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A Massive Commercial to Residential Conversion is Taking Shape Nationwide—Here’s What Investors Should Know

A Massive Commercial to Residential Conversion is Taking Shape Nationwide—Here’s What Investors Should Know

From the boardroom to the bedroom, faced with empty offices as remote employment continues to starve cities of workers, a massive nationwide repurposing is underway to transform workplaces into residential spaces. 

According to a report by RentCafe, “adaptive reuse”—the term for this process—will see 151,000 new apartments take shape this year, up from 122,000 last year, representing a 24% increase and a 17.6% increase from the year before. 

The trend is much needed to stop building owners from going broke and cities from losing much-needed tax revenue. A study completed in November 2022 by researchers at the NYU Stern School of Business and Columbia University estimated a $664.1 billion reduction in real estate asset values from continued remote work trends.

New York and LA Head Conversions

Most of that number involves repurposing hotels—an easier transformation than remaking office spaces, which are also being converted, with Manhattan leading the charge. A small number involve converting industrial buildings such as factories. By far, the largest project in Manhattan is 525 Lexington Avenue. The building now houses 655 student apartments.

Los Angeles has 5,881 units scheduled for conversion this year, while Manhattan has 4,363. Office conversions are at the top of many cities’ agendas. Because of the additional considerations, such as windows, plumbing, and electrical revisions, office conversions take longer than hotel conversions. However, they are still considered an environmentally friendly alternative to razing buildings and starting from scratch. 

“The process minimizes the environmental impact associated with demolition and the production of new materials, making it an eco-friendly approach to design and construction,” Doug Ressler, manager of business intelligence at commercial real estate data firm Yardi Matrix, said in the press release about the RentCafe report. “Although these [office] buildings pose challenges for conversion into residential spaces due to factors like building age, size, configuration, and location, repurposing them helps alleviate the shortage of rental units at diverse price points, especially in areas where vacant or underused buildings are prevalent.”

Tax Revenue, Housing, and Vitality

The immediate advantages of additional city residential spaces include:

  • More tax revenue.
  • Vibrant 24/7 communities.
  • Booming business for nearby restaurants and businesses.
  • A much healthier urban ecosystem.

About 11% of U.S. office buildings are good candidates for conversion, but one of the prohibitive issues is expense. The resultant apartments or condos would need to be high-end to pay for the undertaking. This would do nothing to alleviate the affordability crisis many cities are facing. 

However, a study from Gensler indicates that office conversions are less than one-third of the cost of new construction. Couple this with developer incentives, such as new legislation that provides a 20% credit for qualified property conversion expenditures with developers—providing at least 20% of the resulting units are affordable housing to qualify—and large-scale office conversions could provide a way to revitalize city centers, offering much-needed affordable housing in the process.

The Benefit for Real Estate Investors

In the short term, the additional tax revenue allows cities to function better. It means residential landlords in the city boroughs won’t see a spike in their real estate taxes, and essential city services such as sanitation, police, education, and fire departments will be better funded, making cities better places to live. Also, adding affordable, much-needed inventory to the market could stabilize and even decrease exorbitant, escalating prices, allowing more people to get onto the housing ladder and create more well-balanced cities of full-time residents. 

In the long term, as cities become desirable places to live and socialize, as has happened in cities like Detroit, the knock-on effect benefits the entire city, resulting in appreciating real estate values. 

Investing in City Condos 

Investing in condos is an excellent strategy for passive income. According to the National Association of Realtors, the median sales price of single-family homes rose 5.6% to $412,100 from April 2023, while the median sales price of condominiums increased 5.4% to $365,300. 

Though city condos could be pricier than they are elsewhere, the fact that owners pay a maintenance fee means the public areas of the building and grounds and amenities are well maintained, saving an investor the headaches associated with single-family homes. As with other real estate types, condos appreciate while providing cash flow and tax breaks. 

The downside of condos is that because of the minimal upkeep, overseas investors often buy them in all-cash deals as a haven to park their money while living elsewhere, leaving many buildings half-occupied. 

The Big Picture

According to commercial real estate brokerage JLL, repurposing office buildings for residential and other in-demand uses could provide a windfall for commercial real estate investors. Indeed, 90% of global real estate investors believe a former office’s best uses would be residential assets. 

Other uses mentioned include:

  • Industrial storage and data centers.
  • Hospitality and leisure.
  • Student or senior housing.

That said, assuming the construction aspect of a conversion could be achieved, financial hurdles could still pose a problem.

“If an office was acquired using an office-specific investment fund, pivoting to a different use often requires first selling the property and securing alternative financing,” Raphaelle Bour, lead project manager of Work Dynamics, said on the JLL website. Noting the number of cities getting on board with tax incentives and zoning allowances, Bour added: “Policymakers are also simplifying previous conversion hurdles, hoping to reduce the number of stranded assets whose upgrade costs outweigh their worth.”

Value-Add Propositions of Older Buildings Can Offset Risk 

“There’s an opportunity for investors to acquire vacant office buildings, structure the repurposing, and establish new operators,” says Bour. “They can then offer assets to the market with, say, a decade of secure cash flow, something which is currently in high demand—and many large investors are creating diversified funds for this type of operation.”

Final Thoughts

Repurposing office buildings offers opportunities for both smaller residential and more prominent commercial investors. For owners of small multifamily buildings, a big city’s ongoing healthy social and financial ecosystem means a plentiful supply of tenants, the upkeep of essential services, and increasing housing values.

For passive investors, the supply of new condos to the market offers the opportunity to invest in a hands-off, appreciating asset. Depending on your city’s short-term rental rules, this asset could be used as an Airbnb, allowing you to stay in your residence when you are in town.

For larger-scale investors and syndications, the myriad of potential adaptive uses for older office buildings means that not only will there be financial benefits for a value-added proposition, but also the chance to choose a future-proof, in-demand business such as a data center that is not tenant-dependent and thus less risky than relying on constant upkeep, monthly rents, and high occupancy numbers. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

A Massive Commercial to Residential Conversion is Taking Shape Nationwide—Here’s What Investors Should Know

High Interest Rates Are Forcing Big-Time Investors to Cut Their Losses—Is a Bust Coming?

The sudden increase in interest rates has left many experienced commercial real estate owners gasping for air. It’s a tsunami of woe for landlords who own office and retail space and never saw it coming—and it threatens the nation’s entire real estate ecosystem. 

Not only have mortgage interest rates ascended skyward, with no easing in sight, but remote work and e-commerce have meant former tenants have vacated buildings with no sign of return. Big cities like New York have been especially hit hard.

“You literally have trillions of dollars of investment that are suddenly just massively impaired,” Dan Zwirn, chief executive of Arena Investors, a New York-based asset manager and real estate investor, told the Wall Street Journal. “People thought of these office buildings as forever because, of course, it’s going to be 98% leased forever.”

Property Owners Are Living on Borrowed Time

According to real estate consulting firm Colliers, the vacancy rate in U.S. commercial buildings was at 17% as of the fourth quarter of 2023, higher than it was during the financial crash of 2008. Forgiving lenders don’t want to be saddled with foreclosed properties they can’t sell, and so are holding off on court proceedings. Remaining tenants who are current with rents are holding on, allowing buildings to stay afloat—for the time being. 

However, without fully rented buildings, limping along on borrowed time means maintenance issues will mount, and finding insurance on an almost insolvent building is challenging. Many landlords who can see the writing on the wall have decided to cut their losses. The New York Times reported that many commercial buildings around the country are being sold at a 50% to 80% discount.

As the cycle continues, it’s not just commercial landlords of skyscrapers who are feeling the pinch. Landlords and businesses throughout major cities are hurting as workers move, and municipal budgets that rely on taxes associated with valuable commercial property face shortfalls as lower property tax assessments cut revenue.

How Empty Offices Affect Cities and Small Residential Landlords

When people no longer need to live in cities to work, the entire infrastructure of that city suffers, including smaller landlords who provide housing. Although the lack of inventory and high interest rates have forced people to keep renting instead of buying, it’s not surprising that there has been a huge movement away from expensive Northern cities since the pandemic. 

According to census data, New York City has been most affected, with 78,000 people leaving in 2023. Overall, the state of New York lost 102,000 people. Most people leaving New York were not millionaires but the lower and middle class, earning between $32,000 and $65,000 who, without the need to be tethered to a costly city, were happy to give up high rents and cold weather.

How Empty Offices Could Impact Banks and Loans for Other Smaller Investors

According to Moody’s Analytics, the national office vacancy rate reached a record 19.6% in the fourth quarter of 2023. Not since 1979 had offices been so empty. 

If landlords foreclose or sell for less than they owe, that could spell big problems for banks that hold a lot of commercial real estate debt. The aftershocks could be felt throughout the whole lending industry, affecting smaller landlords seeking real estate loans. 

“We saw this play out last year: A bank gets in trouble, and that creates uncertainty in the market,” Dan Roccato, a clinical professor of finance at the University of San Diego, told CBS. “That uncertainty ripples through the stock market, that uncertainty ripples through the real estate market, and that uncertainty then shows up in your 401(k) plan at the end of the month.” 

The result could be cities looking to make up the tax income shortfall from distressed and discounted commercial building sales by increasing revenue from residential property or sales taxes.

The Waiting Game Gets Harder

“Survive until ‘25” is not a phrase any landlords struggling with high interest rates would have expected to hear at the start of the year when the Fed first touted a series of rate cuts. However, inflation‘s stubborn grip on the U.S. economy and Fed Chairman Jerome Powell’s steadfast position on refusing to cut rates until it falls has investors, homeowners, and many politicians wringing their hands in despair. 

As we have seen from distressed commercial real estate sales and syndications with floating-rate mortgages, holding on to underwater debt has become increasingly difficult. Banks, too, are feeling the heat, having to carry debt expected to be paid off. On average, commercial real estate loans make up more than a fifth of U.S. banks’ overall loan portfolios. Many commercial landlords cough up borrowed cash to extend their loans until rates drop. 

According to CRED iQ analysis, New York landlords SL Green and Vornado had to find around $100 million to extend a $1.08 billion loan on an office building at 280 Park Avenue in April. Other owners have decided they can no longer afford to keep servicing the debt and would do better to deploy their money elsewhere. This is similar to what happened in the financial crash of 2008. Waiting in vain has its limits.

“Last year, borrowers were saying, ‘I just need three months for rate cuts to kick in,’” Alex Killick, a managing director at real estate services company CWCapital Asset Management, told the Wall Street Journal. “We aren’t hearing that anymore. Powell sounded pretty clear that this is the new normal.”

Final Thoughts

Letting properties go is always the last option for investors when the financial strain becomes unbearable. What frustrates many commercial property owners is that the Fed teased rate cuts and then backed off. They will inevitably happen, but when is the all-important question?

In the meantime, the ropes tethering commercial buildings, lenders, owners, and an entire real estate infrastructure are starting to give, threatening businesses, livelihoods, and cities. 

Although no one saw the pandemic coming, the aftershocks must make politicians and landlords better prepared to handle other black swan events. At the root of it all are interest rates, fueling rampant inflation caused by the Fed’s easy money policy.

Other countries have recovered more quickly from the pandemic than the U.S., without the inflation and rate hikes. Lessons must be learned

In the meantime, Jerome Powell needs to offer the nation some hope. Quoting solid economic data is not enough for landlords about to lose their buildings and residents’ homes.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

A Massive Commercial to Residential Conversion is Taking Shape Nationwide—Here’s What Investors Should Know

Yes, Tiny Homes Could Be the Most Cost-Effective Way to Cash Flow Right Now—Here’s Why

Bigger is not always better, especially when it comes to homes and mortgage payments. High interest rates and soaring house prices have made developers, homeowners, and investors consider going smaller to make big money. 

“The monthly payment matters more than anything else, and builders have responded with smaller, more efficient homes,” John Burns, chief executive with Irvine, California-based firm John Burns Research and Consulting, told the New York Times

The same article reveals that the median new U.S. home peaked at around 2,500 square feet in 2015. New homes have since shed about 200 square feet as costs rose, urban living boomed, and families got smaller. The current affordability crisis has shrunk the envelope even more, and many real estate investors have realized that they need to downsize the square footage of their investment homes to cash flow.

What Is a Tiny Home?

But first, what is the definition of a tiny home? 

A tiny home is generally a dwelling that measures less than 400 square feet. Many are constructed on trailers, which makes them mobile. However, accessory dwelling units (ADUs) and other small dwellings, such as cottages and in-law suites, can also be classified as tiny homes if they fit the rough dimensions. 

The Cost of Building a Tiny Home

On average, building a tiny home costs a minimum of $20,000, which is around 4% of the average U.S. home sale price. Custom-built homes with add-ons can double the price of a tiny home, and a home on wheels usually costs between $60,000 and $80,000.  

It’s worth noting that if your tiny home is mobile and located in your primary residence’s garden, you will not need to pay property taxes. If it is on a foundation on a separate parcel of land, you will need to factor in the cost of buying the land and property taxes into your expenses. 

ROI and Cash Flow

With an outlay of over $100,000, what type of cash flow can you earn on a tiny home used for an investment? Much of it depends on your home’s location. If it is by a beach in a popular tourist destination, near a lake in a picturesque countryside, or in a major city in a home’s back garden, expect to earn high rents. 

According to short-term rental analytics site AirDNA, Getaway, a start-up that rents tiny prefab cabins for $129 to $299 a night, raised $41.7 million in 2021. The cost of each cabin was around $40,000 per Airbnb investment. 

TechCrunch revealed that Gateway experienced a nearly 100% occupancy rate for their properties. Rounding off the numbers for convenience, assuming each home was rented for $200/night for 300 nights per year, amounts to a total yearly income of $60,000 per year, which would pay off the cost of the cabin in its first year, with $20,000 left over for additional expenses. 

Airbnb co-founder Joe Gebbia started Samara in 2022, a company specializing in prefab ADUs. This further points to the growing popularity of tiny houses as investments. By placing an ADU in their backyard, homeowners can forgo the expense of real estate taxes and earn extra money without having strangers in their living space.

Cities Are Getting on Board the Tiny House Explosion

Expensive cities see ADUs as a way to alleviate their housing crisesAlthough prohibitive short-term rental laws mean they cannot be used in places such as San Francisco, Los Angeles, and New York for less than 30 days, they are a much-needed housing pressure valve for conventional yearly lease tenants or for homeowners in need of more space. 

ADUs Could Be Great for Homeowners in Pricey Cities

California passed a series of laws in 2016 to make ADUs easier to build in the state by overriding local zoning and land use restrictions, enabling backyard homes. Los Angeles also tried to spur the construction of ADUs by experimenting with new financing methods and other solutions. New York City will help finance the construction of ADUs under its Plus One ADU program with no- or low-interest loans. Although tiny homes on wheels are illegal in New York City, ADUs, which occupy backyards on already-owned homes, are allowed.

It could be a fantastic way for homeowners to bring in extra income in a high-cost rental city. As NYC’s Housing Preservation & Development website states“ADUs can serve a number of different purposes, providing housing to family members or serving as an added source of income for household expenses by renting an additional unit.”

In major cities, however, the cost of constructing an ADU increases dramatically compared to that of a tiny home. For example, Samara’s studio starts at $289,000, and the one-bedroom unit starts at $329,000, including installation costs.

Multiple states have tiny home-friendly development laws, including:

  • California
  • Florida
  • Georgia
  • Kansas
  • North Carolina
  • Oregon
  • Texas

However, tiny homes are illegal in the following states:

  • Alaska
  • Iowa
  • Louisiana
  • New Jersey
  • New York
  • North Dakota
  • West Virginia
  • Wisconsin

Thinking Big

If you’re thinking about instantly scaling your tiny home business, mobile home parks and trailer parks are good places to start because the grounds are already zoned for and equipped with amenities for small homes. It’s fairly straightforward to buy plots of land and replace existing trailers with tiny houses, which are modern, sustainable, and more livable than trailer homes.

Final Thoughts

Whether you want to downsize your living expenses to reach financial freedom sooner by moving into a tiny home, turbo boost your investment capital by buying tiny homes for cash, or getting lower mortgages for multiple properties, the numbers don’t lie: Tiny homes are moneymakers. 

Appreciation is often the big question leveled at tiny homes. Clearly, mobile tiny homes probably depreciate rather than appreciate and do not carry the same tax advantages as tiny homes that are built on a foundation on separate parcels of land. For the latter, as with larger homes, the same holds true for tiny homes. The more valuable the land and the greater the number of improvements you have made on your tiny home, the greater the appreciation will likely be.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

A Massive Commercial to Residential Conversion is Taking Shape Nationwide—Here’s What Investors Should Know

Half of New Condo Development in Southern Florida is Geared Toward Vacation Rentals—Should You Join the Gold Rush?

According to a new report from ISG World, first cited in The Real Deal, over 50% of South Florida’s new condo developments are tailored toward short-term rentals. It’s a marked distinction from other cities that are clamping down on Airbnb and similar vacation rental sites.

There are 20,613 condos in development in Broward County, from Coconut Grove to Hillsboro Beach. Of these, 10,335 units in 31 buildings allow buyers to rent out their units with few restrictions. Traditional condos make up just under half of the developed units—10,278—in over 73 buildings. 

A Housing Crisis

Miami has recently become a haven for short-term rentals, allowing owners, many of whom live overseas or in other states, a place to stay when they visit and generate income when they are absent. Such is the demand that some multifamily buildings are also being converted to STRs. 

The clamor for vacation rentals has meant that the Miami housing market is in flux, with traditional neighborhoods in danger of disappearing. Much of the existing inventory is over 30 years old and less popular than the newer, vacation-friendly construction. In fact, of the nearly 19,000 resale condos currently listed in Miami-Dade, Broward, and Palm Beach counties, almost 16,000 are 30 years or older.

The demand for expensive short-term rentals, which are out of the reach of most long-term residents, has fueled a housing crisis in South Florida, where affordability has become a big issue. 

“They are taking properties off the market that could be used as longer-term rentals,” Ken H. Johnson, real estate economist at Florida Atlantic University, told the South Florida Sun Sentinel. “It’s the shortage of available units that drives rental rates higher. While developers and local governments clearly need to build more units, that’s not the only solution to this problem.”

The Highest Home Vacancies in the U.S.

Short-term rental sites, such as Airbnb and Vrbo, contend that short-term rentals bring in much-needed revenue to a city, which is why Miami has been less restrictive on them than other cities. However, transience, a lack of long-term residents, and lower homeownership levels also invite instability. 

According to a WalletHub study, the cities of Hialeah, Miami, and Fort Lauderdale were ranked as some of the least affordable housing markets in the country, and a Florida Atlantic University joint report from June 2023 showed that the average renter in Miami must make a six-figure salary to avoid being considered “rent burdened.” 

The problem is explained by the fact that Miami has one of the highest home vacancy rates in the U.S., according to a study by home loan marketplace LendingTree.com. The study showed that 12.65% of Miami homes are not inhabited full-time—accounting for 339,451 vacant homes out of the city’s 2,683,497 total units.

What does this mean? It means perfectly well-suited homes are sitting empty while buyers and renters struggle to find housing. As a result, supply constraints in Miami are even more pronounced, pushing prices higher.

High Appreciation

Many investors who purchased a home in Miami over the last four years have enjoyed massive appreciation, with some homes doubling in value

The influx of new residents, remote workers, and businesses has contributed to the city’s affordability crisis. As prices increased, more investors looked to buy here, resulting in increased demand. Thus, new condos catering heavily to vacation rentals for investors who are looking for a place to park their cash have sprouted. 

What Goes Up…

Miami’s rapid appreciation has collided with high interest rates, resulting more recently in dramatic price drops of 8.2% year over year to a median price of $550,000 in February and inventory shooting up by nearly 40%.

The advent of scores of new condos coming to market just as prices are crashing and inventory is peaking could provide a perfect storm for investors looking to snag a deal. It will only help local residents find a home, however, if interest rates drop. Miami’s robust infrastructure, new businesses, and attractions mean that the city remains a good investment long term.

An Opportunity for Buy-and-Hold Investors

The lack of available long-term rental apartments and dropping prices have created an opportunity for buy-and-hold investors who want to avoid dealing with the labor-intensive nature of short-term rentals. According to a recent report, Miami ranked in the top five U.S. cities based on cash flow and appreciation at the end of 2023. Another study by CoreLogic confirmed this, with Miami ranking second to Detroit for home price appreciation last year.

However, the recent and sudden price drop has meant there is now a window until interest rates go down and prices increase again. Increased insurance rates for many condos, along with higher HOA feeshave suddenly made single-family homes an attractive investment proposition again. Worth noting is that Miami’s most lenient laws for short-term rentals are restricted to Miami Beach, where many condos are located, encouraging conventional longer-term rentals elsewhere.

Final Thoughts

Investors in Miami can either invest as a short-term rental owner or a conventional landlord with a long-term tenant. Buying a long-term single-family or small multifamily rental makes sense based on the housing shortage. 

The latest inventory numbers offer a telling picture of the state of the market. In March 2024, Miami-Dade saw 4.3 months of supply of houses and 8.2 months of condos. Broward was at 3.9 months of houses and 7.2 months of condos. The fact that there are double the number of condos available than single-family houses indicates the large number of new condos being built and the prohibitive cost of owning one because of insurance and HOA fees. Also, if you buy a single-family home at the right price, there’ll likely be no shortage of potential tenants.

Not surprisingly, at current interest rates, many Miami buyers are shopping with cash. Miami-Dade saw 37.2% of deals close in cash in March, and Broward was at 42.6%. South Florida has a higher percentage of cash buyers than the national average of 28%. 

The influx of cash buyers points to out-of-town investors looking for a safe place to park their money, earning short-term rental income in the process, confident that real estate prices will continue to rise in the long term as a hot destination city.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

A New South Carolina Law Would Severely Crack Down on Wholesaling

A New South Carolina Law Would Severely Crack Down on Wholesaling

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.