The End of Wholesaling? Understanding South Carolina's New Real Estate Law

Navigating the New Legal Landscape and Finding Alternative Strategies

Today, I want to take a few minutes to discuss a significant change in South Carolina’s real estate market that will surely impact most aspects of how real estate is done today. Over the past week, the Charleston real estate community has been buzzing with discussions about a new law that has just passed the House and Senate. Once the bill is signed by Governor McMaster, the law will make wholesaling illegal in South Carolina. For most of us seasoned investors, this news sounded familiar at first, but this time, the situation is quite different. Let me explain why.

What is Wholesaling?

Traditionally, wholesaling in real estate involves putting a property “under contract” at below-market value, then assigning that contract to another buyer without ever owning the property. The wholesaler profits from the difference between the contracted price and the final sales price.

Why Issues Arise With Wholesaling

The problem with wholesaling, often times, is when the “buyer” fails to disclose their true intentions to the seller, or adds a high assignment fee without the seller’s knowledge. Delays in bringing a buyer to the table, tying up the property, or not including a deposit can also cause issues. Additionally, many wholesalers don’t have proof of funds, calling into question the buyer’s ability to actually close on the sale; this inevitably leads to seller frustration and/or potential legal trouble.

Here’s What the New South Carolina Law Says

House Bill 4754 introduces several key points:

1. Assigning is OK; Marketing for Profit is Not

   1. The law tells us that assigning contracts is still allowed, but marketing a property you do not own for a profit requires a broker’s license. This means that you can assign a contract, but cannot advertise a property for sale without first owning it.

2. Advertising Your Stake is Permissible, But You Can’t Sell It

   1. So, you can market your interest in a property you’re contracted to buy from the title holder, but you cannot imply you are selling the property. Marketing real estate you don’t own to sell for profit is now prohibited.

3. Brokerages Cannot Engage in Wholesaling

   1. Real estate brokerages must honor their commitments to their clients and cannot engage in or assist with wholesaling. They are bound by duties of loyalty, disclosure, as well as reasonable skill and care.

Why Trying to “Workaround” the Law Won’t Work

The new law effectively outlaws traditional wholesaling practices (as we know it). Double closings, where you close on an A-B transaction and B-C transaction on the same day, will no longer be an option. Marketing a property that you don’t own is now illegal, and lawyers are unlikely to risk their licenses to facilitate such transactions.

Ways to Avoid Issues

So, what can investors do to navigate the new landscape..?

1. Legitimate Double Closings

   1. Investors can still profit by legitimately closing on a property and only marketing it AFTER taking ownership. This means proving that you contracted the buyer AFTER you legally owned the property.

2. Installment Contracts

   1. Investors can also use installment contracts, and if you ask me, this is where I see wholesaling headed. An installment contract is where the buyer pays the seller in installments over time while gaining legal interest in the property. This allows for legal ownership and marketing while avoiding the pitfalls of the new law.

Final Thoughts

House Bill 4754 is going to change the game for many investors, and this may not be a bad thing… In fact, I would go so far as to say that this is a welcome change to the real estate industry here in Charleston. While real estate agents and transactional lenders will benefit substantially from the new law, it leaves a gap in the real estate industry as a whole. Wholesaling in real estate does have it’s place, and plays a vital role in creating new inventory for the market as well as revitalizing areas and neighborhoods by proxy. Wholesalers find the properties and then “sell” them to investors to rehab, and then resell, or hold onto them as long-term rentals.

The issue, in my opinion, is when the homeowner doesn’t clearly understand what is happening in the transaction or who is actually buying their home. At the end of the day, this law is sure to help rather than hinder the real estate market, although real estate investors will need to get creative in order to adapt and remain successful.

If you have questions about real estate wholesaling, buying and selling, or real estate in general, don’t hesitate to reach out! I would love to get connected with you. Also, if you’re interested in being part of a discussion on the new laws and what the future looks like for real estate investors here in Charleston, I would encourage you to come to our Charleston Circle Investor Meetup at Tradesmen Brewing on Tuesday, June 4th at 6pm. Reach out for more details if you’re interested! Until next time…

Sincerely,

Craig