The BiggerPockets forums have been abuzz over the past few days about a new law that just passed the House and Senate that would make wholesaling illegal in South Carolina once officially enacted by the Governor. For many investors who have been in the wholesale business for a long time, they may feel like they have encountered these obstacles and developed contractual solutions before, but this time, things are different. Here’s why.
What is wholesale?
Traditionally, real estate wholesaling meant putting a property “under contract” at market value, i.e. signing a sales agreement with the seller and transferring it to another buyer who never owned the property. The original buyer therefore acts as a middleman, profiting from the difference between the initial contract price and the final sales price.
Why wholesale is a problem
Problems can arise with this arrangement when the first buyer does not clearly disclose its intentions to the seller, or extremely high transfer fees are added without the original seller’s knowledge. Failure to bring buyers to the table quickly and prolonging the sale by freezing the property, or not including a deposit in the contract, can also cause problems. This can also become an issue if the wholesaler is unable to produce a letter of funds to fully demonstrate the wholesaler’s ability to close.
These issues can trigger a seller’s ire, leading to possible legal consequences. To make matters worse, each state has its own wholesale laws, so it’s often not a one-size-fits-all approach.
It is important to know and follow your state’s laws. If there’s one rule of thumb in wholesale, it’s to be as transparent as possible. For most wholesalers, disclosing all information and having the seller sign is usually a legal safety net.
South Carolina Law Provisions
Here’s what the bill says about wholesaling in South Carolina and what it means for investors.
1. Just assign value; marketing or advertising is not for profit.
Interestingly, contrary to the common understanding of wholesaling, which usually refers to contractual transfers, the proposed new law provides: “Wholesale does not mean the transfer or offer to transfer the contractual right to purchase residential real estate.”
Instead, it defines wholesale as “Having a contractual interest in purchasing residential real estate from the owner and then selling the property to various buyers before taking legal title to the property. Advertising or marketing real estate owned by other individuals or entities with the expectation of compensation is a “broker” ” definition, permission required.
This definition can cause confusion. This means that it is okay to transfer real estate, but if you plan to sell real estate that does not belong to you and wish to receive compensation, you must obtain a broker’s license. If you don’t make a profit, you can transfer the real estate to another company you own or to someone else.
2. You can advertise and market the property you purchased from the seller who owns the title, but you cannot sell it
The new law stipulates: “The advertising and marketing of real property shall be distinguished from the advertising and marketing of a contractual position in an agreement of sale to purchase real property. This section permits advertising to promote the contractual position of real property from a person with equitable or legal title but does not imply, Propose or support the sale, advertising or marketing of the property in question.
This is a confusing way of saying that if you have a purchase contract with the legal owner, you can market and advertise your interest in the property. However, you cannot imply that you are the seller. Again, marketing property you do not own for profit is not allowed.
3. Real estate brokerage companies must abide by their commitments to customers and are not allowed to wholesale real estate or help others wholesale real estate.
The new law stipulates: “A real estate brokerage firm that provides services to clients through an agency agreement is bound by the obligations of loyalty, obedience, disclosure, confidentiality, reasonable care, diligence, and accounting obligations set forth in this chapter. Subject to the foregoing obligations to clients, real estate brokerage firms and their subagents Not engage in, represent others or assist others in wholesale business.
It’s fairly simple: the brokerage firm must represent the legitimate seller with whom the agreement is entered into, and no one else.
When you consider these three points together, the South Carolina Real Estate Commission is pretty smart. In fact, they say you can’t market or advertise real estate for sale without a brokerage license, and you can’t wholesale if you have a brokerage license. It seems they have closed the loop and banned wholesale.
Why trying to “get around” the law won’t help you
I’m not a lawyer, but I’ve done a lot of wholesale transactions and know the terrain well. I believe this law marks the end of the wholesale industry in South Carolina.If other states follow suit, it could signal the end of wholesale in the United States
But what about double closures, you might ask? The traditional concept of double closing (AB deal in the morning, BC deal in the afternoon) will no longer work because to find an end buyer that closes so quickly, wholesalers will have to market the properties they want. Now that’s illegal.
Also, if there was even the slightest indication that the real estate closing was the result of a wholesale transaction, no competent attorney would jeopardize their license to do so these days (in South Carolina, you need an attorney for the closing, not just an attorney) title company).
Ways to avoid problems
So, how do real estate investors respond to this new law and its implications? Here are some ideas.
legal double closing
If you still want to sell the property for a profit (only own it for a short period of time), you will have to legally close it and not market it to other buyers while you don’t own it. You can then close the deal again with the final buyer.You must prove that you contacted the buyer first back own the property.
installment contract
An installment contract (also known as a land contract or warranty agreement or deed contract) is an agreement between a seller and buyer of real estate under which the buyer agrees to pay the seller the purchase price plus interest in installments over a set period of time.
Simply put, an investor can pay the seller $100,000 to obtain legal title to their home and allow the seller to keep the property for a period of time (such as 90 days) while the investor fixes up the home and sells it. The investor can then legally sell the property for a profit.
final thoughts
New South Carolina wholesale law could be a game-changer for the U.S. wholesale industry. Even if creative investors find loopholes and workarounds, it may still not be enough because it can be difficult to find attorneys and title companies willing to facilitate a closing in these situations.
The two most obvious beneficiaries of this new law are real estate agents, whose commissions have been reduced by recent NAR commission changes, and transactional lenders, who may see an increase in business as former wholesalers are selling. Seeking cash to close on home before home.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
