Wholesaling in Texas Real Estate

Wholesaling Terminology

Most real estate instruments and interests can be freely sold and assigned. Wholesaling is the term for getting a property under contract and then selling that contract to a real estate investor who then does fix-up work before re-selling the property at a profit. Contracts may be assigned more than once. Wholesaling of this type is largely a matter of short-term flips rather than long-term holds.

In discussing assignments, there are seller-assignors and buyer-assignees. Technically, it is the seller-assignor who is the wholesaler as that term is commonly used in real estate investing. The owner of the real property is the property seller.

The Interests of the Parties Diverge

The practice of assigning earnest money contracts—including means, methods, and best practices—varies significantly depending on whether one is the seller-assignor (wholesaler) or the buyer-assignee of the contract, even though both parties may fall into the category of real estate investors. In fact, except for the basic transfer clause containing the words sell, assign, and convey, assignment documents for each party can look quite different. There is no set of standard forms in this area. Wholesaling documents that show up in law offices are all over the place in terms of what they look like and say.

The Role of Counsel

Wholesaling is definitely an area where participants are best served if each has its own counsel. Properly assigning a contract is meticulous work. The parties, typically real estate investors, are not equipped (educationally or temperamentally) to deal with the associated legal nuances and complexities. Lawyers get lots of pushback when they try to explain the correct way to assign a real estate instrument or interest—and there is a correct way to do it.

Clients often ask their lawyers to “review” amateur assignment documents prepared by a wholesaler. This poses a challenge to the attorney since much of this documentation is of such low quality that it must be replaced not merely reviewed. This frustrates clients in search of simplicity and low legal fees. “Why can’t this fit on just one-page?” they ask. They have been told at investor seminars that wholesaling is a simple business and lawyers should be avoided at all costs—clearly a self-serving strategy by seminar gurus who peddle their own dumbed-down wholesaling forms that purport to be good in all 50 states (always a giveaway that documentation is deficient).

Organization of this Article

This article is organized as follows:

Part One: Contract Clauses Providing for Assignment

Part Two: Methods of Assigning the Contract

The Agreement to Assign
Due Diligence by the Buyer-Assignee of the Contract
Due Diligence Checklist for Contract Buyers
Recourse against the Seller-Assignor of the Contract
The Final Assignment Instrument at Closing

Part Three: Changing Law Applicable to Wholesaling

PART ONE
CONTRACT CLAUSES PROVIDING FOR ASSIGNMENT

A residential earnest money contract that is destined to be assigned should expressly state that it is assignable. Omitting this step—and assuming that the property seller will simply go along with an assignment—is hazardous. There is no substitute for a clear and unequivocal assignability provision if there is to be a smooth and successful assignment of the contract.

Once the need for an assignability clause is established, the next step is writing it in a way that satisfies both sides. This is challenging since assignability clauses intrinsically favor either the seller-assignor (wholesaler) or the buyer-assignee. There is no escaping this divergence of interests. And of course the property seller has his own set of concerns. Whether they realize or not, they all these parties need legal advice before proceeding.

Assignability Clause Favoring the Wholesaler

A common practice of wholesalers is to list the property buyer as (for example) “ABC LLC and/or its assigns.” This is helpful but not really sufficient for professional-grade wholesaling. A lawyer advising a wholesaler would prefer a more comprehensive provision:

This contract may be unilaterally assigned by Buyer at any time before closing without prior notice to or consent by Seller. Seller unconditionally agrees: (1) that the effect of any such assignment will be to immediately relieve the person presently named as Buyer from any further obligations under the contract; (2) to accept the assignee of the Contract as Buyer under the Contract; (3) to execute a written consent to said assignment upon request; and (4) to timely and without objection cooperate in the closing process. This duty of cooperation includes meeting title company requests and requirements as well as prompt execution and delivery of all reasonable and necessary closing documents, including but not limited to a general warranty deed.

The available space on the TREC contract form is too short for this custom clause. Additionally, the TREC contract is simply not designed to be sold and assigned as an investment tool. It is not written with contract flippers in mind. Therefore a careful investor will want to add a special provisions addendum that is designed to specifically address wholesaling issues.

Assignability Clause Favoring the Property Seller

The property seller has an interest in (1) having a contract with stable terms and (2) not being involuntarily compelled to do business with someone who does not have the capacity or wherewithal to close as the contract provides. For the property seller, a favorable assignability clause might look like the following:

This Contract may be assigned by Buyer only: (1) with prior written consent of Seller, such consent not to be unreasonably withheld; and (2) after the assignee executes the Contract and its Addenda without material change (thus accepting the unconditional obligation of full and timely performance) after which Buyer shall be automatically released from further obligations under the Contract except in the case of actual fraud. Seller may review and approve (and consult legal counsel) in advance as to any assignment-related documents that require Seller’s signature. Seller shall not be required to sign or consent to any assignment-related document or closing document that differs in any material respect from the terms of the Contract or its Addenda, and Seller shall not be in default if Seller declines to do so.

In other words, the property seller wants to ensure that assignment of the contract does not materially alter or affect the terms of sale as stated in the contract.

Consent to Assignment by the Property Seller

Closing a real estate transaction is a cooperative venture that relies upon the ongoing willingness of the parties. Even if a contract is expressly stated to be assignable, it is always a good idea for a wholesaler to obtain a signed “Consent to Assignment of Contract” from the property seller and attach this consent to the contract assignment.

PART TWO
METHODS OF ASSIGNING CONTRACTS

There are two main methods of selling and assigning earnest money contracts. Actually, these two methods apply to the purchase of any real estate-related instrument or interest including contracts, notes, liens, options, etc.

The First Assignment Method: One Step

In the first method, the instrument is sold as a one-time, one-payment, one-document event that is entirely independent from subsequent closing of the sale of the property. There is no executory due-diligence phase to inspect the contract—no gap in time—in anticipation of finalizing the assignment at a future date. The full consideration is paid contemporaneously with execution of the final assignment instrument, and the assignor (the original buyer under the contract) leaves the picture permanently. The deal (or at least the wholesaling portion of it) is done.

Consideration typically consists of an assignment fee plus reimbursement for the down payment previously posted by the contract seller-assignor. The buyer-assignee then assumes the role of buyer under the contract and goes forward to closing. No additional involvement by the wholesaler (now gone) is required.

This one-step method is legally viable (if at all) only when the features of the instrument to be assigned are self-evident, self-contained, and low risk. The idea of using a due-diligence period to take a closer look is therefore believed to be unnecessary. A quick up-front examination of the document is considered sufficient to proceed directly to a full and final assignment. The assignment instrument itself is often one or two pages. At best, this approach is overly simplified. At worst, it is asking for trouble.

Note that parties who agree on this sort of one-step documentation have not eliminated the contractual and transactional considerations that inevitably accompany the purchase and sale of every real estate instrument or interest. The parties have chosen to ignore such factors because they perceive the transaction as “simple.” Much of the motivation in pursuing this approach is based on avoiding lawyers and legal fees.

The Second Assignment Method: Three Steps

What do the following have in common?

a yacht
a commercial land parcel
a masterpiece painting
a nuclear reactor
real estate notes, liens, options, and contracts

The answer is that these are all high-value items that are most often sold and transferred in similar steps:

(1) a non-binding letter of intent (LOI);

(2) an executory agreement (e.g., an earnest money contract) that includes a first installment of earnest money followed by a due diligence inspection-option period, and then deposit of additional earnest money when the inspection period satisfactorily concludes; and

(3) a final sale and assignment instrument (e.g., a deed) that is executed at closing along with payment of the balance of the purchase price.

Why go through these steps? Because it is logical that:

the intention to do something;
the agreement to do something; and
the actual doing of a thing

are conceptually, functionally, and legally separate. In functional terms, the first two actions are executory (preliminary and incomplete) and the last action is executed (finished). Good legal draftsmanship requires that these three steps be clearly delineated and accomplished, one at a time.

Other recommendations worthy of note:

(1) commencing the acquisition process with a non-binding letter of intent is useful in any creative transaction since an LOI is a painless way to determine if the parties truly have an agreement on major deal points. Often they think they do, but do not. Bypassing an LOI is almost always a mistake.

(2) Before buying a real estate instrument of any kind (contract, note, lien, option, etc.) experience and prudence both suggest that a due-diligence or inspection period coupled with an option to terminate is always the best front-end approach.

An Advantage: Breaking up the Consideration

The three-step approach has significant benefits for the buyer-assignee of a contract because it breaks up the payment of consideration into easily-definable, low-risk steps—a small deposit of initial earnest money, a nominal option-inspection fee, a second deposit of funds when the inspection period ends, and then payment of the balance of the purchase price at closing. Risk of loss is significantly minimized this way.

An Error: Collapsing the Steps

Lawyers often see attempts to collapse the wholesaling process by using an abbreviated and combined document that awkwardly bundles interim/executory terms with the language of a final assignment. Even though the process logically involves different steps, this sort of collapsed documentation attempts to cram executory and executed terms into one document—allegedly for the purpose of keeping things simple. The result is an unsatisfactory legal muddle akin to combining an earnest money contract for the sale of realty with a deed transferring title. A due-diligence inspection period coupled with an option to terminate is usually missing. Ordinarily, no sensible buyer of real estate would do that. Neither should an investor-buyer of an earnest money contract.

The collapsed approach is best viewed as a kind of hustle put over on newbie contract buyers by professional contract flippers.

Questions from the Buyer-Assignee

A prospective buyer-assignee of an earnest money contract should have questions. Is the contract duly executed and otherwise valid and assignable? Does the realty exist and is it actually for sale? Does the seller have title? Is the seller alive? Will the seller cooperate in signing a deed at closing?

The response from the flipper of the contract (the wholesaler) is often to instill urgency: “We need your signature by noon tomorrow! Other investors are waiting in line to buy this contract! This is a simple deal! Let’s keep it that way! Nothing to see here! No need to involve a lawyer! Lawyers cost money and kill deals!” This sales pitch is encountered throughout the secondary market for real estate instruments of all kinds, not just earnest money contracts. Newbie investors are usually the target.

A Prudent and Steady Approach

A good real estate attorney will advise his client to slow down and create step-by-step documentation that includes the opportunity for due diligence on both the contract and the underlying realty. As Lincoln said “Nothing of significance is ever lost by taking one’s time.”

The lawyer will explain that certain inescapable legal issues arise every time a real estate instrument or interest of any kind is assigned. These issues should not be glossed over, ignored, or assumed. They do not go away merely because overly-simplified documents are used.

A client in the grip of FOMO may resist legal advice and rush to sign DIY documents or junk forms from the Internet. For professional liability reasons the lawyer should probably let such a client go. Some people are psychologically wired for imprudent and self-destructive behavior, and the lawyer may want to avoid being around when the implosion occurs.

THE AGREEMENT TO ASSIGN

Advisability of an Interim Agreement

An executory “Agreement to Assign” is a preliminary first step that contemplates a future occurrence—namely, the execution of a separate and final “Sale and Assignment.” Breaking the process into these steps is what it takes to do the job prudently and correctly. If a prospective contract buyer-assignee allows the steps to be collapsed or eliminated (in order to meet a rushed deadline or to “keep things simple”) then he does so at his peril.

It is worth observing that institutions that buy and sell real estate instruments in bulk (the high-level professionals in this field) always do so with an adequate due diligence-inspection period and before tendering any serious money.

Key Terms of an Interim Agreement

An interim agreement to assign should: (1) describe the contract, the parties, and relevant dates; (2) describe the underlying real property; and (3) include mention of all major deal points. It should not include actual sale and assignment language. The best practice is to attach copies of the executed final contract and the seller’s disclosure as exhibits. If a recent title commitment is available then that may be attached as well. Such exhibits are always helpful.

Representations, Covenants, and Agreements

Representations and warranties of the parties are an important issue. The agreement to assign should make it clear whether or not the final assignment will be made: (1) “as is,” in the contract’s present condition and without representation, warranty, or recourse (the approach preferred by the wholesaler); or (2) with representations and warranties (full or limited) plus some form of recourse. Survival of representations and warranties should also be addressed and appropriately limited.

As to covenants and agreements, the wholesaler should commit to delivering the original contract and any related documentation to the buyer-assignee at the time the final assignment instrument is executed. The buyer-assignee should agree to be bound by the earnest money contract and perform accordingly (by tendering the purchase price to the property seller at closing). Both parties should agree to take such other and further action, including execution and delivery of additional documents, as may be reasonable or necessary to effectuate the assignment.

Express Consent from the Property Seller

It is important (vital, in fact) for the buyer-assignee of an earnest money contract to insure that the property seller: (1) consents or will consent to the contract assignment; (2) will honor the assignee’s status as the new buyer under the contract; and (3) will then cooperate in executing a deed and other documents at closing. Without an express signed consent, a contract buyer may face a hostile property seller at closing—if the seller shows up at all.

Cooperation from the property seller should never be assumed. The buyer-assignee of the contract does not want to be in the position of suing a property seller for specific performance—an expensive event that would destroy the profitability of the transaction. Accordingly, the agreement to assign should include an express seller consent along the following lines:

I/We, the undersigned, am/are listed as Seller in the Contract which is the subject of the attached Agreement to Assign. I/We give my/our unconditional consent to the sale and assignment of the Contract and all rights therein to the above-named Assignee, and I/we agree in all respects to recognize and cooperate with Assignee as the rightful Buyer under the Contract to purchase the Property. This includes my/our execution and delivery of a general warranty deed to Buyer upon full payment of the Contract consideration.

Recording the Agreement to Assign

There is no requirement that an agreement to assign an earnest money contract be recorded in the real property records. However, the contract buyer may prefer that recordation occurs in order to insure that the contract is not later wholesaled to another investor. This is a world full of fraud and fraudsters so caution is warranted.

DUE DILIGENCE BY THE BUYER-ASSIGNEE OF THE CONTRACT

The prospective buyer-assignee of an earnest money contract should acquire all important and relevant information and documents as early in the process as possible and definitely before any inspection-option period expires. Any reluctance on the part of the wholesaler or the property seller to cooperate should be a red flag.

Due Diligence as to the Contract to be Assigned

The assignee-buyer should insist on a due diligence-inspection period coupled with an unrestricted right to terminate. This is similar to a buyer’s right to terminate before expiration of the option period under a TREC residential contract. It is an opportunity to take a hard look at the contract in order to assess its accuracy, legal validity, and financial soundness. So long as the buyer-assignee does not terminate before the end of the due-diligence period, the buyer-assignee should be required to post additional funds that will be credited toward the total assignment fee at closing.

Due Diligence as to the Real Property

Purchasing an earnest money contract is inextricably linked to the real property. There is no way around this. The value of the contract derives directly from the condition, value, and title status of the underlying property. Accordingly, a prudent buyer will not only perform due diligence on the contract but on the real property as well.

Disclosure by the Wholesaler

An agreement to assign that is favorable to the buyer-assignee requires full disclosure of material facts from the wholesaler, including any known material defect, circumstance, or condition relating either to the contract or the real property that could reasonably affect the decision to buy or not buy the contract. At the very least, the wholesaler should be required to disclose:

(1) known material facts, defects, or adverse circumstances affecting the contract, including its validity, legal effect, enforceability;

(2) known material facts, defects, or adverse circumstances relating to the property, including defects and needed repairs;

(3) the presence on the property of hazardous materials, flood damage, or mold; and

(4) any known defects or issues relating to title, including heirship situations or pending litigation.

Caution to prospective wholesalers: failure by the seller-assignor of a contract to disclose known material facts involving either the contract or the underlying realty may constitute fraud.

DUE-DILIGENCE CHECKLIST FOR CONTRACT BUYERS

The Property Seller

Is the property seller alive?
Is the property seller legally competent?
Has the property seller’s spouse signed off on everything?
Has the property seller given consent in writing to a contract assignment?
If not, is the property seller willing to do so before the end of the inspection period?

The Contract

Is the contract seller in possession of an original contract?
Is the contract fully completed (no blanks) and duly signed by all parties including spouses?
Is the contract a legitimate TREC or TXR contract (with addenda) or is it junk from a seminar or the Internet?
Is a copy of the contract and seller’s disclosure available to be attached as exhibits to the interim agreement?
Was the contract prepared by a professional?
Does the contract appear to be legally valid in all respects?

If an LLC is Involved

Is the LLC’s manager identified in the contract and named as authorized signatory?
Is the LLC in good standing with the state in which it is registered?
Has good standing been confirmed with the secretary of state?

The Property

Does the property exist?
Is the property actually for sale?
What is the present use of the property?
What is the condition of the property?
Have the contract buyer actually laid eyes on the property?
Is a recent inspection report available?
Is a recent seller’s disclosure of property condition available?
Are documents or information available as to any recent repairs or rehab work?
Are there any other documents you should obtain in order to gain information on the property?
If you were investing directly in the property, would you buy it for the price stated?

Property Sales Price

Does the property sales price make sense? In other words, is the underlying transaction sound?
Is a recent appraisal available?
What are comparable properties on the same street selling for?
Is a substantial profit margin realistically available if the contract closes?

Title to the Property

Is a recent title commitment available?
Is the property seller in the contract named in the title commitment as current owner?
Have spousal signatures been obtained in order to wrap up any community property interest?
Do any third parties have an interest in or claim to the property?
If this is an estate, have all possible heirs signed off?

Existing Loans and Liens

Will the contract assignment be done “subject to” existing loans or liens that will not be fully paid off at closing?
If so, have copies of the existing note, deed of trust, and recent loan statement been obtained?
Does the existing deed of trust have a due-on-sale clause?
Are existing loans or liens in arrears? By how much?
Are property taxes current?
Are HOA dues current?

Assignor-Contract Seller

Has the contract seller committed in writing to make full disclosure as to any material fact, defect, or adverse condition that affects either the contract or the property?
Is the contract seller cooperative? Do they appear honest and forthcoming or do they seem to be hiding the ball when it comes to requests for information?
What is the reputation and track record of the contract seller?
Is the contract seller willing to stand behind the contract by making representations and warranties in the final agreement?
Or is assignment of the contract supposed to be “as is” without representation or warranty?
If there will be reps and warranties by the contract seller, will they survive closing? If so, for how long?

Closing and Closing Documents

Will an escrow agent (title company) be used for the final closing?
Will the escrow agent be holding the contract buyer’s deposit?
As to closing documents (particularly the final assignment instrument), who will prepare them?
Will the non-drafting party have input in document preparation?
Will the deed be a general warranty deed or a special warranty deed?
Will there be an opportunity to review and approve closing documents before closing? Even better, before the end if the inspection period?
Does the contract buyer have an “out” if the legal documents presented at closing do not accurately reflect the deal?
If the property is leased to a tenant, will there be an assignment of lease, rents, and security deposit at closing?

Recourse against Contract Seller

Will the contract buyer have recourse against the contract seller if the deal fails to close?
Will there be full recourse, limited recourse, or no recourse?
What are the precise terms of any recourse, refund, or buyback mechanism?
How long does recourse last?
Is recourse available if the property seller fails to appear at closing or refuses to sign a deed?
If that occurs, will you get your full deposit back?

Overview

Has all relevant information and documentation been obtained and examined?
Has the contract buyer fully evaluated and assessed the legality, feasibility, suitability, and financial merits of the proposed assignment?
Does the deal make common sense?
Is there enough prospective profit margin plus a decent buffer for unforeseeable events?
What does your attorney think of the deal?

RECOURSE AGAINST THE WHOLESALER

Recourse and Remedies for the Contract Buyer

What recourse will there be (if any) against the wholesaler if the transaction fails? What if the property owner declines to appear at closing or sign a deed? What happens if the spouse of the property seller has a change of heart and refuses to sign? Property sellers breach contracts all the time, which is why the courthouse is busy with such cases. If default occurs, will the deposit and assignment fee be refunded?

The issue of recourse and remedies is thus inescapable when drafting good assignment documents. Generally, assignments may be written with recourse or without recourse by the buyer-assignee against the seller-assignor (wholesaler). Recourse comes in three varieties: none, full, or limited.

No recourse means what it says—if the contract is deficient or does not close, then the buyer-assignee is stuck with a failed contract and is solely responsible for pursuing remedies against the property seller. This is the “as is” with all faults scenario.

Full recourse means that the buyer-assignee gets to give the contract back to the wholesaler and obtain a full or partial refund if the transaction fails to close through no fault of the buyer-assignee.

Limited recourse is a flexible and highly variable category falling somewhere between no recourse and full recourse.

In all of these cases, the assignment documentation should expressly address the availability of recourse—whether none, full, or limited—and specify the time period during which recourse will be available. Recourse is generally time-limited (e.g., 30 to 90 days after closing).

Sale and Assignment of a Contract “As-Is”

Earnest money contracts may be assigned “as is,” with all faults and no recourse. Wholesalers clearly prefer this. If sale of a contract is to be sold entirely “as is” an effective clause for this purpose must be included. Drafting an “as is” clause should be done carefully since the wholesaler should want not only to disclaim assurances regarding the contract but also any representations or warranties concerning the condition or value of the underlying real property. Oral statements should of course be disclaimed.

THE FINAL ASSIGNMENT INSTRUMENT AT CLOSING

To conclude the wholesaling process, a final assignment instrument (typically entitled “Sale and Assignment of Earnest Money Contract”) should be executed in order to wrap up the assignment process. The buyer-assignee pays the balance of the assignment fee with credit for the deposit money paid at the interim stage. The wholesaler usually receives a credit for earnest money previously paid to the property seller.

Similarity to Sale of a Note

Assignment of a contract is comparable to assigning a promissory note since many of the same principles apply. The main difference is that earnest money contracts, unlike notes, are not negotiable instruments subject to the Uniform Commercial Code. Even so, these two types of assignments share a number of characteristics:

(1) the advisability of thorough due diligence by the prospective assignee (including an inspection period) which requires not only an examination of the contract but also aspects of the underlying realty;

(2) the preference on the part of the assignor to make the transfer “as is” and without recourse;

(3) the inclusion of a method of recourse if closing fails; and

(4) the survival (if at all) of representations and warranties made by the seller-assignor.

PART THREE
CHANGING LAW APPLICABLE TO WHOLESALING

Occupations Code Licensing Requirement

Is a real estate broker’s license required in order to engage in wholesaling? Section 1101.002.A of the Occupations Code answers this question with a definite maybe depending on how one defines the brokerage of real estate. Chapter 1101 states that a real estate 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 one of the following acts . . . deals in options on real estate, including buying, selling, or offering to buy or sell options on real estate. . . .” An executed earnest money contract can be considered a kind of option to buy real estate. It definitely represents an interest in real estate. So if one is buying or selling such contracts (engaging in wholesaling) then a broker’s license may be required. More on this below.

Occupations Code Disclosure Requirement

Section 1101.0045 of the Occupations Code offers a loophole for wholesalers who are working without a broker’s license, but only so long as they make express disclosure that what they are selling is merely an equitable interest—as opposed to a legal interest. The difference can be challenging for non-lawyers to understand; however, an equitable interest means an interest that is less tangible, less certain, and more contingent than a solid and present legal interest. The statute reads:

OCC Sec. 1101.0045. Equitable Interests in Real Property

(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 in writing the nature of the equitable interest to any seller or 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 as provided by Subsection (a)(2) is engaging in real estate brokerage.

OCC Section 1101.0045 wants wholesalers to make full disclosure, which means making it clear that what is being transferred is not the property itself but only an equitable right to acquire the property subject to the terms and conditions of the contract being assigned. Accordingly, wholesalers who assign contracts are not illegally acting as real estate brokers if they fully disclose the nature of the interest they are selling. The difference between a broker’s license being required or not required comes down to disclosure.

Texas Administrative Code Disclosure Requirement

TAC contains TREC rules applicable to real estate license holders. Rule 535.6 states:

22 TAC Sec. [TREC Rule] 535.6. Equitable Interests in Real Property

(a) A person may acquire an option or enter into a contract to purchase real property and then sell or offer to sell the option or assign or offer to assign the interest in the contract without having a real estate license 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 their 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.

(c) A license holder who is engaging in real estate brokerage by selling or buying or offering to sell or buy an option or assigning or offering to assign an interest in a contract to purchase real property must disclose to any potential seller or buyer that the principal is selling or buying an option or assigning an interest in a contract and does not have legal title to the real property.

(d) A license holder acting on his or her own behalf or in a capacity described by §535.144(a) who is selling an option or assigning an interest in a contract to purchase real property must disclose to any potential buyer that the license holder is selling an option or assigning an interest in a contract and that the license holder does not have legal title to the real property.

This TREC rule echoes a theme found in the Real Estate License Act, the Property Code, and case law: full disclosure is always the safer route whether one is a license holder or not.

Property Code Disclosure Requirements

The Property Code sets out two disclosure requirements (in Sections 5.0205 and 5.086) that apply in the context of the sale and assignment of earnest money contracts:

Prop. Code Sec. 5.0205. Equitable Interest Disclosure

Before entering into a contract to sell an option or assign an interest in a contract to purchase real property, a person must disclose in writing to (1) any potential buyer that the person is selling only an option or assigning an interest in a contract and the person does not have legal title to the real property; and (2) [to] the owner of the real property that the person intends to sell an option or assign an interest in a contract.

This is the second disclosure requirement:

Prop. Code Sec. 5.086. 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.

These sections of the Property Code apply to everyone whether licensed or not. Every seller-assignor (wholesaler) must comply.

Reading the above statutes together, it should be clear that wholesaling without providing the required equitable interest disclosure (to the property owner and the buyer-assignee of the contract) can get an investor in double trouble, both for violating the Property Code and potentially for brokering real estate without a license.

Equitable Interest Disclosure

The following proposed wording at or near the top of the contract assignment would likely satisfy equitable interest disclosure requirements:

EQUITABLE INTEREST DISCLOSURE PURSUANT TO TEXAS PROPERTY CODE SECTIONS 5.0205 AND 5.086: THIS INSTRUMENT REPRESENTS ONLY AN OPTION TO PURCHASE REAL PROPERTY OR AN ASSIGNMENT OF AN INTEREST IN REAL PROPERTY. IT IS NOT A SALE OF THE PROPERTY OR A TRANSFER OF TITLE TO THE PROPERTY. ASSIGNOR DOES NOT HAVE LEGAL TITLE TO THE PROPERTY. ASSIGNOR IS NOT A REAL ESTATE BROKER AND HAS NOT GIVEN ASSIGNEE REAL ESTATE ADVICE. CONSULT AN ATTORNEY PRIOR TO EXECUTING THIS DOCUMENT IF YOU DO NOT UNDERSTAND IT.

The disclosure is probably best inserted beneath the customary notice of confidentiality rights that is required by Texas county clerks for recordable instruments.

The equitable interest disclosure requirement of the Property Code could be the beginning of a future regulatory scheme for the wholesaling of earnest money contracts. Abuses and mishaps in this area make news from time to time, so Texas legislatures may decide to build on existing disclosure requirements and expand beyond them, just as occurred in the case of executory contracts in 2005. The pressure for regulation may also increase as cases appear that seek to bring wholesaling within the reach of the Deceptive Trade Practices Act.

CONCLUSION

The details of wholesaling transactions vary widely. This is an investment arena full of determined DIYers who often use seminar forms and junk documents from the Internet. Such documents ignore key terms that should be addressed in any assignment of a real estate instrument or interest. Overly-brief or collapsed assignment documentation that fails to address the full range of legal issues is an invitation to a lawsuit. Such issues do not go away merely because they are ignored. Defaults and litigation are common results.