Residential real property” means real property with fewer than five dwelling units. 

2. “Wholesale buyer” means a person or entity that enters into a purchase contract for residential real property as the buyer and assigns that same contract to another person or entity. 

3. “Wholesale seller” means a person or entity that enters into a purchase contract for residential real property as the seller, that does not hold legal title to that real property and that assigns that same contract to another person or entity. 

Frequently Asked Questions 

Q1. Can an individual/entity be a wholesale buyer and wholesale seller in the same transaction? 

A1. Yes.  When the wholesaler contracts to purchase the home from the seller, they are acting as a wholesale buyer. When that same individual seeks to convey their equitable interest to an end-buyer, they are acting as a wholesale seller. 

Q2. What does the new law require of the wholesale buyer?  

A2. As required by the new law, the wholesale buyer must disclose to the seller in writing before entering into a binding agreement for residential real property that they are a wholesale buyer. 

Q3. What does the new law require of the wholesale seller? 

A3. The new law requires the wholesale seller to disclose to the potential end-buyer that they are a wholesaler that holds an equitable interest in the real property, not an ownership interest, and may therefore prove unable to convey title. 

Q4. How can the wholesale buyer and/or wholesale seller go about disclosing their status in writing PRIOR to entering into a binding agreement as required by the new law? 

A4. The wholesale buyer and/or wholesale seller can appropriately disclose their status by: (i) submitting written notice to the appropriate party, either the seller or buyer, before entering into a binding agreement; (ii) inserting the required verbiage into the Additional Terms and Conditions section of the sales contract before conveying their offer; or (iii) inserting the required verbiage into a counteroffer before it is conveyed. 

Q5.  If I am a wholesale buyer and a real estate licensee, how do I operate under this new law? 

A5.  You should confirm with your broker whether the transaction must go through the brokerage. In addition to disclosing you are a wholesale buyer, you must disclose that you are a licensed agent. 

Q6.  If I am a principal and a real estate licensee, what are my obligations as a wholesale seller?  

A6. In addition to disclosing you are a wholesale seller, you must disclose that you are a licensed agent.  Furthermore, as a principal in the transaction, you should never represent the buyer because your ownership presents an unwaivable conflict.   

Q7. What if the wholesale buyer does not disclose their status as a wholesale buyer before the parties sign the purchase contract? 

A7. If a wholesale buyer does not disclose to the seller that they are a wholesale buyer before the parties execute the purchase contract and the transaction has not closed escrow, the seller can legally cancel the purchase contract and retain the wholesale buyer’s earnest money deposit, if any. 

Q8. If a wholesale buyer does not disclose to the seller that they are a wholesale buyer, does the seller have to wait to see if the wholesale buyer can close escrow? 

A8. No. This new law does not require the seller to wait to see if the wholesale buyer can close escrow.  Rather, the new law allows for the seller to immediately cancel the purchase contract and retain the wholesale buyer’s earnest money deposit, if any.  

Q9. Even if having timely made the required disclosure, following the wholesale buyer’s assignment of their equitable interest to an end-buyer, does the wholesale buyer remain liable if the end-buyer fails to perform?  

A9. Yes. The wholesale buyer’s assignment of their equitable interest does not change the terms of the underlying sales contract, nor does it negate the wholesale buyer’s contractual obligations owed to the seller. 

Q10. What if the wholesale seller does not disclose in writing their status as a wholesale seller before assigning their equitable interest to an end-buyer? 

A10. If before entering into a binding agreement, a wholesale seller does not disclose in writing to the end-buyer that the wholesale seller holds only an equitable interest in the real property and therefore may not be able to convey legal title to the property, the end-buyer can legally cancel the sales contract and be refunded their earnest money deposit, if any. 

Q11. If a wholesale seller does not disclose to the end-buyer that they are a wholesale seller, can the end-buyer still purchase the property? 

A11. Yes. As long as the wholesale seller can convey legal title to the end-buyer, the end-buyer can still choose to close escrow.