If your real estate investor business includes wholesaling, assignments, and double closes, you need to know how you will be impacted by Texas Senate Bill 2212 after September 1, 2017.
Perhaps you have been helping buyers who have experienced financial struggles, divorce, the need to relocate for business, or other matters by purchasing their properties below market value and “assigning” your purchase rights to another person. It’s done every day in Texas. Everyone wins.
Will You be able to Continue Using This and Related Real Estate Investment Strategies?
Texas Senate Bill 2212, which was enacted in the recent legislative session, effectively changes the way wholesale properties are to be advertised and sold. Specifically, the bill amends section 1101 of the Texas Occupations Code to add a new Section 1101.0045 and adds a new Section 5.086 to the Texas Property Code. The new statute takes effect September 1, 2017.
New Section 1101.0045
“(a) A person may acquire an option or an interest in a contract to purchase real property and then sell or offer to sell the option or assign or offer to assign the contract without holding a license issued under this chapter IF THE PERSON:
“(1) Does not use the option or contract to purchase to engage in REAL ESTATE BROKERAGE; AND
“(2) Discloses the nature of the equitable interest to any potential buyer.
“(b) A person selling or offering to sell an option or assigning or offering to assign an interest in a contract to purchase real property without disclosing the nature of that interest to a potential buyer IS ENGAGING IN REAL ESTATE BROKERAGE.”1
New Section 5.086 to Texas Property Code
“EQUITABLE INTEREST DISCLOSURE”
“Before entering into a contract, a person selling an option or assigning an interest in a contract to purchase real property must disclose to any potential buyer that the person is selling only an option or assigning an interest in a contract and that the person does not have legal title to the real property.”1
What is “Real Estate Brokerage?”
The Real Estate License Act that took effect June 1, 2003, defines what acts constitute “real estate brokerage.” Specifically, a “Broker” means a person who, in exchange for a commission or OTHER VALUABLE CONSIDERATION, or with the expectation of receiving a commission OR OTHER VALUABLE CONSIDERATION, performs for another person of the following acts:
1 | Sells, exchanges, purchases or leases real estate;
2 | Offers to sell, exchange, purchase or lease real estate;
3 | negotiates or attempts to negotiate the listing, sale exchange, purchase or lease of real estate;
4 | Lists or offers, attempts, or agrees to list real estate for sale, lease or exchange;
5 | Auctions or offers or offers, attempts or agrees to auction real estate;
6 | Deals in option on real estate, including a lease to purchase or buying, selling or offering to buy or sell options on real estate;
7 | Aids or offers or attempts to aid in locating or obtaining real estate for purchase or lease.2
What is the Effect on Wholesale (Assignment) Transactions?
1 | Must disclose in any advertising to buyers that the wholesaler does not own legal title but only equitable title as buyer under a contract;
2 | Should offer to sell only the contract, not the property for a designated Assignment Fee price;
3 | Assignment Contracts will need to be amended to specify that the wholesaler is only offering an assignment fee for a set fee; and
4 | A new disclosure probably should be added to the closing documents for a buyer to sign at closing acknowledging that they were advised that the wholesaler did not own the property and they were aware of the nature of their interest.
Possible Examples of Advertising Dos and Don’ts
“973 Smith Street for Sale – $100,000”
Constitutes real estate brokerage pursuant to the Occupations Code – Offering the underlying real estate for sale.
“Assignment contract for real property at 973 Smith. Assignment fee of $10,000 payable to XYZ Wholesaler”
Should comply with the new Property Code provision and does not constitute real estate brokerage as it does not market the underlying real estate.
Will This Effect Double Close Transactions?
Although not directly addressed by the new law, a wholesaler could have an issue on a double close transaction as well.
In particular the wholesaler would still would have to be careful in advertising a property that they do not own. Doing so could cause the advertising to fall within the definition of real estate brokerage.
One fix could be to just add in advertising:
“Under contract – offering 973 Smith for $100,000 subject to XYZ Wholesaler’s closing on the purchase”
Penalties for Noncompliance
Section 1101.758 Texas Occupations Code
(a) A Person commits an offense if the person acts as a broker or sale agent under this Chapter without holding a certificate.
(b) An offense under this Section is a Class A Misdemeanor.
This would be a Class A misdemeanor for EACH OFFENSE. Multiple Class A Misdemeanors can result in a Felony Charge.
In addition, the Occupations Code provides for a private cause of action for violations such as receiving consideration as a result of acting as a broker. The aggrieved person may receive a penalty of not less than the amount of money received or more than three times the amount received by the violator.3
Wholesaling in Texas can be a lucrative endeavor. However, under this new law, changes are going to have to be made in the way wholesale investors market their properties. Once the law goes into effect in September 2017, we will see how this new law is enforced and investors will need to adjust their behavior accordingly.
1Texas Senate Bill 2212. https://legiscan.com/TX/text/SB2212/id/1557149. Retrieved July 25, 2017
2 Texas Real Estate License Act. http://www.statutes.legis.state.tx.us/Docs/OC/htm/OC.1101.htm. Retrieved August 3, 2017.
3 Texas Occupations Code. http://www.statutes.legis.state.tx.us/?link=OC. Retrieved August 3, 2017.
Gaylene Rogers Lonergan and Lonergan Law Firm, PLLC, 2017. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. The Lonergan Law Firm, PLLC, will represent you only after being retained and that agreement is made in writing.