Wholesaling in Oklahoma

In the ever-changing landscape of real estate, wholesaling has become a popular strategy amongst investors. However, with the passage of the Oklahoma Predatory Real Estate Wholesaler Prohibition Act, wholesale investors must know the basics, the new licensure requirements, and the essential documents to navigate the process of wholesaling legally and effectively.

What is wholesaling? How do you wholesale?

A wholesale transaction is a real estate investing method that involves three parties (seller, wholesaler, and buyer) instead of the normal two parties (seller and buyer). The seller is ideally motivated to sell quickly and willing to negotiate on price in order finalize the sale quickly. This allows the wholesaler to step in and act as an intermediary between the seller and the ultimate buyer of the property. After the wholesaler has secured the property under contract with the seller, they seek and find available buyers. The process ends with the wholesaler assigning their interest in and under the original purchase contract to the end buyer for a profit, and the buyer stepping into the shoes of the wholesaler and closing the transaction with the seller.

The goal of the wholesaler is to make a profit by securing a purchase contract on a property for a favorable price, then transferring/assigning their rights in the contract to the end buyer for a higher price. The practice is most common with residential, rather than commercial or industrial properties.

Key Steps to Wholesaling in Oklahoma

1. Finding Motivated Sellers. The wholesaling practice requires the wholesaler to find sellers that are eager to sell quickly and willing to negotiate on the price of the property. This requires a level of marketing on the part of the wholesaler, which is typically done through networking, mailing campaigns, and social media.
2. Contracting with the Seller. After finding a willing seller and negotiating the purchase price, the wholesaler and the seller then enter into a purchase and sale agreement (PSA), also known as a purchase contract. Under the assignment method, the PSA must contain an assignment clause which allows the wholesaler to assign the contract to another buyer without getting additional written permission from the seller, as this is the crux of the entire strategy.
3. Marketing the Property to Potential Buyers. Once the contract is in place, wholesalers need to market the property to potential buyers. It is common for wholesalers to have “private” lists of consistent buyers, like investment firms or private money investors, in order to guarantee a quick sale.
4. Assigning the Contract. This is the critical piece for wholesalers in order to profit from the transaction. The wholesaler will assign their rights in the PSA to the end buyer, who will complete the transaction closing and receive title from the seller. Upon assignment or at closing, the wholesaler will receive a fee for facilitating the deal, which will be the difference of the original purchase price and the final sale price.

Two Most Common Wholesaling Structures: Assignment and Double-Close

There are two common wholesale transaction structures: the assignment method and the double-close method:

Assignment Method: The assignment method follows the typical wholesale process: seller and wholesaler agree on a PSA, the wholesaler assigns the “buyer’s” PSA rights to an end buyer, who stands in the shoes of the wholesaler and ultimately takes title to the property.

Double-Close Method: The double-close method can be used by wholesalers that prefer to not assign the PSA or are unable to attain the unilateral right to assign. Through this method, the wholesaler actually closes the purchase of the property from the seller, and – on the same day and at the same title company or attorney’s office – will act as the seller to an end buyer.

Key Documents in Wholesaling

No matter which wholesale method is used, the (1) Purchase and Sale Agreement and the (2) Assignment Contract/Document are the two most important legal documents.

Purchase and Sale Agreement

An effectively drafted PSA is the cornerstone of all wholesaling. However, unlike a majority of standard real estate agreements, a wholesale PSA should contain:

1. Assignment Terms. Wholesalers using the assignment method must have contract language that allows the wholesaler to assign their rights under and to the contract to the future buyer without approval or feedback from the seller.
2. Timing of Closing and Inspection Period. The wholesale transaction requires a long enough inspection period to gather potential end buyers and properly complete their own inspections. However, this inspection period cannot be so long that it lapses into the time period where the final buyer takes Assignment, otherwise the final buyer could conduct their own independent inspections and ultimately reject the deal, potentially leaving the wholesaler left to (a) terminate the PSA and lose the earnest money, or (b) close the purchase as originally contracted.
3. Taking As-Is. This term not only reduces the assumption of responsibility for costs of repairs, but it also simplifies and streamlines the entire transaction. It’s highly appealing to more distressed sellers, while also removing some of the liability of the wholesaler if there are damaged conditions discovered later.

Assignment Contract, or Assignment of Purchase and Sale Agreement

When using the assignment method, the assignment contract, or assignment agreement, is just as important as the PSA. Without a formal document assigning the rights of the wholesaler to and under the original PSA to the end buyer, the wholesaler remains liable for the original purchase price and closing obligation. This document requires the acknowledgement of the release of the contract from the assignor to the assignee, complete with signatures from both parties.

2021 Law Changes: Oklahoma Predatory Real Estate Wholesaler Prohibition Act

In 2020, the Oklahoma legislature passed HB3104, otherwise known as the Predatory Real Estate Wholesaler Prohibition Act. The goal of this law was to put wholesalers under the same code of ethics as real estate agents within the state. As of November 1, 2021, all individuals choosing to conduct business through wholesaling are required to obtain a real estate license and abide by the Oklahoma Real Estate License Code and Administrative Rules. Without a valid OREC license, it is illegal to wholesale real estate in the state of Oklahoma. This new requirement, though not an extreme barrier, is necessary knowledge to have for those looking to engage in the real estate market through wholesaling in the state.

Why is a license required by law? Under the Oklahoma Real Estate License Code and Administrative Rules, it is unlawful to list, sell or offer to sell, buy or offer to buy any real estate… unless you are a licensed agent. The common work-around practice, which has not been conclusively litigated in Oklahoma as a permissible method at the time this article was published, is to disburse information about a wholesale property to a “private” list of potential buyers; this approach carries legal risk and runs counter to the intent of the Wholesaler Prohibition Act, as the Act effectively bans public marketing of a property for purchase or sale unless the individual marketing the property owns the real estate or has a proper license.

Ready, Willing, and Able to Close

An additional concern with wholesaling practices are the wholesaler’s intent and ability to actually close a transaction when signing a PSA. One issue with this method is that some wholesalers get a property under contract with the intent to terminate the contract if they cannot find a suitable end buyer; from a legal perspective, this would mean the wholesaler did not have the requisite intent to sufficiently bind the seller/property under an enforceable PSA.

Oklahoma Wholesale Real Estate Attorneys

Wholesaling is on the rise in Oklahoma. Prospective wholesalers should protect themselves by understanding and complying with Oklahoma licensure requirements and local practices for wholesale investing. Work with the experienced and trusted real estate legal counsel at Avenue Legal Group to review your PSA and assignment documents before beginning your wholesale practice, troubleshoot a wholesale dispute, or other help with your real estate investment needs.