All of us have seen the roadside signs offering to buy houses fast, for cash. Many of these solicitations are from Real Estate Wholesalers. Wholesalers enter into purchase contracts with home sellers—sellers who are often elderly, distressed or disadvantaged who may be attempting to sell without the help of a realtor. But the wholesaler-buyer has no intention to purchase the home. Instead, they attempt to find a buyer that will agree to purchase the home for a higher price. If such a buyer can be located, the new buyer’s money funds the purchase. The seller gets the lower price it agreed upon. The new buyer gets the home. And the additional money paid by the new buyer goes to the wholesaler who has had none of its own money invested—not even earnest money in some cases.

It is often easy to recognize a wholesaler contract. Here are the signs:

• The buyer is an investor-usually an LLC.
• There is little earnest money offered. And, often, the agreed earnest money is never deposited with a title company.
• The contract provides that it can be assigned by the buyer/investor.
• The contract provides that, to protect the buyer’s interest, an affidavit or other memorandum of the contract can be recorded. This clouds the seller’s title making it impossible to sell to anyone else.
• The contract form used is often not the standard form used by most real estate agents.
• The buyer offers no proof of funds or pre-approval for a loan.
• The contract may contain disclosure that this is a wholesaling transaction.
• The price offered for the home may be substantially lower than a fair market price.

If no buyer is found within the time allowed by the purchase contract, an attempt may be made to get the seller to agree to an extension of time. But the seller’s agreement is not needed. The wholesaler will have recorded a memorandum of the purchase contract. Now the seller can sell to no one else until this cloud on title is removed. This can be devastating to a seller who must sell quickly because their home is in foreclosure. In some cases, a quiet title action and months of litigation might be needed to clear title. In others, sellers end up selling for a under-market price.

During the last decade or so of increasing real estate prices, wholesaling has grown fast. It promises large returns with no money invested. And there is little risk of loss since most wholesalers organize as LLC’s which limit liability and often have few assets. A money judgement against such an LLC is often uncollectible.

The Arizona Department of Real Estate has received many complaints about this activity. But since wholesalers do not need to be licensed, there has been little that the Department of Real Estate could do. The Arizona legislature addressed the issue on September 24, 2022, when a new law, ARS 44-5101, went into effect. It requires buyers and sellers engaged in wholesaling to disclose the fact that they are acting as a wholesale buyer or seller in any residential real property transaction. Disclosure must be made before the parties enter into any binding agreement. The penalty for failure to disclose can be contract cancellation at any time prior to close of escrow. The full text of the new law is set forth below. This is a help, but it is not as helpful as hoped. Some wholesalers comply with the law, but a homeowner may not understand the disclosure. Some wholesalers ignore the law. Their risk is small. If the deal is cancelled, they move on to the next.

44-5101. Wholesale buyers; wholesale sellers; disclosure; unlawful practice; definitions

• A. Before the parties enter into any binding agreement:
  • A wholesale buyer of residential real property shall disclose in writing to the seller that the buyer is a wholesale buyer.
  • 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.
• 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.
• 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.
• For the purposes of this section:
  • “Residential real property” means real property with fewer than five dwelling units.
  • “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.
  • “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.

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