Written by Bradley S. Dornish, Esq. with Olivia Mark and Nathan Morgan
Wholesaling is a common type of real estate transaction that occurs in many states, but Pennsylvania’s Real Estate Licensing and Registration Act (RELRA) (63 P.S. § 455.101 et seq) has generally prohibited its most common form for years. Act 52 of 2024, known as the Wholesale Real Estate Transaction Transparency and Protection Act eliminates any ambiguity in its restriction. Act 52 achieves this by requiring wholesaling parties to have real estate licenses, by necessitating that they make certain disclosures, and by affording appraisal and cancellation protections to buyers and sellers.
Act 52 passed July 8, 2024, and becomes effective January 4, 2025. Act 52 clarifies what is a “Wholesale Transaction.” Essentially, wholesaling real estate is a specific type of real estate transaction that occurs when someone facilitates the transfer of interest in real property without becoming the owner on paper. This means the original buyer (wholesaler) does not become the title owner of the property. This typically happens through a contract or an option in which the price is set between the seller and the wholesaler who agrees to buy the property in an identified time frame. The wholesaler intends not to buy himself or herself, but to earn a fee for assigning the agreement to an actual buyer rather than owning the property as a traditional buyer would. In simple terms: Party A (the property owner) and Party B (the wholesaler) enter into an agreement of sale in which Party B agrees to buy the property from Party A, but Party B has the right to assign that agreement to another buyer. Party B in turn markets the property they have agreed to buy, and finds a prospective buyer, Party C. Party B assigns the right to buy the property under the original agreement to Party C. When C closes on the purchase of the property from A, B, the wholesaler obtains a fee for the assignment.
Previously under the PA Real Estate Licensing and Registration Act, a “broker” was defined as someone who negotiates real estate transactions for others for a fee. As you can see, a wholesaler as described above already met this definition. However, many out of state real estate mentors have promoted wholesaling without being aware of these restrictions in PA, and many PA real estate investors unknowingly broke the RELRA licensing law. Act 52 clarifies the prior definition, categorizing those who “engage or attempt to engage in a wholesale transaction” as “brokers” of real estate. Act 52 further clarifies that someone is deemed a real estate “salesperson” whenever they “engage in or attempt to engage in a wholesale transaction for or on behalf of such real estate broker” (§ 201). The idea is to clearly subject both wholesaling “brokers” and “salespersons” to real estate licensing requirements.
In section 610, Act 52 also allows consumers involved as buyers or as sellers in wholesale transactions the right to cancel sales agreements or contracts under certain conditions. The parties to wholesale transactions, (Parties A and C above) would each have thirty (30) days to cancel an agreement of sale after they have signed the agreement or until the property is transferred (whichever happens first) (§ 610 (a)). The notice of cancellation must be made by the party canceling the agreement and it must be sent through certified mail or another legitimate delivery method in which they obtain a receipt confirming the delivery (§ 610 (b)). All payments must then be refunded 10 days after receiving the cancellation notice and an acknowledgement that the agreement has been terminated (§ 610 (c)). Through this process, the party exercising the right to cancel cannot be held liable for any damages resulting from canceling the agreement (§ 610 (d)). The description of these cancellation rights must clearly be included within any sales agreement for a legal wholesale transaction which clearly outlines: the agreement as a wholesale transaction; the consumers right to obtain an appraisal; the right consult with an unbiased licensee or seek legal advice; the parties right to cancel and how to exercise this right; and a commitment that all payments made by the consumer will be refunded within the time frame set out by Act 52 (§ 610 (e)). Section 610 mandates clear disclosures and refund procedures to protect consumers involved in legal wholesale transactions done by licensed agents and brokers.
With all of these conditions and restrictions, we believe it is absolutely clear that as of January 4, 2025, no unlicensed real estate investors will be able to engage in wholesale transactions which involve the assignments of agreements of sale in PA. Note that any such assignments are already subject to a second set of transfer taxes on the assignment [see PA Realty Transfer Tax Bulletin 2008-1, The Rule in Baehr Brothers) 2(d), 2(e), 2(f)].
Real estate investors can engage in A to B to C double closings involving a complete transfer by deed from A to B, and a second transfer of the property from B to C, with “wet” funds from B, for the first closing, not using C’s money to fund B’s purchase. Those closings can both occur on the same day, are not within Act 52’s prohibitions, and often PA title insurers will waive the requirement that B purchase a title insurance policy.
We do not believe that PA licensed agents and brokers will handle a significant number of legal wholesale transactions following the requirements of Act 52, because the disclosures and rescission periods required will deter the completion of transactions in that manner.
Our firm offers free consultation on compliance with the requirements of Act 52 and structuring transactions outside the prohibitions of Act 52. Call today to prepare your business for this new law.
