Monday, July 3, 2017

Clarifying SB 2212: TREC’s new Rule on Wholesaling

Last week, the social media boards were a flurry of discussion as a result of an email sent out by TREC to licensed agents regarding a new bill recently signed by the governor directly related to wholesaling. While titled “Sale of Equitable Interests in Real Estate Clarified” it seemed to do more to create confusion and concern than clarify the new TREC rule.

Here is what the body of the email said:
SB 2212 amends Chapter 1101 to codify the clarifying changes to TREC rules regarding sale of certain equitable interests in real property. 
Just like the rule, this statutory change clarifies that a person selling or offering to sell an option or assigning an interest in a contract to purchase real property must accurately disclose to potential buyers the nature of the interest offered. If a person offers a property for sale when the person does not own the property, that person is engaged in brokerage and must be licensed to do so. This is the current law. 
If a person offers to sell an option or assign an interest in a contract on a property, the person must accurately describe the interest being offered.  The same requirement for accuracy is added in the Property Code. The practice of “wholesaling” remains legal if these “truth in advertising” rules are adhered to. 
They further discussed the new rule in their Legislative Update:

One person thought that your profit had to be disclosed and another wondered if a double closing would mean they could avoid the requirement. Also, if an investor wholesales a property does that mean he is improperly practicing real estate brokerage?

I decided to call the TAR Legal Hotline to get clarification from their attorneys. Here’s what I found out:

·      The rule requires that a person advertising or offering to sale an equitable or contractual interest in the party must disclose this to the buyer.
·      TREC’s main concern is that the end buyer be aware that it is a wholesale transaction.
·      Disclosure to the homeowner/seller is NOT required.
·      There is no limit to how many transactions a wholesaler can perform as long as the disclosure is made to the end buyer.
·      There is no guidance on preferred language or placement of the disclosure. The TAR attorney agreed that Special Provisions would likely be the most appropriate place.
·      Contract language “and/or assigns” is still not required as the contract is still assignable unless it specifically states that it is not assignable.
·      A licensed agent may still act as a principle and wholesale properties as long as the proper disclosures (agency status and contractual interest) are made.

As we chatted, an interesting line of conversation began. In seeking clarifications on how the new rule would impact Agents/Brokers the TAR attorney stated that an agent CAN represent a wholesaler in the sale of their equitable/contractual interest as long as the same disclosure is made to the end buyer. He further stated that, under TREC rules, there is nothing indicating that an agent cannot advertise the offering on the MLS.  This got my attention and I inquired further. He stated that a listing agreement would need to be made between the seller of the interest and the broker and that, if it would be advertised on the MLS, permission would need to be given by the current homeowner to do so.

Previously, my understanding from the boards is that they do not allow the placement of wholesales on the MLS because their rules require a listing agreement between the homeowner and the Broker in order for a property to be listed on the MLS.  I decided to give ABOR a call to confirm that was still the case. After utterly confusing the first person who answered my call and being connected to the MLS supervisor I asked again. I then had to educate the MLS supervisor on what is “wholesaling”.  What a perfect example of how out of touch the traditional Realtor world is with creative and investment real estate!

Once he understood the question he stated that no, it is not allowable to place wholesale properties on the MLS. I further inquired based on what? Was it stated in ABOR rules and regulations or other written policies? He answered that it was based on “general business practice” but could not tell me where the rule was written.

He later emailed: MLS Rule 2.2 states that the MLS is not required to accept every type of listing. Most listings are an exclusive right to sell which contains a warranty that the seller has title to the property. Therefore, under rule 2.8 Right to Reject, we have historically rejected listings that only have an option to purchase the property.

I will continue the conversation with ABOR and Stan about this.

In the meantime, here is the final take away: Beginning September 1st, if you are wholesaling, be sure to disclose that you are selling a contractual interest in a property.

Thursday, June 1, 2017

Lesson's Learned and Shared

As your Broker, it’s always my goal to advocate for my agents whether they are having a challenge in an agency situation or as an investor buyer or seller. Sometimes my agents are in the right and I can help them navigate a tough situation for a positive outcome.  However, sometimes these issues turn into hard, but important, lessons learned. Elliot Grochel, Agent-Investor in San Antonio, recently had to suffer through one of those hard lessons.

Elliot (who gave me permission to tell you his name and his story) called me a few weeks ago with a frustrating situation. He had a contract on a listed home that he was trying desperately to close on.

All was moving along smoothly until the appraisal came in low. The seller refused to budge on the sales price so Elliot started looking for alternatives. He could get a different loan product but that was going to take some time and he would miss his closing date. The seller offered to  take a 2nd lien for the difference and spent several days negotiating back and forth with the seller until an agreement, via email, was made.

Because Elliot thought the seller was working with him in good faith to find a solution he did not terminate the contract and kept moving forward.

Then… the seller changed gears. He no longer wanted to provide the second lien. Elliot scrambled to get a new loan that would allow him to purchase the property but at this point he has gone past his financing option (although he did give notice via email within the he allotted time period that the financing was not approved) and he did not close on the scheduled closing date. The seller declined to extend the closing date and went under contact with another buyer.

Elliot, feeling like he had been played by the seller who acted as if he was going to go forward with the contract only to run out the clock, went looking for help. Despite the advice he got from me, Dan Burke and Kelly Toney, a StepStone Associate Broker, the deal died and Elliot is still trying to recoup his earnest money.

There were a few ways this deal went sideways and Elliot was generous enough to let us share his story so you can avoid the same issues.

From the broker perspective, what left Elliot at a disadvantage, was not getting the proper paperwork executed which would have protected his position. While he did send over contract amendments the seller refused to sign any.  At the time his financing fell through, an amendment to the contract either changing the financing type and/or the financing timeline, the closing date or a notice of termination of contract would have put Elliot in a better position. However, Elliot, being a good guy, expected that because the negotiations continued that the seller would move forward in good faith.

Once Elliot was unable to close on the scheduled closing date, without an amendment, he had failed to perform and the seller was free to contract with someone else.

I asked Elliot for his take away’s to share with you. This is what he added:

  • Be prepared for appraisal to come in lower than sales price. If you still think the deal is good, you will have to cover the additional amount out of pocket.
  • If seller then offers to finance the additional amount over appraisal on a 2nd lien note, be prepared to have them back out (keep going through with traditional financing if you still intend to purchase as a backup plan, so you don't lose time on closing)
  • When you send an amendment to extend the closing date, note in "other modifications" that your third party financing date changes with the new closing date, to give you additional protection. If not, you may extend closing but your third party financing is not specifically connected to the closing date; only to the original executed contract date.
  • Make sure before you send any contracts/amendments, that your lender can close within the timeframe provided. If the seller gets cold feet, they can essentially stall you while you run out of time to close. They may not work with you to give the lender additional time for underwriting!

We’ve all heard the adage “Buyers are Liars and Sellers are Worse”. No matter how nice, friendly or accommodating a party in the transaction seems to be ALWAYS be proactive with your contract documents to make sure you and your position are protected.

Thanks to Elliot for sharing his grief with us so we can be more alert to protecting ourselves!