Arkansas Real Estate Commission views on wholesaling in Arkansas

[Mark Rogers]

The Arkansas Real Estate Commission (AREC) discussed real estate investing and unlicensed real estate activity at its monthly meeting this morning.  AREC expressed a desire to protect unsavvy, sometimes desperate sellers from savvy, predatory, unlicensed wholesalers. It is a Class D Felony to engage in unlicensed real estate activity in Arkansas. Unlicensed real estate activity is broadly defined to cover most activities related to buying, selling, or leasing real estate or marketing or negotiating such purchase, sale, or lease without a valid active Arkansas license. Exemptions allow individuals to undertake those types of activities for themselves.

In the past, unlicensed “wholesalers” have attempted to fit within the exemption by getting a house under contract and claiming that they had an equitable interest in the property that allowed them to fit within the ownership exemption and market their contract, not the property.  In 2017, the Arkansas legislature attempted to eliminate this potential loophole by stating that the ownership exemption did not apply if the person “[o]btains an equitable interest in real estate with knowledge that the interest was obtained on behalf of a person or entity that intends to gain an interest in the real estate other than that of ownership.” Ark. Code 17-42-104(c).

AREC looks to the intent of the purported buyer and takes the position that the “buyer” must have an actual intent to close on the purchase of the property or the “buyer” will not qualify for the ownership exemption. AREC highlighted a few red flags that it looks for in the purchase and sale agreement which it believes suggest a lack of intent to close on the purchase of the property. A few of those red flags include:

(1)Provisions allowing the buyer to unilaterally extend the closing date without the consent of the seller;

(2) Provisions allowing the buyer to walk away at any time with no real negative consequences;

(3)Provisions indicating that the buyer may market the property;

(4)Extremely long inspection periods, like 60 days;

(5)Provisions allowing the buyer to put a lien on the property;

(6)Other one-sided provisions which tend to lock in the seller but not the buyer.

AREC and the Assistant Attorney General mentioned ongoing litigation over the issue involving a wholesaler who put a house under contract in Maumelle, Arkansas, Stassi V. Isom, 525 S.W.3d 27 (Ark. Ct. App. 2017).  AREC found that Stassi had engaged in unlicensed real estate activity and assessed a $5,000 penalty plus hearing costs. Stassi appealed to Arkansas Circuit Court, which affirmed AREC’s findings. Stassi then appealed to the Arkansas Court of Appeals. The Court of Appeals is sending the matter back to AREC for AREC to add more details to its findings of fact and conclusions of law to address Stassi’s exemption argument. From the tone of today’s discussions, it sounds highly unlikely that Stassi will fair any better in front of AREC the second time around.

If you plan on wholesaling in Arkansas, you should strongly consider seeking counsel from an Arkansas attorney who has experience dealing with these types of issues.