If you are a real estate investor or real estate wholesaler, there are new laws that will affect you. Last week, Governor Ducey signed HB 2747 into law and this new law places disclosure requirements on buyers that enter into residential real estate contracts and then assign the contracts to someone else. In short, HB 2747 applies to real estate wholesalers.
Under a typical wholesaling transaction, the real estate wholesaler contracts with a home seller and, thereafter, shops that home around to potential buyers. The wholesaler then assigns the existing real estate contract to one of the buyers. Under this scenario, the wholesaler makes money on the assignment of the contract and never intends to own the home.
Pursuant to the new law, a “Wholesale Buyer” must “disclose in writing to the seller that the buyer is a wholesale buyer.” Similarly, a “Wholesale Seller,” which is ultimately the same party as the wholesale buyer, must “disclose in writing to the buyer that the seller is a wholesale seller that holds an equitable interest in the real property and that the wholesale seller may not be able to convey title to the property.”
If a “Wholesale Buyer” fails to make the disclosures required by HB 2747, “the seller may cancel the contract for sale at any time prior to the close of escrow without penalty and may retain any earnest money paid by the Wholesale Buyer.” In other words, the seller may cancel the purchase contract and retain the earnest money. Notably, if the transaction closes with a contract that does not have HB 2747’s disclosure language, the seller cannot later come back and unwind such a transaction. If a “Wholesale Seller” fails to make the disclosures required by HB 2747, “the buyer may cancel the contract for sale at any time prior to the close of escrow without penalty and shall be refunded all earnest money paid by the buyer.”
This allows the assignee or end buyer to terminate the assignment and receive a return of the earnest money even if it is designated as non-refundable.
Real estate investors/wholesalers should begin the process of updating their contracts in order to comply with HB 2747.
Patrick MacQueen is founding partner of McQueen & Gottlieb, PLC in Phoenix.
