Category: Contracts 101

South Carolina, under Title 40, requires all contractors to be licensed. This includes a builder of a new home – obviously! – but it carves out an exception if the owner of land wants to build her own home for her own use. We like this. Property rights and the ability to do what you want with your own property are a wonderful right.

However, the law states that any sale or offer for sale, or offer to rent the home out, within two years after completion or the issuance of the certificate of occupancy is prima facie evidence that this is not being done for the owner. This means that if it’s placed for sale or rent, the law assumes they were not doing it for their own use, and they have to prove otherwise, or they are in violation of Title 40. What does this mean?

For the seller/builder: multiple civil and criminal penalties. Additionally, the complete inability to place a lien on the home, such as a mechanics lien for failure to pay. Unlicensed contractors cannot sue for payment.

For the buyer: if aware, a number of potential issues:

• the buyer will have to list on their seller’s disclosures, if they ever sell, that the entire structure was done by unlicensed contractors, which will have a significant impact on the value of the home. Because this is a known but latent defect, the state requires it to be on the disclosures documents. Failure can result in civil and criminal penalties.
• the buyer should use this info to negotiate a lower price as it has a significant impact on the value.
• if anything goes wrong, there will be no warranty. Unlicensed contractors are operating illegally and cannot provide a warranty as such. The buyer will have no recourse against the seller, where usually there are several types of warranties and covenants – none of those will exist here for the buyer.
• the home will not qualify for FHA, VA, or potentially even conventional financing – the facts must be disclosed, and underwriters will not want this risk. It will be completely unacceptable for FHA and VA due to legal regulations; for conventional it will be a business risk decision (possible, but not probable to be accepted). Your buyer will likely have to be cash only.

In such a situation, the buyer is taking on all of the risk. Best practice is to demand the builder get an exception or rebut the presumption of the legal violations and get their waivers. The buyer can waive whatever the buyer chooses (subject to lenders’ requirements, if any), but should be aware of the risks, both legally and financially, before accepting such a situation.

A buyer can always back out of a contract. A contract is just an agreement between two people – it’s governed by contract laws. Either party can back out at any time; the question is what will the damages be?

Assuming we’re near closing and the buyer decides to back out of a real estate deal, here’s generally what will happen – at this point, near closing, and assuming all the contingencies have been satisfied and we’re “clear to close.”

• The earnest money stays in the trust account where it was deposited.
• The seller has the option of simply keeping the earnest money and doing nothing, OR
• The seller may re-list the home, even for a slightly lesser price, in order to obtain a fast closing, and then
• The seller may sue the buyer for the difference in price between the breached contract and the new sales price, and may add on her costs (whatever per diems – taxes, utilities, additional interest amounts).
• The buyer’s earnest money deposit will be released to the seller as a down payment on these damages.

This is why it’s really important as a seller to have a decent earnest money deposit up front.

Contract tip: Make the earnest money deposit due after due diligence to avoid complications. Then make sure to obtain the deposit evidence to make sure the seller is protected in the deal.

*Note: this is general information which can not be relied upon without knowing the specific details of your circumstances, which may cause the info to be inaccurate. You must consult an attorney for your specific case to be sure of your rights and obligations.