Category: Real Estate 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 real estate agent can violate their fiduciary duties in several ways, such as:

Conflict of interest: If a real estate agent puts their own interests ahead of their clients or if they engage in any activity that would benefit them at the expense of their clients, they have violated their duty of loyalty.

Concealment of information: If a real estate agent fails to disclose all material facts about the property or transaction to their clients, they have violated their duty of disclosure.

Breach of confidentiality: If a real estate agent shares their clients’ information with third parties without their clients’ consent or if they use their clients’ confidential information for their own benefit, they have violated their duty of confidentiality.

Negligence: If a real estate agent fails to exercise reasonable care and skill in representing their clients, they have violated their duty of reasonable care.

Disobedience: If a real estate agent fails to obey lawful and reasonable instructions of their clients or acts against their clients’ interests, they have violated their duty of obedience.

In short, any action or inaction by a real estate agent that harms their clients or breaches their trust can be considered a violation of their fiduciary duties. If a real estate agent is found to have violated their fiduciary duties, they may face legal and disciplinary action, including a revocation or suspension of their license and liability for damages to their clients – also including loss of their commissions.

A 1031 exchange is an exchange of like-kind property meeting certain guidelines allowing sellers to defer the payment of taxes on the gains of the sale of the initial property. In a nutshell, property which has been used actively for productive business purposes (think rentals or business offices) can be sold and exchanged for different or better property to avoid–by deferral–recognizing gains on that transfer. The whole transaction is documented on IRS form 8824 for Like-Kind exchanges and governed by Internal Revenue Code section 1031 – thus, the name. Instead of paying taxes on the increase in value at the time the property is sold, that increase in value (“gain”) is held and passed on – it passes with the person, not the property. Very basically, the person holds on to the gain and carries it forward to the next property, allowing her to invest more of her money.

For instance:

• Sale: A four-unit apartment building is purchased for $1 million USD in cash and the basis, for simplicity’s sake, is $1 million. Five years later it is sold for $2 million. The seller owes capital gains tax (around 20%) on the $1 million increase in value since she purchased it; she has a tax bill this year of $200k. Instead of having $2 million to reinvest, she now has only $1,800,000.
• 1031 Exchange: The same apartment building with its $1 million basis is instead sold for $2 million and then exchanged for a $2 million qualifying beach rental property. If she puts nothing else down, the basis remains the same – $1 million – in the newly acquired property, but she gets to use the full $2 million in value, while deferring ALL of the gain from the initial property. She does not owe $200k in capital gains tax this year. The gain from the sale of the original (relinquished) property is “deferred” – which can be deferred indefinitely. This can allow her to generate much more wealth with purchasing power. If she were to put down $500k in cash and purchase a qualifying property worth even more, that amount would be added to the basis ($1.5 million in basis on the newly acquired property) which would allow access to larger properties as better investments.

To do this, you need:

• qualifying properties,
• an exchanger,
• the intent of a solid business purpose and plan (not “to avoid paying taxes,”),
• a qualified intermediary, aka “QI“, (someone who cannot have served as the seller’s real estate agent or broker, or attorney, or any number of other types of roles including accountant) in the last two years, and
• to meet a very specific and mandatory timeline.

Qualifying properties:

• generally, all real estate held for business use qualifies.
• it’s referred to “like kind” because there used to be many other types of property that could qualify, which went away circa 2018.
• beach houses used for renting for STRs qualify, even if you use it sometimes for yourself (check with an attorney to see specific details on this)
• farmland used for growing crops or rental
• apartments, condos, SFD homes used for rental purposes
• it cannot be your own personal property that you lived in / will live in on either end of the transaction, even if held in a disregarded but legally separated entity of some type.

There are three parties involved:

• the seller (the person taking advantage of the 1031), the exchanger, and the QI.
• the exchanger helps the seller, but there is a wall between the exchanger and the funds and property exchanges. (in fact, if the exchanger has access to the funds at all, the whole thing fails.)
• the seller has an agreement with the exchanger; the exchanger has an agreement with the QI.
• each party has her own very specific and important roles.

How the exchange itself works:

• the seller decides she wants to exchange property via 1031.
• the seller puts her property up for sale, aided by the exchanger.
• the QI steps in, in place of the exchanger, for the sale of the initial property.
• the QI receives the money from the initial property’s sale and transfers the deed to the new buyer.
• the QI places the sale money into a trust account pending the purchase of the new property.
• once her sale CLOSES, the 45 day window begins to run and she seller must identify a new property within 45 days and completely close within 180 days.
• once she identifies a new property that qualifies, with the help of the exchanger, she begins the purchase.
• the QI steps in, in the place of the exchanger, for the new purchase, and is named as the buyer on the closing statement of the replacement property.
• the QI pays for the new property, obtains the deed and transfers it to to exchanger, fully completing the 1031 exchange.

There are many things that can impact these qualifications and timelines, so it is very important to use parties who know what they are doing – attorneys, people with experience and licensure, and those with solid accounting for their trust accounts. Any one of these items that fails can destroy your 1031 or even an entire daisy chain of 1031s, potentially, and leave all gains fully recognized and taxable.

Final caveat: DO NOT RELY ON ANYONE FOR A 1031 EXCHANGE WHO DOES NOT FULLY UNDERSTAND AND WORK WITH TAX LAWS.

Resources:

• The 1031 Like Kind Exchange Form provided by the IRS:
  • https://www.irs.gov/pub/irs-pdf/f8824.pdf
• Additional info from the IRS: https://www.irs.gov/pub/irs-news/fs-08-18.pdf
• A direct link to IRC section 1031: https://www.law.cornell.edu/uscode/text/26/1031

*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.

A CL-100 is a South Carolina document used for real estate evaluation purposes. The “CL” stands for “Clemson Letter,” because the document is governed by the Clemson Department of Pesticide Regulation.

This form is generally requested for most transactions and required by many lenders. It may be waived by a buyer or a lender, but even a buyer who wants to waive it may still find the lender is requiring it (to protect their investment, of course).

The form checks for several types of damage to a home – that created by pests, and that created by moisture or other wood destroying fungi related to such moisture.

The inspection usually costs anywhere from $85 to $250 and takes just an hour or two. It will determine the presence of any currently active or formerly active pests or moisture damage. It’s limited to visible areas – the inspectors, who must be appropriately licensed under category 7A, may not move anything around or remove siding, etc. This can limit the benefit of this inspection, but they can still do a decent job of finding issues.

The form used MUST be the most current form published. Under SC Code 27-1085(K)(2), it’s required that the most recent form be used; if they do not use the most current form, they have not provided you with a CL-100. This is extremely important for both sides of a transaction. A seller does not have to inform a buyer that they have realized the CL-100 sent over is invalid. It is the buyer and the buyer’s agent’s responsibility to ensure an adequate one has been provided.

On the form, if the “Yes” boxes are checked, especially in #3 and #4, the moisture reading must be provided, and the location of the damage must be indicated. A vague comment like “recommend investigation” or “N/A” in the moisture reading lines is invalid.

Damage must be noted in the comments! To “clear” a CL-100, there is no such thing as a “clear letter.” What you need is for an appropriately licensed contractor, determined by the type of damage noted on the CL-100 notes section, to state that it is structurally sound at the time of inspection. It does not require repairs, per se, unless there is question of structural soundness. The only repairs or replies required for any CL-100 are to the ones written on the form itself. If it’s not on there, it’s not part of the transaction – period.

You should always:

• make sure the form used is the most current – if not, don’t pay for the service, they have not performed it.
  • https://www.clemson.edu/public/regulatory/pesticide-regulation/bulletins/bulletin-16-wood-infestation-report.pdf
• check the current licensure of the applicant performing the work:
  • http://regfocus.clemson.edu/dpr/commercial.htm
• respond only to specific, actual damage noted on the form.

*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.

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.