Wholesaling in Texas Real Estate

Sale and Assignment of Earnest Money Contracts

by David J. Willis J.D., LL.M.


Wholesaling is the term for getting a property under contract and then selling that contract to a real estate investor who typically does fix-up work before re-selling the property at a profit—all within a reasonably brief timeframe. There are, of course, other wholesaling scenarios and contracts may be assigned more than once.

Both the Texas legislature and TREC have moved in recent years toward greater regulation of the business of sale and assignment of earnest money contracts. Current applicable law is discussed in detail below.

Assignability of a Contract

An earnest money contract that is destined to be assigned should expressly state that it is assignable. This obvious first step is often omitted by amateurs.

A common way to list the buyer in paragraph 1 of the TREC contract is (for example) “ABC LLC and/or its assigns.” This helpful but not really sufficient for wholesaling. Time and space permitting, careful lawyers would prefer a more comprehensive provision such as:

It is expressly agreed that this contract may be assigned at any time by Buyer 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 of any further obligations under the contract; (2) to accept the assignee as Buyer; and (3) to timely and without object cooperate in the execution and delivery of closing documents, including a warranty deed, according to the terms of this contract.

Since the available line on the TREC 1-4 form is just too short for this longer and more thorough clause, an investor involved in the business of wholesaling should consider including a custom attorney-drafted special provisions addendum. There is no substitute for such an assignability addendum if there is to be a smooth and successful sale and assignment of the earnest money contract to a substitute buyer.

Even if the contract is expressly designed to be assignable, it is always a good idea to attach the seller-owner’s written consent to any assignment instrument. More on this below.

Two Approaches

There are two main approaches to the business of selling and assigning earnest money contracts.

The First Method: One Step

In the first method, an earnest money contract is sold as a one-time, one-document event that is entirely independent from closing of the sale of the property. In other words, there is no executory due-diligence phase—no gap in time—in anticipation of a later finalization at a future closing. The full consideration is paid now, a final assignment instrument is executed, and the assignor (the original buyer under the contract) leaves the picture permanently.

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

The Second Method: Two Steps

The second approach is more complex. Instead of a one-time, one document event, the assignment process moves forward (or at least should move forward) in several distinct steps:

(1) Agreement to Assign. An interim/executory agreement is executed. This is an agreement to assign the earnest money contract (upon certain terms and conditions) in anticipation of a final assignment that will occur more or less simultaneously with a future closing of the sale of the property. The key drafting point to understand here is that there is major difference between an agreement to assign and the final assignment.

The interim agreement recites contingencies and critical deal points such as whether or not the final assignment of the contract will be made “as is,” in the contract’s present condition, and without representation, warranty, or recourse, express or implied. (The alternative is to include representations and warranties plus a means of recourse if the seller of the property fails to sign over a deed at closing.)

(2) Deposit. As consideration for the agreement to assign, the assignee pays a non-refundable deposit which is less than the full assignment fee that will be due at closing (but will be credited towards it).

(3) Due Diligence by Assignee. The time between execution of the interim agreement and the date of closing of the property sale may be used by the proposed assignee as a due-diligence period. The agreement to assign may contain provisions for accessing information about the contract and the property along with a provision for unilateral termination if the assignee decides not to proceed.

(4) Closing. At the property closing there is a two-step process (or back-to-back closings). In order to wind up the assignment, the contract assignee pays the balance of the assignment fee and refunds the earnest money to the contract assignor as required by the agreement to assign. The assignment should then be finalized by a “Sale and Assignment of Earnest Money Contract.” The assignment process thus concludes. The assignee now “owns” the earnest money contract, which really means that he now stands in the shoes of the buyer for purposes of moving forward with closing of the property sale (conveyance of title by warranty deed).

The obvious advantage to the above approach, at least for the buyer of the contract, is that only a deposit is required to begin the assignment process—not full payment of the entire assignment fee and earnest money refund to the contract assignor. Full payment is not due until closing when it is clear that the seller of the property has appeared and is ready to execute and deliver a warranty deed. The contract assignee thus risks less up-front money by using this approach.

Collapsing the Steps

One often sees an attempt to collapse these steps (in the documentary sense) by means of a single abbreviated and combined instrument that purports to join interim/executory and final assignment provisions within the same instrument. The result is muddled at best, akin to trying to combine an earnest money contract for the sale of property with the actual transfer of title in a deed. These steps are conceptually and transactionally separate, and that separation should be maintained in order to achieve a correct and durable legal outcome.

The details of wholesaling transactions can vary widely. This is an investment arena full of determined DIYers (using junk forms from the Internet that are non-specific to Texas) and many wholesale assignment transactions fail as a result.


Before delving into further practical aspects of the wholesaling process, we should stop and take a look at applicable law.

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:


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

Note that a buyer-assignee of an earnest money contract should probably want the assignment instrument to be recorded. Why? To insure that the contract will not later be sold by an unscrupulous seller-assignor to someone else.


General Features of the Assignment

The assignment instrument is often entitled “Sale and Assignment of Earnest Money Contract” or “Assignment of Contract” or something similar. We will refer to it simply as the assignment.

It goes without saying that the assignment should adequately describe both: (1) the main features of the contract and (2) the underlying real property. In order to make the assignment a complete package, it is good practice to attach a copy of the contract as an exhibit. If there is a lengthy metes and bounds property description (rather than the usual lot and block) then this should be attached as well.

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 buyer-assignee, which requires not only an examination of the terms of the contract itself but also the underlying realty;

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

(3) the inclusion and limitation of representations and warranties by the seller-assignor plus a method of recourse if the property seller fails to perform;

(4) the period during representations and warranties will survive, if at all; and

(5) the requirement that the seller-assignor disclose any material issues, facts, or conditions that could reasonably influence the buyer-assignee’s decision to buy or not buy the contract.

Failure by the seller-assignor to disclose known defects or adverse conditions in either the contract or the underlying realty (if justifiably relied upon by the buyer-assignee) constitutes fraud.

Representations and Warranties by Assignor

An assignment may include extensive representations and warranties, limited reps and warranties, or no reps and warranties at all—in which case the assignment is made entirely “as is” and without recourse against the assignor. It should be obvious that these issues need to be made clear in the instrument, but one often sees assignments that ignore reps and warranties altogether in the interest of “keeping it short.” Internet junk forms are particularly deficient in this respect.

A poorly-written assignment that does not address the full range of reps and warranties (and how they may be limited or excluded) is an engraved invitation to a lawsuit. If this subject is not thoroughly addressed, either or both parties may assume that reps and warranties exist when they do not, or they may later assert that reps and warranties were somehow implied in the course of dealing between the parties. Either outcome can lead to litigation involving a lot of finger-pointing and he-said-she-said allegations. Dodging reps and warranties in the interest of document brevity is amateurish and dangerous. Critical legal issues do not go away merely because they are ignored.

Covenants and Agreements

When it comes to duties and obligations of seller-assignor and buyer-assignee, clarity and express written provisions are important. Nothing oral should be relied upon. Nothing should be assumed or implied. For example, a well-drafted assignment would include agreement by the assignor to promptly deliver the original contract and any related documentation to the assignor. The assignee should agree to be bound by the earnest money contract and perform accordingly as the new buyer thereunder. Both parties should agree to take such other and further action, including the execution and delivery of additional documents, as may be reasonable or necessary to effectuate the assignment.

Recourse in Event the Contract or Closing Fails

As is the case with promissory notes, contracts can be assigned with or without recourse against the assignor. Recourse comes in three varieties: none, full, or limited. No recourse means what it says—if the contract does not close, then the assignee is stuck with a failed contract and is solely responsible for pursuing remedies against the selling property owner. Full recourse means that the buyer-assignee gets to give the contract back to the seller-assignor if the transaction fails to close through no fault of the buyer-assignee. Limited recourse can mean different things, but it falls somewhere between no recourse and full recourse. In any of these cases, the assignment should provide that the availability of recourse—whether none, full, or limited—is circumscribed within a specific time period.

It is often the case that earnest money contracts are assigned without recourse, meaning “as is.” If sale of a contract is to be entirely “as is,” an effective clause for this purpose is essential.

Drafting of an “as is” clause should be carefully done, since the seller-assignor will want not only to disclaim assurances regarding the transferred earnest money contract but also any reps or warranties concerning the condition and value of the underlying real property.

Oral statements should of course be disclaimed.

Express Consent from the Owner of the Property

It is important—vital, in fact—for the buyer-assignee of an earnest money contract to be sure that the property owner consents to the assignment and will honor the buyer-assignee’s status as the new buyer under the contract. Otherwise, the assignee may face a hostile seller at closing who refuses to accept the assignee of the contract as the legitimate buyer of the property.

The cooperation of the property seller should not be simply assumed. After all, the buyer-assignee of the contract does not want to be put in the position of being forced to sue the property owner for specific performance—an expensive event that could easily destroy the profitability of the transaction. Accordingly, the assignment should include owner-consent wording along the following lines:

I/We, the undersigned, am/are listed as Seller in the Contract which is the subject of this Sale and Assignment. I/We give my/our unconditional consent to the sale and assignment of the Contract to the above-named Assignee, and I/we agree to in all respects recognize and cooperate with Assignee as the rightful Buyer under the Contract to purchase the Property.


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.


Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.

Copyright © 2024 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.