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.