Oklahoma HB 1148, which regulates real estate “wholesaling,” goes into effect Nov. 1, 2021. The new law requires so-called wholesalers to hold a state real estate license.
Wholesaling is when someone, typically an unlicensed individual trying to make money in the real estate market, enters a contract to purchase real estate and then immediately attempts to resell, for profit, their interest in that real estate contract to a different purchaser, typically a rental real estate investor, prior to the closing of the sale of the property. The wholesaler usually has no intention of purchasing the property and rarely takes title to the property unless it is a part of a dual closing transaction where the ultimate purchaser is closing the second transaction at the same time as the homeowner is closing the sale with the wholesaler.
One of the problems with wholesaling is that, if the wholesaler is unable to assign the contract to another buyer for a sufficient profit, the wholesaler will typically cancel the contract and the homeowner must start over again selling the house. Because wholesalers typically use custom short form purchase contracts instead of the Oklahoma Real Estate Commission “OREC” form, there is often no or minimal earnest money on deposit to forfeit or other seller protections found in the OREC form.
Prior to this new legislation, wholesalers could publicly market the property as if they owned the property, but it is more often the case that they have a list of regular real estate investors that they offer the contracts to at a markup. This markup profit is a type of real estate commission that will now be regulated by the OREC. This practice is often indistinguishable from the activities an Oklahoma real estate licensee engages in when marketing a property for a seller, yet the wholesaler was not required to hold an Oklahoma real estate license.
An issue that may have to be decided by the courts or OREC regulations is to what extent the new law creates a safe harbor for wholesalers to continue their activities without a license as long as they do not “publicly market for sale an equitable interest in a contract for the purchase of real property between a property owner and a prospective purchaser.” Most wholesalers only public market themselves as the initial purchaser of the real estate. When it comes to the resale of the equitable interest in the real estate contract to a prospective purchaser, this second transaction is usually an unadvertised private sale or assignment with a select list of sophisticated real estate investors.
Also, if a dual closing is set up with a title and closing company familiar with wholesale transactions, there is no actual sale of an equitable interest in the original real estate contract. A double closing AKA “back-to-back” closing, is common when wholesaling houses: a wholesaler will purchase a property, only to resell it immediately without rehabbing it. Double closings are not all that different from two traditional buy and sell transactions; except that they happen at a much faster pace. Two transactions take place in a double closing. The first transaction, not surprisingly, involves a wholesaler and a homeowner. The second transaction will then have the wholesaler immediately resell the recently purchased property to a new buyer who is typically a real estate investor. Each transaction will have its separate escrow and settlement statements as they are two independent transactions. The homeowner may have no knowledge of the terms of the resale transaction. Unlike an assignment or sale of an equitable interest in a contract, a double closing will have the wholesaler take legal title and possession of the property, if only for an instant. As long as the wholesaler does not “publicly market” this second prospective sale, such a transaction may not run afoul of the new law.
The new law is codified in the Oklahoma Real Estate License Code at Title 59 Professions and Occupations 59 O.S. § 858-301 (OSCN 2021),
As of November 1, the regulation:
- “Provides protection to the public and accountability for buyers and sellers in real estate transactions for the largest financial transaction individuals will make.”
- “Requires individuals engaged in wholesale activity to pass national and state real estate license examinations.”
- “Requires individuals engaged in wholesale activity to pass a basic background check and reduces opportunities for harm to the public.”
- “Provides oversight by the Oklahoma Real Estate Commission to investigate consumer complaints at no cost to the public. Provides a free avenue for the public to resolve disputes and claims that otherwise could only be addressed by litigation, which is costly to the public and difficult to resolve.”
- “Allows the Real Estate Commission to implement common-sense regulations via administrative rules for predatory actions as they evolve moving forward.”
- “Requires individuals engaged in wholesale activity to obtain the same amount of continuing education as all real estate licensees. Promotes education, best practices, and conformity with Oklahoma laws and regulations.”
Wholesalers who continue to operate without a license after November 1, 2021, should be aware of the penalties for violations which include, but are not limited to, a fine of up to One Thousand Dollars ($1,000.00), imprisonment in the county jail for up to six (6) months, or both.