Only some wholesaling activities are legal in Oklahoma. The Oklahoma Predatory Real Estate Wholesaler Act (the “Wholesaler Act”) prohibits many wholesaling activities by banning public marketing prior to closing. To avoid fines of up to $5,000 per occurrence and possible imprisonment, make sure you understand the laws explained in this article.
What is “wholesaling real estate” under Oklahoma law?
Usually, wholesaling refers to the practice of entering a contract to buy real estate and then selling the contractual rights in exchange for a wholesaling fee. In legal terms, this is simply an assignment of contract. However, different types of wholesaling are treated differently under Oklahoma’s Wholesaler Act.
The internet offers many conflicting definitions for wholesaling. Much of the confusion results from the fact that there are two fundamentally different approaches to wholesaling, each of which is explained below.
Wholesaling Approach #1: Selling the Contract
In this situation, the wholesaler never intends to close on the property (and probably does not have the ability to close). The wholesaler places the property under contract, knowing that the deal will never close unless he finds an end buyer to purchase his contractual rights and then close on the property. Then, the wholesaler markets the property publicly to find an end buyer.
At the time of marketing to an end buyer, the wholesaler does not own the property. All he owns is an “equitable interest” in the property based upon his contract right to purchase the property. The wholesaler never buys or sells a property. He buys and sells a contract. I’ll refer to this approach as “Selling the Contract.“
Wholesaling Approach #2: Re-Selling the Property
In contrast, some wholesalers enter into purchase contracts having both the intent and the ability to close on the property. They buy the property and take record title ownership. Then, re-sell the property at a profit. Sometimes, they re-sell the property on the very same day. Other times, they re-sell the property months or years later. This approach is sometimes referred to as whole-tailing, but I will refer to it simply as “Re-Selling the Property.“
The confusing and critical part of this discussion involves the timing of public marketing. Exactly when does the wholesaler publicly market the property? Normally, wholesalers who are Re-Selling the Property have the intent and the ability to close on the property at the agreed price, making them fundamentally different than those wholesalers who are merely Selling the Contract. However, even wholesalers who are Re-Selling the Property could be at risk of violating the Wholesaler Act if they publicly market the property before closing on it.
Which type of wholesaling is illegal in Oklahoma?
In general, Selling the Contract (as defined above) is an illegal form of wholesaling in Oklahoma if performed without a license. Under 53 Oklahoma Statute Section 858-301, anyone who “publicly markets for sale an equitable interest in a contract” is deemed to be acting as a real estate licensee. Before closing, the wholesaler owns nothing but contractual rights. These contractual rights are referred to as “an equitable interest in a contract” in the Wholesaler Act. Wholesalers who are Selling the Contract without a license are violating the Wholesaler Act because all they own is an “equitable interest in the contract.” This “equitable interest” is the only thing they can possibly market for public sale, placing them squarely within the danger zone of the Wholesaler Act.
Which type of wholesaling is legal in Oklahoma?
Re-Selling the Property (as defined above) is allowed under the exception to the Wholesaler Act, which states that the act is not intended to “prevent any person…from acquiring real estate for its own use.” As long as the wholesaler does not publicly market the property before closing on it, an unlicensed wholesaler can engage in Re-Selling the Property without violating the Wholesaler Act.
In other words, you don’t need a real estate license to buy and sell real estate on your own behalf. But if you publicly market the real estate before closing on it, then the Wholesaler Act assumes you are not buying it on your own behalf. The timing of marketing remains critical. Even if the wholesaler intends to close on the property, he still owns nothing but an “equitable interest in the contract” until closing actually occurs. So, to stay on the safest side of the Wholesaler Act, the wholesaler should refrain from public marketing until after closing.
What are the penalties for illegal wholesaling in Oklahoma?
The Wholesaler Act basically pulls wholesaling into the definition of licensed real estate activities. So, illegal wholesaling presumably carries the same penalties as selling real estate without a license, as defined in 59 Oklahoma Statute Section 858-401. Under sub-section A, penalties can include up to 6 months in jail. Under sub-section B, penalties can include fines of up to $5,000 per violation.
There is Room for Interpretation
The Wholesaler Act was passed only recently, so the exact application and scope of this legislation remains unclear. As with any new statute, clarity will increase with time as courts begin to interpret and apply the new rules. For that reason, do not assume that the interpretation of this article is 100% ironclad. This article is based on my analysis of the law as it currently exists, and my interpretation is subject to change.