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.

[Randy Thomason]

Thanks @Mark Rogers for that overview but that was not all that was conveyed in the meeting I interviewed the Commissioners in.  Here is the additional info for everyone.  

They hate the term "Wholesaling" and would prefer that we use a different term for what we are doing.  

They do not believe wholesaling is illegal in and of itself, but unfortunately a lot people are doing it illegally in this state. Understand that the people they see usually are the worst of the worst offenders and not the run of the mill assigner that we are mostly familiar with.

When I described my personal business model to the Commissioners, as I buy rentals, I buy rehabs, I buy flips where I double close, and I assign some, they said that is what they wished everyone was doing.  The Commission does NOT have a problem with assignments IF and I say IF again, that is not your whole business model.  If you are doing 100% assignments then they believe that is a blatant attempt to circumvent licensee law and you should have a real estate license to do that.

There was a lot more discussed after my discussion ended with the full Commission. The Executive Director and I had some off record conversations immediately after to clarify several things.  For example, You Can place a lien on a property to secure your contract or option agreement, but when your contract expires and you didn't close or is cancelled by both parties agreement then the lien should be extinguished also. 

Here is the bottom line: 

Standard contract law states you must have capacity and intent to have a valid contract.  If  you don't have the money somehow, i.e. private lender, bank line of credit, partner, etc., then you don't have capacity. If you never plan to close a deal, then you don't have intent.  If you have "weasel clauses" to cancel the contract up till day of closing, then the red flag goes up for intent.

And for those who think that because you are out of state and never setting foot here that the Commission doesn't or can't punish you, you are wrong.  Class D Felony. The State's Attorney General's Office is the prosecutor.  If they get the verdict then they notify your states law enforcement.  If it is a fine then they garnish.  If a jail sentence then you get extradited if you don't surrender on your own.

Here is the KICKER:  If you have a Felony record you can't own a gun, you can't hunt, you can't vote, you can't get a passport to travel out of the country, you can't get a real estate license, you might not be able to be a teacher or child care worker.  Lots of restrictions on your life from that point forward.  

Do things right and you don't have to worry.