- What are some of the common
pitfalls involving a real estate deal ... ?
- Should I f I hire a real
estate broker, or a real estate lawyer ... ?
- If I hire a real estate broker,
why do I need to hire a real estate lawyer... ?
- What are the different type of
deeds and why should I care ... ?
- Does it make a difference how I
take title to a commercial property ... ?
- What is a 1031 exchange and why
should I care ?
A:
Regardless of whether you're buying a home or a piece of investment
property, there will always be risks involved. Your goal should be to
lessen these risks as much as you can. Examples of potential problems
that oftentimes lead to legal disputes include:
-
Defects in title
-
Debt service and lender requirements
-
Mechanics liens
-
Zoning and land use problems
-
Market fluctuations
-
Hazardous waste and environmental contamination
Real property interests are usually conveyed by a deed. In order
to track how property changes hands, every state has a public record
system where real property deeds are recorded, becoming a part of the
public record system for everyone to see. In theory, this is a great
system for keeping track of who owns what, but deeds are sometimes not
recorded. Sometimes people sell or transfer partial interests in
property. Lenders make loans against properties and record mortgages or
deeds of trust that become liens that are of public record. Easements
given to cross over or use property may or may not be of record. A
judgment against a person can be recorded and become a lien against any
real property that person owns, even without his consent. All these
things can become a lien against title. You may not be buying everything
you though you were buying, because someone else may have a prior claim
that you did not know about.
If
you are borrowing money to acquire a piece of real property, the lender
is no doubt going to want security for the loan. While a personal
guarantee may work if your net worth is substantial, a lender will
usually want a mortgage or deed of trust against the property. This will
give the lender the right to foreclose if you fail to comply with the
terms and conditions of the loan. Beyond the repayment requirements,
these terms and conditions can give rise to other concerns that could
become a problem. For example, some lenders prohibit borrowers from
taking out more loans on their property, which could stop you from
getting more financing that your business may need down the road.
Oftentimes, a commercial loan will also require that a business maintain
a certain "net equity." Pre-payment penalties are also common on
real property loans. Also, many lenders on a big commercial real estate
deal require that their legal fees and costs be paid by the borrower(s).
In
a business context, contractors who do work on real property have a
process called a "mechanics lien" that they can use to make sure
that they get paid. This is a statutory lien that contractors, laborers
and materialmen place on property when they've performed work or
furnished materials in the erection or repair of a building or an
improvement. They must generally give advance notice that they are going
to file the lien, and must then take action to enforce the lien within
strict timelines if they aren't paid. Ultimately a mechanic's lien could
be used to foreclose on property, so it can be a very powerful tool for
a contractor, a laborer or a materialman.
A
big concern for a business is to make sure not only that property used
in the business is properly zoned, but also that the zoning of nearby or
adjacent properties is not going to be a problem. Believe it or not,
many people fail in new businesses because they don't investigate the
land use and zoning issues carefully enough. And even if you do your
homework, issues can come up down the road if governmental agencies or
neighbors try to change the zoning on your property to limit your use of
it.
If
you are in the real estate business, changes in property values and
other market fluctuations can have a profound effect on your operations.
Rents can go up or down; tenancy rates can increase and decrease.
Changing property values and market fluctuations can also affect any
other type of business that owns property. With retail space, for
example, a company that owns rather than leases a store location may
decide to change locations to follow their customer base, only to find
out that they can't afford to move because of property values having
dropped to the point that their business premises can't be sold at the
price they need. (In contrast, a lease may provide more flexibility
because, at the end of the term, the business could simply pack up and
move without having to worry about selling the premises.)
The biggest potential concerns to owning business property, though, are
hazardous waste or environmental cleanup problems. Property owners are
the ones who have primary responsibility for fixing such problems, even
if the current property owner did not cause them. These problems may not
be obvious or apparent to the naked eye, and could arise from anything
ranging from an underground storage tank to an old garbage dump. If
you're in the chain of title to contaminated property (meaning that a
some point you held an ownership interest in that property), you're
potentially responsible for paying for the clean up. The costs for an
environmental cleanup operation can run into the millions of dollars.
A:
The goal of every seller is to maximize profits, and every prospective
buyer wants to get property as cheaply as possible. Having to pay a real
estate commission or other professional fees as part of a real estate
deal only works at odds with these goals. Consequently, many business
people who are sophisticated when it comes to negotiating real estate
deals may feel comfortable with doing a lot of the work themselves on
commercial real estate deals. However, even sophisticated business
people will still rely on professional advice when comes down to
actually closing a deal, as the potential pitfalls can be so
significant. The bottom line is that you should seriously consider
hiring real estate professionals, and professional fees should be
factored in as a cost to doing any commercial real estate deal.
There are many reasons why you should hire your own real estate broker
(or an agent who may work for a broker). The broker or agent should have
specific expertise in commercial real estate, and particularly in the
area where you need it (for example, office space, retail space,
industrial warehouse space, apartment complexes, agricultural land).
Even if you're just leasing property, a real estate broker may be
invaluable. If he or she is good, an agent will go out and find property
for you. The agent will also serve as an arm's-length intermediary to
negotiate on your behalf, which can be much more effective than you
trying to negotiate the deal yourself. (Wouldn't you love to have an
agent representing your interests when you go buy a new car? It would
help you to avoid high-pressure sales tactics, prevent you from making
rash decisions and make it easier for you to say "no." The same
considerations apply here.)
Keep in mind, too, that real estate agents work on similar deals all the
time, so presumably know what they are doing. Their knowledge and
contacts can well be worth the cost of a commission. They can also help
you with the paperwork, to make sure you don't do something stupid when
submitting an offer.
If
you are a buyer, it may really make no sense not to hire a broker when
it would usually be at no extra cost to you. The seller usually pays the
commission in most real estate deals. Most real estate agents agree to
split the commissions on listed properties, though, so an agent has a
real incentive to be involved in a deal even if he or she is not the
listing agent. But a buyer can simply chose to work with the seller's
agent to close a deal. The seller's agent usually won't object if a
written consent is signed. (Incredibly, this happens all the time and it
only makes sense from the standpoint of the seller's agent, who then
gets to keep the whole commission!)
A
multiple-listing arrangement is a "you scratch my back, I'll
scratch yours" sharing mechanism for real estate agents. They are
mutually beneficial to buyers and sellers, as well, since the multiple
listing of all properties on the market will inevitably help to bring
buyers and sellers together. One of the conditions to an agent
participating in such an arrangement is that commissions are shared when
more than one agent is involved in a transaction.
Any reputable real estate agent would be more than happy to explain the
process at greater length. The agent should also be willing to work with
you as long as you understand that he or she would have to look to the
seller's agent for payment of a commission, if any is to be paid. This
helps protect the buyer in the rare instances where there is no seller's
agent (for instance, a "property for sale by owner") where the seller's
agent does not participate in a multiple-listing arrangement.
You shouldn't hire a broker just because he or she is a relative, or
because he or she is your best friend's spouse. Instead, hire the best
person you can find who has expertise in representing parties on real
estate sales in the segment of the market where you are looking. Ask
lots of people who they would recommend and why. Ask disinterested
parties who are more likely to give you an informed answer (for example,
escrow agents, lenders, contractors, real estate attorneys, and people
who have recently bought or sold commercial property). Look in the
newspaper advertisements to see who have been the highest producers in
your segment of the real estate market. When somebody's name comes up
more than a few times, that person would be someone who you would want
to contact.
A:
The benefit of competent legal advice on a real estate deal stands on
its own. There are so many things that can go wrong on a real estate
deal that you may very well end up kicking yourself mightily if you
don't hire an attorney to help you with the transaction. You may even
end up hiring a lawyer on a lawsuit, which could end up be a lot more
expensive. Real estate agents don't usually get paid unless the deal
closes (or unless you somehow become obligated to pay a commission by,
for example, backing out of a deal or otherwise breaching your listing
agreement). And listing agreements will clearly state that real estate
agents are not providing legal advice. So real estate agents are
typically not going to worry about the "what if's" of the legal details
and are inclined to do whatever they can to push a deal to closure. This
is not the case with an attorney working on an hourly basis, who is
going to get paid one way or the other. An attorney will be in a better
position to provide you with essential legal advice and to do so with
more impartiality than may be the case with your real estate agent.
A:
The type of deed can make a big difference. In some states, the typical
conveyance is a grant deed, which basically says the seller has
an interest in the property and that it is being conveyed to the buyer,
but not necessarily with any representations or warranties as to title.
Other states have warranty deeds that go a step further to
provide a warranty that the seller has good title to the interest being
conveyed. All states have something like a quitclaim deed where a
party is only signing over whatever interest that party has in the
property, if any.
The bottom line is that you could take a deed from someone that means
nothing. While this may amount to fraud on the part of the seller, who
wants to have to sue someone to try to enforce your rights? And you may
not even have a good case if, for example, you accepted a quit claim
deed that says that you got only whatever interest the other party had,
which may have been nothing. You can see the need to get competent legal
advice.
A:
There are many issues that can arise with respect to how you take title
to property, and especially so in a commercial context. If you take
title as an individual, you may be exposing yourself to potential
liability exposure that you might want to try to avoid or at least
minimize. You take title through a business corporation, but doing this
could be disaster from a tax standpoint point. Sometimes, there may be
other alternatives such as forming a limited liability company that you
would own and control that, in turn, could lease the property to your
business entity.
If
joint ownership is involved, you should clearly understand the
differences between taking title as joint tenants, as tenants in common,
as a partnership, or as community property. You should also clearly
understand your rights versus the rights of your co-owners. Each and all
of these types of ownership have significant ownership implications and
rights of survivorship.
It
short, there are no universal rules of thumb with respect to how to take
title. It's always advisable to seek professional advice, including your
lawyer and CPA, to assist you in making a smart decision.
A:
A
"1031 exchange" refers to a method of deferring tax on the sale of an
interest in real property allowed under section 1031 of the Internal
Revenue Code. In brief, it allows a seller to defer tax on a gain that
would otherwise be realized on a sale of property if the proceeds from
the sale were reinvested in like-kind property. It's quite common for a
1031 exchange to be involved in some manner in a commercial real estate
transaction.
A
seller must contractually arrange to convey his or her interest in the
property being sold in exchange for receiving an interest in another
piece of commercial property. If cash is involved, an escrow company or
facilitator usually it, because treatment under section 1031 won't be
possible if the proceeds are paid to the seller even for an instant. In
practice, however, the rules for a 1031 exchange can be quite complex
and it is easy for a seller to run afoul with them. It's always
advisable to have competent legal counsel involved in the transaction.
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