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. The public voiced concerns over a lack of disclosure identifying the wholesaler’s status, predatory wholesalers, an increased number of defaults/cancellations by wholesalers, and a lack of knowledge or understanding of the wholesaling business.

This led to confusion and frustration by Sellers who believed they were being taken advantage of when they learnedthat a wholesale buyer was assigning their equitable interest in the property to an end-buyer and profiting monetarily from that assignment at close of escrow. Additionally, many wholesalers never intended 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.

As a means to alleviate misunderstanding between the public and wholesalers, A.R.S.§ 44-5101 was enacted to require wholesalers to disclosure their wholesaler status in writing PRIOR to entering into a binding agreement.  To assist in the compliance for written disclosure, the Arizona REALTORS® Addition Clause Addendum (ACA) incorporates a section for wholesaler status disclosure.

A.R.S.§ 44-5101 states: 

A. 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 law require of the wholesale buyer?  

A2. The law requires the wholesale buyer to 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 law require of the wholesale seller? 

A3. The 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 legal title, and may therefore be unable to convey legal 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 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 disclosure into the Additional Terms and Conditions section of the purchase contract or use of the Arizona REALTORS® Additional Clause Addendum before conveying their offer; or (iii) inserting the required disclosure into a counteroffer before it is conveyed. 

Q5.  If I am a wholesale buyer and a real estate licensee, how do I comply with the 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 also 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 also 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. The law does not require the seller to wait to see if the wholesale buyer can close escrow.  Rather, the law allows the seller to immediately cancel the purchase contract and retain the wholesale buyer’s earnest money deposit.  

Q9. Assume a wholesale buyer timely makes the required disclosure and assigns 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 purchase 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 purchase 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.   

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