Know the Legal Ropes of Real Estate before Investing

April 8, 2009 by  
Filed under Real Estate Investing

Real estate, whether used as a residence or investment property, is very tricky when it comes to the many laws and codes that regulate these dealings. Buying or selling a home involves using large amounts of money, and several different parties with interests at hand.

Property law is extremely old, and is always evolving in modern times. Laws exist which regulate disclosures and actions of all parties involved in financing, selling, renting or buying a home. Considerations may include environmental issues, liability and tax considerations, not to mention legal descriptions of what is and what is not part of the property.

Most practices when you buy or sell your residence are well-known by your mortgage lender and agent, and can easily be referenced with your local recorder’s office. However, it does behoove real estate investors to become at least slightly familiar with the area of property law to prevent any business-busting mishaps.

‘Mutual assent’ is included in any real estate contract, and is simply a written agreement outlining what each party will offer the other for exchange. Today, even a verbal agreement with your best friend must be written down and recorded to hold up in the court of law.

Parties are identified by their legal names or entities, and the legal description and address of the property dealt with is included. A price that both parties have agreed to in order for the property to change hands is also clearly identified, and each party must sign the contract. Laymen may refer to this contract as a ‘purchase agreement.’

Property law states that the property in question must be valued at what both parties claim, and this is typically determined by appraisals and local comparables.

If you’re looking into flipping a house, or buying and selling quickly for profit, there are other statutes you must be concerned about. The act of flipping is perfectly legal, unless documents on a run-down property reflect an inflated price.

Commercial and rental properties, on the other hand, open a whole other can of worms for an investor to worry about. Tenant rights are clearly outlined in your state’s constitution.

Lenders are also constantly governed by new requirements as to how much they can charge you for a loan, types of insurance and other items they can require as a condition of issuing the loan, and how much of a home’s value they may finance.

This means that due to the recent downturn in the housing market, many home loan lenders will most likely not be able to issue second mortgages at more than 100% of a home’s current value. This means that many borrowers currently owe much more than what their home is worth.

Tax considerations also come in to play when investing in commercial real estate. Flipping does not allow you to take advantage of many tax advantages, but may allow different ones for maintenance and repairs as a business cost. Always consult a tax professional before deciding to invest in commercial real estate to assess these costs.