Over the past few days, the BiggerPockets forum has been abuzz with talk of a new law that has just passed the House and Senate and, when made official by the Governor, will make wholesaling illegal in South Carolina. For many investors who have been wholesaling for a long time and might feel they have encountered these roadblocks before and strategized contractual workarounds, this time, things are different. Here’s why.
What Is Wholesaling?
Conventionally, wholesaling real estate means putting a property “under contract” under market value—that is, signing a sales agreement with a seller and assigning it to another buyer without ever owning the property. Thus, the initial buyer has acted as an intermediary, profiting from the margin between the initial contracted price and the final sales price.
Why Problems Arise With Wholesaling
There can be problems with this arrangement when the first buyer either fails to disclose his intentions clearly to the seller or adds an extremely high assignment fee without the initial seller’s knowledge. Failing to bring a buyer swiftly to the table and prolonging the sale by tying up the property, or not including a deposit in the contract, can also cause problems. If the wholesaler can’t produce a proof of funds letter adequately showing that the wholesaler is capable of closing, it can also become an issue.
These issues can trigger the seller’s ire, resulting in possible legal ramifications. Further muddying the waters is that each state has its own laws concerning wholesaling, so it is generally not a one-size-fits-all practice.
Knowing and adhering to your state’s laws is crucial. If there’s a rule of thumb in wholesaling, it’s to be as transparent as possible. Disclosing everything and having the seller sign off on it was customarily the legal safety net for most wholesalers.
What the South Carolina Law Says
Here’s what the bill states regarding wholesaling in South Carolina and what it means for investors.
1. Assigning is OK; marketing or advertising for profit is not
Interestingly, unlike the common understanding of wholesaling, which usually refers to the assignment of contracts, the proposed new law says: “Wholesaling does not refer to the assignment or offering to assign a contractual right to purchase residential real estate.”
Instead, it defines wholesaling as “having a contractual interest in purchasing residential real estate from a property owner, then marketing the property for sale to a different buyer prior to taking legal ownership of the property. Advertising or marketing real estate owned by another individual or entity with the expectation of compensation falls under the definition of ‘broker’ and requires licensure.”
This definition could cause confusion. It means that assigning real estate is OK, but if you plan to market real estate that you do not own and expect to receive compensation, you must be licensed as a broker. You can assign real estate to another company you own or someone else if you do not make a profit.
2. It’s OK to advertise and market your stake in a property you are under contract to buy from a seller who is on the title—but you can’t sell it
The new law states: “The advertising and marketing of real property is to be distinguished from the advertising and marketing of a contractual position in a sales agreement to purchase real estate. An advertisement that markets a contractual position to acquire real property from a person with either equitable or legal title and does not imply, suggest, or support to sell, advertise or market the underlying property is permissible under this section.”
This is a convoluted way of saying that you can market and advertise your interest in a property if you are contracted to purchase from a legitimate owner. However, you cannot imply that you are the seller. Once again, marketing a property you do not own to sell for profit is not allowed.
3. Real estate brokerages must honor their commitment to their client and cannot wholesale properties or help others wholesale
The new law states: “A real estate brokerage firm that provides services through an agency agreement for a client is bound by the duties of loyalty, obedience, disclosure, confidentiality, reasonable care, diligence, and accounting as set forth in this chapter. Pursuant to the aforementioned duties owed to a client, a real estate brokerage firm and its subagents are prohibited from engaging in, representing others in, or assisting others in the practice of wholesaling.”
This is fairly straightforward: A brokerage must represent the legal seller with whom it has entered into an agreement and no one else.
The South Carolina Real Estate Commission has been ingenious when you take all three points together. In effect, they have said that you cannot market or advertise real estate for sale without a brokerage license, and if you have a brokerage license, you cannot wholesale. It appears they have closed the loop, outlawing wholesaling.
Why Trying to “Workaround” the Law Will Not Help You
I am not a lawyer, but have done many wholesale deals and know the terrain well. I believe this law marks the end of wholesaling in South Carolina. And if other states follow suit, it could mark the end of wholesaling as we know it in the U.S.
But what about double closings, you ask? The conventional idea of a double closing—closing on an A-B transaction in the morning and a B-C transaction in the afternoon—will no longer work because to find an end buyer for such a fast closing, the wholesaler would have had to market a property they do not own. That is now illegal.
Also, if there’s the merest whiff that a real estate closing was the result of a wholesale deal, there is no lawyer worth their salt now who would jeopardize their license to do so (in South Carolina, you need a lawyer to close, not just a title company).
Ways to Avoid Issues
So, how do real estate investors deal with this new law and its implications? Here are some ideas.
Legitimate double closings
If you still want to sell real estate for a profit—having only owned it for a short period — you will have to close on it legitimately, without having marketed to another buyer while you did not own it. Then, you could set up another closing with your end buyer. You must prove that you first contacted this buyer after owning the property.
An installment contract
An installment contract (also called a land contract or articles of agreement for warranty deed or contract for deed) is an agreement between a real estate seller and buyer, 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 could give a seller $100,000 to gain legal ownership of their house and allow the seller to remain in the property for a period of time (90 days, for example) while the investor fixes up the house and then markets it. The investor could then legitimately sell the property for profit.
Final Thoughts
The new South Carolina wholesaling law could be a game changer for wholesaling in the U.S. If other states adopt it too, as this insightful podcast from Jerry Norton seems to suggest is a real possibility, conventional wholesaling techniques could be a thing of the past. Even if inventive investors find loopholes and workarounds, it still might not be enough, as it could be hard to find lawyers and title companies willing to facilitate closings in these scenarios.
Two of the most obvious beneficiaries of this new law are Realtors, whose commissions have been undercut by recent NAR commission changes, and transactional lenders, who could see an uptick in business as former wholesalers look for cash to close on homes before marketing them.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
