Is Wholesaling Real Estate Legal In South Dakota?Jan 11, 2022
Wholesaling is a wise real estate investment strategy that allows you to get your feet wet in the real estate market in South Dakota without significant capital or time invested. But, similar to any new business endeavor, a real estate wholesaler must understand both the benefits and the areas of concern related to wholesaling real estate in South Dakota, which are discussed below.
A real estate wholesaler’s work resembles that of a flipper but reduces some of the more glaring risks associated with rehabbing real property. This is because there is no need for construction, permits, or time for something to go wrong.
A real estate wholesaler enters into a real estate contract – which can be for owner-occupied property, investment property, or rental property – but typically at a price below market value. The attractive price is usually the result of the seller needing to move quickly or another financial challenge that requires raising cash quickly. Therefore, many wholesale deals in South Dakota are found online in auction or foreclosure websites or real estate related websites like Zillow or Redfin.
The executed, binding purchase agreement legally re-defines the ownership of the subject property under the provisions created by the Principle of Equitable Conversion, which refers to the manner in which a property’s financial interests are determined, as follows -
The business of real estate wholesaling is an investment strategy that follows these general steps –
- A real estate wholesaler executes a purchase contract of sale with a seller
- A real estate wholesaler assigns the rights and obligations granted by the real estate contract to a different buyer – usually from a curated buyers list, by executing an assignment of contract.
- The difference between the first and second purchase price is considered the gross profit or assignment fee.
Wholesaling offers a real estate investor an investment technique that has become a popular real estate investment strategy because –
- It requires little in terms of capital, except for a standard earnest money deposit.
- It optimizes a return on an investment in a rapidly appreciating real estate market.
- It allows new investors to learn the business from a practical perspective. This includes the creation of a referral network of lenders, other wholesalers, and cash buyers, among others.
Next, let’s review what real estate wholesalers need to know about wholesaling in South Dakota.
- What Do You Need To Know About Wholesaling Houses In South Dakota?
- Is Wholesaling Real Estate Legal In South Dakota?
- What Are The Wholesaling Laws In South Dakota?
- Do You Need A License To Wholesale Real Estate In South Dakota?
- Final Thoughts
What Do You Need To Know About Wholesaling Houses In South Dakota?
South Dakota, located in the northern central portion of the Great Plains, was the fortieth state to enter the Union in 1889, at the same time as its sister state – North Dakota. The state is landlocked and bordered by Minnesota to its East, North Dakota to its North, Nebraska to its South, Montana to the West and Iowa, to its southeast.
With more than 77,000 square miles, South Dakota about 30% larger than New York, about 15% larger than the Sunshine State of Florida and about 70% of the size of Colorado. The Great Plains of South Dakota are low-density in terms of population but offer a scenic view of herds of Buffalo.
South Dakota is home to phenomenon landscapes and tourists’ attractions, including –
The Black Hills is home to the state’s highest peak – Black Elk Peak – at 7,242 feet above sea level.
The Badlands – a fantastic collection of eroded buttes and untouched grass prairies.
South Dakota’s population in 2021 was as follows, which ranks the state as the fourth least state in the country. South Dakota’s population is less than 7% of Ohio’s population despite the fact that Ohio is more than 40% smaller than the Mount Rushmore State.
The state of Delaware is about 2% of the size of South Dakota, but with nearly 1,000,000 residents, Delaware has about 10% more residents.
The five largest cities in South Dakota are –
Pierre, the state capital, and South Dakota’s eighth-largest city, has a population exceeding 13,000.
Real Estate Professional Organizations In South Dakota
The largest real estate professional trade organizations in South Dakota are noted below. Each of these South Dakota real estate professional associations is a member of the larger - National Association of REALTORS(NAR) –
Chartered in 1944, the SDR operates as a nonprofit that represents nearly 2,000 licensees and real estate professionals in South Dakota. The South Dakota REALTORS offers various benefits to its members via education, networking opportunities, and educational options, to name a few.
The CSDBOR is the voice for real estate in fifteen counties covering the central portion of the state. The Central South Dakota Board of REALTORS offers its members and the public a variety of tools, resources, and education options to support property ownership.
The BHAR is the primary real estate professional organization in the mid-central and western portions of South Dakota. The Black Hills Association of REALTORS provides homeowners and professional licensees the support and legislative advocacy required.
RASE was initially established as the Sioux Falls Board of REALTORS in 1920. Currently, RASE is the largest professional organization in eastern South Dakota that serves more than 1,000 real estate and related members and affiliated members. Its geographic territory includes these counties – Lincoln, Lake, Turner, McCook, and Minnehaha).
The MRAAR was established to further the interests of property owners and real estate professionals working and living in western South Dakota. Its mission is to exert beneficial influences throughout its geographic territory in South Dakota.
The South Dakota Real Estate Commission (SDREC)
The agency responsible for managing and enforcing license law is the South Dakota Real Estate Commission – housed with the South Dakota Department of Labor and Regulation (DLR). Real estate agents, brokers, real estate brokerage operations and brokering, plus other related professionals must comply with these South Dakota Statutes –
- South Dakota Codified Law Chapter 36-21A – Real Estate Licensing.
- Administrative Rules of South Dakota (ARSD) Article 20:69 Real Estate Brokers & Salespersons
The South Dakota Real Estate Commission’s authorization and creation can be found in SD 36-21A-13 -
According to South Dakota Codified Law (Chapter 36-21A-1), below are the relevant definitions related to South Dakota real estate license state law.
Real estate is defined as follows –
Salesperson or Licensee
And, according to 36-21A-12 –
(10) "Designated broker," any broker licensee designated by a responsible broker to act for the company in the conduct of real estate brokerage;
(16) "Responsible broker," any person holding a broker's license issued pursuant to this chapter who is responsible for the real estate activities conducted by those licensees acting in association with or under the auspices of the responsible broker;
(5) "Broker associate," any broker acting in association with or under the auspices of a responsible broker;
Persons & Entities Exempt From South Dakota License Law
The following provision delineates those persons offered exemptions to South Dakota’s license law-
South Dakota Real Estate License Reciprocity
Pursuant to the rules set forth by the South Dakota Real Estate Commission (SDREC) – these are the guidelines regarding the state’s real estate license reciprocity rules, which includes a passing grade on the state licensing examination.
Real estate licensees in good standing from a state with equivalent licensing requirements should follow these steps -
South Dakota Real Estate Market Metrics
Real estate wholesaling offers investors a viable and often-profitable investment strategy when home prices are in the Expansion Phase (Phase 2) of a typical 4-stage real estate cycle.
According to Zillow, the current South Dakota median home price in the market as of October 2021 is $261,947, which is higher than that in Michigan ($218,051), Pennsylvania ($245,153) and South Carolina ($247,606), but lower than New Hampshire ($391,033). Prices in South Dakota have nearly doubled since 2012, as evidenced by the following graph –
The following graphic breaks-down how South Dakota counties fared during the recent real estate-pandemic boom. Note that the areas shaded in darkest green below represent the most robust growth in the South Dakota marketplace.
Finally, real estate appreciation in Q2-2021 in South Dakota was an impressive 6.44% which calculates to a 28.35% average annual appreciation rate.
Is Wholesaling Real Estate Legal In South Dakota?
Yes. Wholesaling real estate in South Dakota is considered legal if wholesalers and investors carefully avoid behaviors and actions that do not violate the legal lanes created by South Dakota lawmakers.
But note, real estate wholesaling in South Dakota (and elsewhere) may create a debate regarding its legality – with opponents asserting that wholesaling real estate ultimately creates a transaction that requires a South Dakota real estate license.
However, these assertions hold little in terms of legal weight because real estate wholesalers are not selling/marketing real property but rather their legal rights (as granted through the Doctrine of Equitable Conversion) as a contracted purchaser delineated in a legally enforceable contract.
From this perspective, wholesaling real estate is considered legal. But - and this is a necessary clarification - real estate wholesalers must remain aware of South Dakota regulations and real estate laws. Knowledge of current real estate and license law helps to make sure that one’s wholesaling actions and choices remain within South Dakota’s legal limits – prior to making a move that cannot be undone.
A real estate wholesale deal requires the investor/wholesaler to execute a real estate contract with the seller/property owner of the wholesale properties. The real estate contract of sale is the legal document that awards the real estate wholesaler (along with delineated obligations) the legal right to sell/market and then assigns the real property as defined by the terms delineated in the real estate contract or purchase agreement.
A real estate purchase agreement is a bilateral contract. In this legal agreement, both parties to the contract have detailed requirements (i.e., contract provisions) if the contract is to be fulfilled (by a closing) according to the terms. It is noted that most real estate contracts are assignable by default unless the purchase agreement or local law explicitly states otherwise.
Remember, wholesalers of real estate have the legal right – as the purchaser in an executed contract of sale - to sell or market their legal right/option to purchase real property as described by the executed contract - to other interested potential buyers.
However, this does not create a violation of license law if the wholesaler has avoided selling/marketing the property and instead marketed/sold the equitable interest awarded when the buyer and seller entirely executed the contract.
What Are The Wholesaling Laws In South Dakota?
South Dakota Codified Law is quite clear as to when a real estate license is required to operate in the state legally.
Further, South Dakota license law requires a potential licensee to be qualified by exam.
According to SD 36-21A-6, a real estate broker, and therefore a salesperson is anyone who does any one of the following activities –
Penalties For Violation Of South Dakota Law
Those found guilty of violating South Dakota license law -
Do You Need A License To Wholesale Real Estate In South Dakota?
No, if you are a real estate wholesaler working in South Dakota, you do not need a real estate license that is state-issued if actions and choices do not violate the defined behaviors that require a license - in SD 36-21A-6.
Remember - the key to legally wholesaling real estate is to market and sell their legal asset; the real estate wholesaler’s equitable interest is granted when the buyer and the seller execute the real estate contract of sale.
Real estate wholesalers should ensure the contract of sale is clearly written to stay within the legal limits set forth by South Dakota legislators, including required disclosures and disclaimers.
South Dakota Is Not An Attorney-Close State
South Dakota does not require an attorney to close a real estate transaction. However, it is prudent to obtain legal advice from a real estate attorney should the wholesaler face complex decisions that likely have undeniable legal consequences.
Real estate investing, whether it involves wholesaling, flipping, or holding a long-term investment property to create passive income, remains one of the careers that provide business venture capitalists and entrepreneurs with the potential for limitless income. But it requires that real estate wholesalers operate within the legal limits established by lawmakers in South Dakota.
In addition to some fantastic opportunities for income and wealth-building, real estate wholesaling offers the benefit of on-the-job training, although, at times, newer wholesalers consider the path a little bit like trial by fire.
As you consider upscaling your career as a real estate wholesaler in South Dakota, it is important to keep these essential aspects forefront in your mind as you traverse the South Dakota real estate wholesale landscape –
- Operate with transparency and be candid with all transaction parties. This permits those involved to make educated decisions that best fit their strategy and objectives, whether the seller or a potential end buyer.
- Keep the seller in mind. Sellers that offer a property that would be attractive to a real estate wholesaler are likely facing financial pressures or other duress. They very often need to raise cash quickly. Don’t take advantage of someone facing challenging life situations.
- Get legal advice regarding the legality of your actions when situations are new or unknown.
The wholesale market in South Dakota real estate offers excellent opportunities to those who work within the state’s real estate and licensing laws. Understanding the legal boundaries can help you avoid violating them.
*Disclosure: Real Estate Skills is not a law firm and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs