Does real estate “wholesaling” work in our market?

Standard

Maybe, but real estate practitioners should be careful!

A recent discussion on South Carolina Bar’s real estate section listserv surrounded whether and how to close “double closings” vs. “assignments of contracts”.  This is not a novel topic in our market. In the very hot market that preceded the crash beginning in 2007, one of the biggest traps for real estate attorneys was closing flip transactions. Title insurance lawyers fielded questions involving flips on an hourly basis!

Flips have never been illegal per se. Buying low and selling high or buying low and making substantial improvements before selling high are great ways to make substantial profits in real estate.  

Back in the day, we suggested that in situations where there were two contracts, the ultimate buyer and lender had to know the property was closing twice and the first closing had to stand on its own as to funding. In other words, the money from the second closing could not be used to fund the first closing. (Think: informed consent confirmed in writing!)

Where assignments of contracts were used, we suggested that the closing statements clearly reflect the cost and payee of the assignment.

The term real estate investors are using these days to define buying low and selling high is “wholesaling”.  A quick Google search reveals many sites defining and educating (for a price, of course) the process of wholesaling. This is a paraphrase of a telling quote I found from one site:

If you’re looking for a simple way to get started in real estate without a lot of money, real estate wholesaling could be a viable option. Real estate wholesaling involves finding discounted properties and putting the properties under contract for a third-party buyer. Before closing, the wholesaler sells their interest in the property to a real estate investor or cash buyer.

One of the smart lawyers on our listserv, Ladson H. Beach, Jr., suggested that there does not appear to be a consensus among practitioners about how to close these transactions. He suggested reviewing several ethics cases* that set out fact-specific scenarios that may result in ethical issues for closing attorneys.

In addition to the ethics issues, Mr. Beach suggested there may be a licensing issue where an assignor is not a licensed broker or agent. A newsletter from South Carolina Real Estate Commission dated May 2022 which you can read in its entirety here addresses this issue. The article, entitled “License Law Spotlight: Wholesaling and License Law” begins:

“The practice of individuals or companies entering into assignable contracts to purchase a home from an owner, then marketing the contract for the purchase of the home to the public has become a hot topic, nationwide in the real estate industry in recent years. This is usually referred to as ‘wholesaling’. The question is often, “is wholesaling legal?’ The answer depends upon the specific laws of the state in which the marketing is occurring. In South Carolina, the practice may require licensure and compliance with South Carolina’s real estate licensing law.”

The article suggests that the Real Estate Commission has interpreted that the advertising of real property belonging to another with the expectation of compensation falls under the statutory definition of “broker” in S.C. Code §40-57-30(3) and requires licensure. Further, the newsletter suggests S.C. Code §40-57-240(1) sets up an exception; licensing is not required if an unlicensed owner is selling that owner’s property. The Commission has interpreted, according to this article, that having an equitable interest is not equivalent to a legal interest for the purpose of licensing. In other words, a person having an equitable interest acquired by a contract is not the property’s owner and has no legal interest in the property for the purposes of this licensing exemption.

So real estate practitioners have several concerns about closing transactions of this type. Be very careful out there and consult your friendly title insurance underwriter and perhaps your friendly ethics lawyer if you have concerns as these situations arise in your practice.

*In re Barbare (2004), In re Fayssoux (2009), In re Brown (2004) and In re Newton (2007)

How do you advise clients on issues of insurable title vs. marketable title?

Standard

An age-old question for dirt lawyers: how do you explain the state of title to your client where you have discovered a title defect but you were able to obtain affirmative coverage over that defect from your favorite title insurance company?

I spent over two thirds of my legal career working for a title insurance company. A title insurance underwriter’s job involves, for the most part, fielding title questions from practicing lawyers. Questions go something like this: “Two links back in the chain of title, there is a deed from an attorney-in-fact to herself for no consideration. Is that a problem?”  What the caller really means is: “I found a title defect in the chain of title and want to know whether you will insure over it.”

The underwriter will answer “yes” or “no” and discuss whether the title defect is a real concern or merely a technical defect that will not cause future problems. Often the discussion will include suggestions of how to “fix” the problem if it can be remedied. And often the discussion will lead to how to insure the title. At the end of the discussion, the two lawyers will have determined whether the title is insurable.

The question of whether a title is marketable is an entirely different matter.  My unofficial definition of marketable title is title that is reasonably free from doubt and acceptable by a prudent purchaser or lender and their attorneys. That definition includes a great deal of reasonableness which means that the standard is open to discussion. I often picture the county’s best dirt lawyer and decide whether that person would close on the title without calling a title insurance company.

Most real estate contracts provide that the seller will deliver marketable title. When the standard is marketable title, the arbiter is the prudent purchaser or lender, their lawyers and, ultimately, the courts. Some contracts call for insurable title, a standard that is determined by title insurance company underwriters.

Let’s look at some examples. Take the case of the power of attorney question above. Case law in South Carolina and elsewhere (and common sense) all lead to the conclusion that this title is probably not marketable. Depending on the passage of time and the estate file for the principal, a title insurance underwriter may agree to insure over the defect.

What if you discover a tax deed in your chain of title? Depending on the age of the tax deed and ownership of the property since that deed, an underwriter may insure the title, but this title is most likely not marketable.

What if your title reveals a deed that recites, “we are all the heirs”, but there is no estate confirming the identity of the heirs? That title is probably not marketable but may be insurable, depending on the facts.

Assuming your underwriter can be convinced to insure these titles, how do you advise your client?

I suggest obtaining informed consent confirmed in writing is the only answer that will protect you and your client.

In a real-life example from private practice days, a doctor client purchased a large house in the Hollywood area of Columbia for his newly blended family. The current survey revealed a very tiny (inches!) violation of a side setback line and a reverter in the chain of title. Technically, the property had reverted to the developer when the house was built in the 1950’s.

Because the violation was so small, I was able to talk my friendly and brilliant underwriting counsel into insuring over it. But because the defect was so technically, if not practically, devastating, I wrote a letter to the client, advising him of the problem, telling him to refrain from adding onto the house which would have made the violation larger and more difficult, and suggesting that any sale of the house should involve a contract drafted by me to provide for insurable, not marketable, title.  I added a paragraph at the bottom to the effect that he understood the conundrum and agreed to purchase the house despite the defect. He dutifully signed the letter.

Did he listen to me? Of course not!

How do I remember this tale so well decades later?

The next time I heard from the doctor and his title was in the context of one of those phone calls a dirt lawyer never wants to receive. A lawyer friend called the day before closing of the sale of the property asking how I managed to close in the fact of the huge (yards, not inches) setback violation with a reverter clause in the restrictive covenants. The doctor had added onto the house and had subsequently signed a standard residential contract requiring marketable title. In the minutes between the phone call and retrieving the file, I lost ten years off my life. But thankfully, the file revealed my CYA letter. 

How was the situation resolved? My law firm brought a quiet title action for the client on his dime. The developer corporation was defunct with no apparent survivors. The court quieted the title, and I lived to practice law another day.

Here is my point. Never fail to explain title defects to your client even if you are smart enough to obtain affirmative coverage. And always obtain informed consent confirmed in writing.

EAO Opinion 22-04 gives real estate lawyers guidance on non-negotiated checks

Standard
How we did it back in the day

Ethics Advisory Opinion 22-04 addresses a trust accounting question from a real estate practitioner.

The underlying facts are: “Due to the nature of a residential real estate practice, Lawyer frequently issues relatively small dollar amount checks from Lawyer’s trust account to both clients and third parties. A number of these checks are not timely negotiated, resulting in ongoing trust accounting maintenance costs, including labor costs, stop-payment fees and mailing fees for uncashed trust account checks that require stop payments and/or reissuance and re-mailing to the payee.”

This is an age-old concern. When I was in private practice (150 years ago or so), our law firm’s excellent bookkeeper chastised me monthly about the $5.00 check issued for mortgage satisfactions that never seemed to get cashed.

The lawyer poses the following question to the Ethics Advisory Committee: “May Lawyer charge an amount to cover administrative costs associated with stop-payment fees and trust account check reissuance and re-mailing fees for checks that remain outstanding for more than thirty (30) days after issuance?”

Thankfully, the Committee responded affirmatively.

The opinion states that a lawyer may charge a check recipient an amount to cover administrative measures undertaken to resolve the outstanding check, which includes expenses incurred such as stop payment fees and postage fees, provided the amount charged is not unreasonable.

Comment 1 to Rule 1.5 provides, “A lawyer may seek reimbursement for the cost of services performed in-house…by charging an amount that reasonably reflects the cost incurred by the lawyer.” The Committee opined that the lawyer may charge an amount against the recipient’s check to obtain reimbursement for the same, provided the amount charged is not unreasonable. To collect on the amount charged, Lawyer may deduct the amount to be charged from funds that remain in trust after adequate steps have been taken to cancel, void, or otherwise nullify the previously issued check…”

The Committee imposed one limitation by stating that the amount to be charged is limited to the total amount of funds that were paid by the outstanding check.

This opinion may provide a small amount of assistance, but the administrative nightmare remains. Small checks that fail to be negotiated will remain a monthly quagmire. But this opinion may allow law firms to at least recoup a portion of the cost.

Here’s a new wrinkle in real estate marketing: “Homeowner Benefit Program”

Standard

South Carolina title examiners are discovering “Homeowner Benefit Agreements” or “Exclusive Listing Agreements” filed in the public records as mortgages or memoranda of agreement. The duration of the agreements purport to be forty years, and a quick search revealed hundreds of these unusual documents filed in Georgetown, Horry, Charleston, and Berkeley Counties. The documents indicate that they create liens against the real estate in question.

The company behind these documents is MV Realty PBC, LLC which appears to be doing business in the Palmetto State as MV Realty of South Carolina, LLC. The company’s website indicates the company will pay a homeowner between $300 and $5,000 in connection with its Homeowner Benefit Program. In return for the payment, the homeowner agrees to use the company’s services as listing agent if the decision is made to sell the property during the term of the agreement. The agreements typically provide that the homeowner may elect to pay an early termination fee to avoid listing the property in question with MV Realty.

In response to numerous underwriting questions on the topic, Chicago Title sent an underwriting memorandum to its agents dated June 8 entitled “Exclusive Listing Agreements”. Chicago Title’s position on the topic was set out in its memorandum as follows: “Pending further guidance, Chicago Title requires that you treat recordings of this kind like any other lien or mortgage. You should obtain a release or satisfaction of the recording as part of the closing or take a exception to the recorded document in your commitments and final policies.”

Googling MV Realty results in a great deal of information. Real estate lawyers should familiarize themselves with this company and its program to advise clients who may question whether the program makes sense from a financial and legal perspective.

Updates on dangerous high-rise condo projects

Standard

I have recommended previously that all South Carolina dirt lawyers subscribe to the DIRT listserv run by Professor Dale Whitman of the University of Missouri at Kansas City Law School. I emphasize that recommendation today and have two updates from that service to share with you. Both updates relate to the collapsed Surfside project in south Florida.

First, a 50-unit condominium building in Waukesha, Wisconsin, Horizon West, has been ordered to be demolished by the Waukesha City Council. Professor Whitman reports that the building’s steel structure has been compromised by water infiltration, much like the Surfside project, and is considered a risk for collapsing.

The residents don’t have the funds to pay for the demolition, and the insurance company is taking the position that the building should be repaired, not demolished. The cost of the demolition has skyrocketed because of the presence of asbestos.

The units were valued at $90,000 to $140,000 according to Zillow, prior to the discovery of the defects. During the current high-priced housing market, it is not likely that the property owners will be able to replace their housing even if they receive their full replacement costs from insurance. It is a very sad situation, but, of course, not as sad as an actual collapse resulting in the loss of lives.

Second, Florida’s legislature has passed a law that requires regular building inspections and requires homeowners’ associations to maintain reserves. The act was unanimously passed by both houses, and Governor DeSantis signed the bill into law on May 26th.

Under the new law, inspections are required when a condominium building reaches 30 years of age and every ten years thereafter. For buildings within three miles of the coast, the first inspection is required at 25 years of age.

In addition, mandatory structural integrity reserve studies are required every ten years under the new law, and reserves are required to be maintained based on the studies. The power of the HOA to waive reserves was removed, effective December 31, 2024.

This legislation is encouraging and should be considered in South Carolina, particularly because of the existence of our numerous high-rise coastal condominium projects.

The only downside I see about such legislation is that it will make condominium living more expensive and may price some retirees and lower-income individuals out of the market entirely. But, logically, the cost of maintenance should be factored into every residential property purchase. The ability of an owners’ association to waive reserves and thereby kick the maintenance can down the road is a dangerous proposition.

** Please note that the new inspection and reserve Florida legislation applies only to condominium and cooperative buildings of 3 stories and higher above ground. See more details from Florida attorney, Michael Gefland.

Charlotte TV station reports on Fort Mill HOA “service fee”

Standard

Charlotte television station WSOCTV (Channel 9) published a story on May 23 delving into an HOA fee from Baxter Village in Fort Mill. The story, entitled “South Carolina HOAs can charge substantial fee to leave neighborhood”, focuses on a residential seller who was shocked to find a more than $1,700 charge from her owners’ association on her closing statement.

The line item read “HOA Service Fee to Baxter”, and the fee was almost double the annual regular assessment of $950. According to the story, the covenants provide that the sale of a home will result in a fee which shall not exceed the greater of $500 or .25% of the gross sales price. The reporter interviewed a spokesman for the subdivision’s management company who said the fee has been in place since 1998. The sales price for the home highlighted in the story was $685,000.

The reporter interviewed a lawyer familiar with homeowners’ association issues in North Carolina as well as South Carolina. He said that North Carolina’s legislature had passed a Planned Community Act in 2010 that banned exit fees except in a few specific cases. South Carolina, of course, does not have similar legislation.

As with every residential purchase, the buyer should be advised by the attorney of the existence of covenants and should be encouraged to read them in their entirety to avoid surprises.

What do you think, dirt lawyers? Should we pass similar legislation in South Carolina?

Florida condo collapse class action lawsuit reaches settlement

Standard

This blog has previously discussed the June 24, 2021 collapse of the 136-unit Champlain Towers South condominium project in Surfside, Florida and Fannie Mae’s response by issuing Lender Letter (LL-2021-14) which directs lenders to gather information from owners’ associations about potential unsafe conditions.

As we near the anniversary of the disaster, a $997 million settlement has been reached for the wrongful death victims and survivors. The settlement was announced in the Miami-Dade Circuit Courtroom of Judge Michael Hanzman on May 11. The settlement includes insurance companies, developers of the project next door, engineers, architects, a law firm, and the owners’ association. 

The building has now been demolished, and the settlement does not include the potential sale of the underlying real estate, which will be auctioned later this month. The opening bid is $120 million. A prior settlement of $83 million was reached for economic losses.

Judge Hanzman will oversee the division of the settlement funds among the victims. He has announced that he would like to have the process completed by September.

South Carolina has many aging condominium projects, particularly along our coast. And we have an earthquake fault line to consider. Do our local homeowners’ association boards face expensive repair and reserve dangers like those in Florida? Should condominium purchasers consider the financial impact of possible major assessments to address delayed repairs? Should legislation be proposed to address these issues?

I’ve previously recommended Episode 8 of the podcast “Collapse: Disaster in Surfside” produced by Treefort Media and the Miami Herald for an excellent discussion of the legal and financial issues surrounding aging condominium projects.

Once these huge projects are completed, there is no legislative requirement for future inspections. The county in Florida where Champlain Towers South was located has a requirement to inspect tower projects after forty years. Forty years is a long time! Champlain Towers’ forty-year inspection had found the potential problems, but there were no “teeth” requiring the repairs to be made. The property owners of Champlain Towers were aware of the need for expensive repairs, but they continued to kick the can down the road to avoid the expense.

After the collapse, Florida’s legislature considered an act which would have required reserves and inspections, but the legislative effort failed because of the fear of chilling South Florida’s development frenzy. My guess is that South Carolina would face a similar roadblock.

Some condominium projects have served as affordable housing in certain geographic locations and as affordable second homes and rentals in resort areas. The podcast suggests that tacking on the annual cost of reasonable reserves may threaten this affordability. Think about elderly individuals who live in their dream coastal condominiums. Taken to a logical conclusion, these projects, properly run, may become available only to the wealthiest among us.

Beaufort County offers fraud alert for property owners

Standard
Allstate’s “Mayhem”

Do you know the name Dean Gerard Winters? He’s the actor who plays the character “Mayhem” in Allstate commercials. The character acts out cringe-worthy scenes involving car accidents, fires, falls and other calamities and advises us to buy insurance to protect against “Mayhem like me”.

I’ll never forget the name of a character who created mayhem in the midlands title world several years ago. That name is Matthew Cox.

A telephone call tipped us off that we had a serious mortgage fraud situation in Columbia. Representatives of several closing offices were recording mortgages describing the same two residential properties in Blythewood, as if the properties had been refinanced multiple times in the same day by different closing offices.

At first, we thought our company and our attorney agent were in the clear because our mortgage got to record first. South Carolina is a race notice state and getting to record first matters. Later, we learned that deeds to the so-called borrower were forged, so there was no safety for anyone involved in this seedy scenario. Thousands of dollars were lost.

Next, we learned about the two fraudsters who had moved to Columbia from Florida through Atlanta to work their mischief here. The two names were Matthew Cox and Rebecca Hauck. We heard that Cox had been in the mortgage lending business in Florida, where he got into trouble for faking loan documents. He had the guts to write a novel about his antics when he lost his brokerage license and needed funds, but the novel was never published. With funds running low, Cox and his girlfriend, Hauck, moved to Atlanta and then Columbia to continue their mortgage fraud efforts.

We didn’t hear more from the pair until several years later, when we heard they had thankfully been arrested and sent to federal prison.

How do you protect against Mayhem like Matthew Cox? Beaufort County has found a way. My friend and excellent dirt lawyer, Sarah Robertson, who practices with Burr Forman in Bluffton recently sent out an article to her clients advising that Beaufort County has set up a program to allow property owners to register at no charge to receive alerts from the ROD regarding possible fraudulent activity involving their properties. Sarah’s article indicates some other counties are beginning to offer this service.

This is a great service for clients that could be championed by real estate lawyers in other locations to protect against Mayhem like Matthew Cox!

Residential sellers must disclose sea level rise risk in Hawaii

Standard

Like South Carolina, Hawaii has a mandatory seller disclosure form that must be completed by sellers of residential properties. Unlike South Carolina, Hawaii updated its legislation in 2021 to become the first state to require the disclosure of the risk of sea level rise to the property based on the 3.2-feet Sea Level Rise Exposure Area. The legislation went into effect on May 1 of this year.

Hawaii has developed a sea level rise viewer which you can check out here. To identify a property location relative to a sea level rise exposure, the street address or tax map key of the property must be entered into the viewer. The viewer is intended to provide map data depicting projections for future hazard exposure and assessing economic and other vulnerabilities resulting from rising sea levels.

The viewer was developed by the Pacific Islands Ocean Observing System (PacIOOS) at the University of Hawaii School of Ocean and Earth Science and Technology. Mapping is based on an upper-end projection of 3.2 feet of sea level rise by the year 2100.

Like the existing flood zone disclosure requirement, the sea level risk disclosure is intended to help home buyers better understand how the sea level risk will impact their properties. The disclosure requirement applies to oceanfront and near-oceanfront properties as well as properties near streams and other areas likely to flood in times of heavy rainfall.

Will we see similar legislation in South Carolina and other coastal states? My guess is that we probably will.

“Collapse” podcast focuses on legal issues of aging condominiums

Standard

This blog has previously discussed the June 24, 2021 collapse of the 136-unit Champlain Towers South  project in Surfside, Florida and Fannie Mae’s response by issuing Lender Letter (LL-2021-14) which directs lenders to gather information from owners’ associations about potential unsafe conditions.

South Carolina has many aging condominium projects, particularly along our coast. And we have an earthquake fault line to consider. Do our local homeowners’ association boards face expensive repair and reserve dangers like those in Florida? Should condominium purchasers consider the financial impact of possible major assessments to address delayed repairs? Should legislation be proposed to address these issues?

My husband and I have considered downsizing to a condominium in Columbia, but after spending some time with this repair and reserve issue, I would have to spend extensive time with the financials of any project that might interest us. And the high-rise projects at the coast face more difficult repair issues than those in the midlands because of salt, sand, water, and wind.

I’d like to recommend a podcast episode to lawyers who may be interested in this topic. And I believe all dirt lawyers who represent owners’ associations and even condominium purchasers should be aware of the legal and financial concerns that were clearly brought to the surface by this tragedy.

The podcast is entitled “Collapse: Disaster in Surfside” produced by Treefort Media and the Miami Herald. The podcast series discusses the collapse, the personal experiences of escape and failure to escape, the media coverage, the legal maneuvers, the insurance issues, and many other matters. The heart wrenching conflict between the victims who lost family members and those who lost their homes was difficult to absorb. I won’t ask you to listen to all of that.

But Episode 8 summarizes the legal and financial issues, and I highly recommend that episode.

Our horizontal property regime legislation is deficient at best. Reserves for repairs are discussed in our  HPR legislation but not required.

Once these huge, often high-rise projects are completed, there is no legislative future inspection requirement. The county in South Florida where Champlain Towers was located has a requirement to inspect tower projects after forty years. Forty years is a long time! Champlain Towers’ forty-year inspection had found the potential problems, but there were no “teeth” requiring the repairs to be made. The property owners of Champlain Towers were aware of the need for extensive repairs, but they continued to kick the can down the road to avoid the expense.

After the collapse, Florida’s legislature considered an act which would have required reserves and inspections, but the effort failed because of the fear of chilling South Florida’s development frenzy. My guess is that South Carolina would face a similar roadblock.

Some condominium projects have served as affordable housing in certain geographic locations and as affordable second homes and rentals in resort areas. The podcast suggests that tacking on the annual cost of reasonable reserves may threaten this affordability. Think about elderly individuals who live in their dream coastal condominium. Taken to a logical conclusion, these projects, properly run, may become available only to the wealthiest among us.