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DUE DILIGENCE AND MULTIFAMILY PROPERTY PURCHASES

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Friday, July 27, 2018.

Buying a multifamily property can be a fantastic investment — but only if you make sure to perform your due diligence first. That’s the only way to make certain that your money is wisely managed.

Don’t get sidetracked by the excitement of the venture. Something that seems like a great deal may not be all that special once you dig deeper. Here’s where you need to start your due diligence on a multifamily property:

1. Interior unit inspections

You need a thorough inspection of each rental unit, including appliances, floors, bathroom fixtures and ceilings to check for needed repairs or replacements.

2. Environmental hazards

A detailed environmental inspection should include information on any asbestos or lead paint on the premises. Hidden hazards can make getting financing difficult and expose you to litigation.

3. Tenant information

What are the demographics of your tenants? Can you expect long-term leases to continue? You also need copies of all of the leases in order to understand exactly what agreements have been made. A schedule of rents is also important so that you know how much rent is due — and how good the tenants are at paying. That helps you avoid hidden issues that could lead to evictions and a lot of expense for you later on.

4. Market analysis

Look into what is happening with the economy in the area, the real estate taxes, the population growth and any big changes in demographics. Who are the major employers in the area? If one major company employs most of the tenants, your economic health is tied to the company’s health once you invest. Make sure that’s something you’re willing to do.

5. Litigation

The last thing you want to do is purchase someone else’s legal headache. Make sure that there’s no litigation pending regarding safety, structural problems or management issues. If there is, you need to protect yourself against liability before you agree to buy.

Remember, you can’t trust the seller to warn you about any risks you are taking with a commercial property acquisition. It’s always, “Buyer beware!”

Related Posts: Three questions to ask before any commercial property purchase, Lawsuit against Zillow quashed again: Buyer beware, Is it a good time for your business to buy commercial property?, How does the adverse possession of real estate work?

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THREE QUESTIONS TO ASK BEFORE ANY COMMERCIAL PROPERTY PURCHASE

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Wednesday, July 11, 2018.

Commercial property is one of the most solid investments you can make over time, but only if you invest wisely.

How can you make sure that you’re putting your money where it will do you the most good? Ask questions about the indicators of investment success before you buy any piece of property.

1. What is the neighborhood like?

Take care to evaluate both the current condition of the neighborhood and the things that are likely to change its shape in the near future. For example, a property that’s in an area that’s gradually being gentrified could bring about significant returns if you buy early.

Look at the changes in the area and try to determine the general direction that the neighborhood is moving. Plans around hospitals, public transportation, roads and zoning can all affect your investment’s value.

2. Is the seller motivated?

You want to get a deal for your money, which means you need a seller who is motivated to let go of his or her property at a price that gives you room for profit. There are plenty of them out there, especially as owners age and decide to move on to other places, but you need to be willing to walk away from any property where the seller isn’t ready to deal.

3. What will your net operating income be?

This is a critical question. You can’t tell how valuable (or affordable) a commercial property is going to be unless you have some idea of what your net operating income will be. Calculate the value of the property’s gross income and subtract the cost of your anticipated operating expenses. This will give you the net figure you need to determine if you can make a profit.

The more familiar you are with the language of commercial real estate investment, the better you’ll be at picking out a good deal when you see it. Take plenty of time to familiarize yourself with the process. Commercial real estate purchases are something that you never want to rush if you want the most reward for your money.

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LAWSUIT AGAINST ZILLOW QUASHED AGAIN: BUYER BEWARE

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Thursday, June 14, 2018.

A class-action lawsuit against Zillow was tossed out of federal court for the second time. The plaintiffs had alleged that Zillow’s home-valuation tool was misleading and the company’s practices were intentionally deceptive.

According to the complaint, which was filed by a group of property sellers near Chicago, Zillow has hidden relationships with realtors that put private owners who try to sell their properties on their own at a serious disadvantage. The online valuation tool provided by Zillow was the first to give property buyers and sellers access to the type of value comparisons that had traditionally been available only to realtors.

Since so many people look at Zillow when shopping for a property, an incorrect value on the site can damage the chance of a sale before it even gets started. Owners claim the company ignores challenges to inaccurate estimates and purposefully lowers the value on properties not listed with the company’s affiliated agents. They say the company has a financial incentive — 71 percent of its revenues — to manipulate the figures because the affiliated brokers pay for ads and leads on the site.

For its part, Zillow maintains that its estimates use millions of pieces of public data that are put through its private algorithms to produce an approximate value. It also claims that its values are fairly accurate — and that users are warned from the start that the figures they see are merely estimates.

The judge in the case stated that Zillow’s warning to consumers is sufficient. Its arrangements with realtors who pay for advertising on the site doesn’t create a conflict of interest.

Buyers who are looking for property — whether they plan to change residences or want to invest in rental property — should keep Zillow’s warnings in mind when they use the tool. Instead of relying on an estimate provided by the site, use it as just one piece of information as you seek to determine the true value of a property.

Source: The Real Deal, “What to make of the dismissed class-action lawsuit over Zestimates,” Kenneth Harney, May 27, 2018

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IS IT A GOOD TIME FOR YOUR BUSINESS TO BUY COMMERCIAL PROPERTY?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Thursday, May 24, 2018.

Owning your own piece of commercial real estate sounds like a great idea — but is it really worth the trouble?

According to the experts, it’s actually a great time to make that kind of investment if you’re already in business for yourself.

Why? There are a host of reasons that a commercial real estate purchase could be right for you:

More control

You already know that it can be difficult to negotiate a good commercial lease that accounts for all the variables that can happen in business.

Owning your building negates that problem because you control your rent. Even better, it allows you to control the external factors that can affect your business — especially if you operate out of a multi-unit plaza or building. You can control the mix of tenants and the type of overall clientele coming in.

The tax benefits

It pays to get some advice when you decide how to organize your business holdings. Some companies choose to create a separate business entity to own and administer their buildings. The parent company then pays monthly rent back to the holding company — which works to secure some important tax benefits for both the owner and the business.

A growing asset

Commercial property usually goes up in value over time — which means that you have an asset that will appreciate in value. That’s always a wise business decision.

Secure wealth

One of the hardest parts of being a business owner is deciding what to do with the company’s money. You need to save some, but you also want to put it back into the business. Property acquisition gives you the opportunity to do both that the same time. Because the property can be used to secure loans in the future, it’s almost as good as money in the bank.

Only you can decide if buying commercial property is in your company’s best interest — but it’s definitely something that you should assess while interest rates are still favorable.

Source: business.com, “5 Reasons to Purchase Commercial Property in 2018,” Chris Hurn, accessed May 24, 2018

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HOW DOES THE ADVERSE POSSESSION OF REAL ESTATE WORK?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Friday, April 20, 2018.

Adverse possession is an unusual quirk of property law. Essentially designed to help settle boundary disputes or to give property owners their rights back when the documentation of ownership was haphazard, adverse possession laws have the ability to turn squatters into owners.

For example, imagine that you own a large tract of wooded land. A man decides to move into an old hunting shack out there and make it his own. You’re aware of his presence, but decide to not to make him leave. There’s a possibility, depending on what he does, that he could end up the owner of the shack, the property it sits on and whatever part of the land he maintains for his use.

In California, in order for the squatter to gain title to the shack and any of your land around it, he would have to:

  • Either enclose the land he’s claiming inside a fence, cultivate the land or somehow improve the property
  • Do so openly for five continuous years
  • Pay the taxes on the land he has claimed

In addition, you would have to fail to take any action to stop him or assert your right to the property — including paying the taxes yourself.

It doesn’t particularly matter if the man living on the land believed the property was his from the start or knew that it really belonged to you — his claim of ownership is hostile to yours.

Adverse possession can be a real problem for absent landowners. If you hold title to some undeveloped property, an empty lot in a city or an empty house somewhere, it’s very possible that someone else could claim it if you aren’t paying attention.

To prevent the problem of adverse possession:

  • Pay your property taxes in a timely manner
  • Visit your property at least once a year in person
  • Document your visit, preferably with photos, to show that the property is uninhabited
  • Get legal advice if you find out that someone else has paid taxes on your property
  • Begin eviction proceedings against anyone you find living on or using your property
  • Consider encroachments — the use or claiming of a small part of your property on its boundaries by someone else — a serious issue

Remember, in real estate law, you can never be too careful — a relaxed attitude toward possession can end up being very costly.

Source: lawshelf.com, “Acquisition by Adverse Possession,” accessed April 20, 2018

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BAD REAL ESTATE DEAL LANDS TAYLOR SWIFT IN LAWSUIT

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Friday, March 2, 2018.

Even the rich and famous can end up in trouble when a real estate agreement goes south.

A real estate company is suing the firms that represent pop icon Taylor Swift. At issue is whether or not the firms gave a specific agent the exclusive right to sell the singer a piece of New York property she wanted. Famous individuals like Swift often go through intermediary companies to purchase real estate. It’s the only way they can avoid paying artificially inflated property values once the sellers get wind of who wants the property.

He claims that he had a written promise from the singer’s representatives, but the property deal was closed through another agent anyhow. The agent is asking for more than $1 million, which represents the commission he lost when the sale went through another agent.

While neither the singer nor her representatives signed a formal real estate contract with the agent, the representatives did communicate with the agent by email. In at least one of those emails, the agent was told that the companies representing the singer’s real estate holdings would “solely” go through him. While the singer herself didn’t do anything to create the problem, it could end up costing her or the companies she worked with quite an additional expense if the lawsuit is successful.

In this case, it’s very possible that the somewhat casual email exchange between the holding company and the real estate agent may be enough to establish a legally binding contract. It has been sufficient in past court cases that were similar.

Buyers should always be careful about having a written agreement with their real estate agent. While many people don’t like signing a contract that gives someone the exclusive right to sell them a property, those contracts can provide buyers with something very important: an end date to the agreement.

If an agent isn’t working out, the contract can be allowed to expire before the buyer decides to move on to another agent’s services.

Source: realtor.com, “Can Taylor Swift ‘Shake Off’ a Real Estate Lawsuit Gone Horribly Wrong?,” Judy Dutton, Feb. 21, 2018

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WHAT’S THE DIFFERENCE BETWEEN MINERAL RIGHTS AND SURFACE RIGHTS?

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Wednesday, February 7, 2018.

Most people assume that when they buy a piece a land they’re buying ownership in “fee simple,” meaning that the deed includes everything on it and under it as well. However, that may not be the case if the property happens to be located in an area where there are often significant underground resources.

Surface property rights include the right to build on the land and farm it. Mineral rights, on the other hand, include the right to mine the property for oil, gas and precious minerals like gold and silver. These two rights can be severed and sold (or willed and inherited) independent of each other.

This can create a lot of confusion about who has the right to do what on the property. If you own the surface rights but not the mineral rights, you may not be able to stop someone from reasonable access to mine the land. On the other hand, if you own the mineral rights, a mining company may not be able to simply start digging for gas or oil. The owner of the surface rights has to be considered.

Unfortunately, it isn’t always easy to tell whether or not a property seller is offering fee simple rights or not. It isn’t among the required disclosures in many states to tell a prospective buyer if a property’s mineral rights have a different owner.

That’s why it’s always advisable to have a title search done very carefully before you purchase. If you do find out that the mineral rights are severed on a piece of commercial real estate that you plan to purchase, you have a variety of legal options to explore rather than just walking away.

For example, it’s possible to negotiate a lease agreement with the holder of the mineral rights that will restrict access to the minerals and prevent a mining company from coming in and disturbing things. Alternately, you could try to purchase a share in the mineral rights yourself (if the owner won’t sell them all). That would prevent a company from mining them without your agreement.

Source: Mineral Wise, “Surface Rights vs Mineral Rights in Oil & Gas Leasing,” accessed Feb. 07, 2018

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SHORT SALES CAN MAKE A GOOD BARGAIN

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Thursday, January 11, 2018.

Many real estate purchasers shy away from short sale properties because they hear a lot of third-hand horror stories.

Short sale investment properties can be a bargain, especially in areas where real estate prices were inflated at one point but have now fallen. You can also simply get lucky and happen across a short sale in a coveted location.

Short sales properties are those being sold for less than their mortgage’s total value. The sale is allowed only because the seller is undergoing a hardship that makes it the reasonable thing to do and the property’s equity is too low to cover both the mortgage and the costs associated with selling it (like realty fees).

For example, if a commercial property goes up on short sale, the owner may have been a corporation that dissolved due to a death or legal trouble, or gone bankrupt. The seller has to have permission from the bank to sell at the reduced price — so there’s no fear on your end if you’re the buyer.

If you decide to make an offer, you may have to wait a little longer than you would for a private seller alone to answer — both the owner and the bank have to agree to the sale. While the owner obviously wants to unload the financial burden, keep in mind that the bank is still going to want fair market value.

This is where it pays to do your research carefully. The property may end up with multiple offers if it is in an attractive area and at a good price, so don’t offer the minimum unless you really think that’s all it is worth. Before you write your offer, make sure that you:

  • Research comparable properties that have recently sold in the area
  • Note any faults or problems with the property that could reduce its value (such as poor maintenance)

Then, be prepared to wait. While you can get approval in a matter of weeks, a short sale isn’t for you if you’re in a hurry — expect 3 to 4 months before the agreement goes through.

Sometimes, a short sale can be significantly eased through the services of an attorney that’s familiar with the process. If you’re concerned about closing the deal, consider seeking advice on property acquisitions and dispositions.

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HOMEOWNERS’ ASSOCIATIONS: WHAT YOU NEED TO KNOW BEFORE YOU BUY

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Friday, December 22, 2017.

If you’re thinking about buying property that comes with a homeowners’ association (HOA), there are some things that you need to think about before you buy.

HOAs form what are known as “common interest” communities that are designed for everyone’s benefit — but you may not feel particularly “benefited” if you don’t like the rules.

Before you let a dream home turn into a nightmare, this is what you need to know:

1. Homeowner association fees are not optional. Whether you want to take part or not, the HOA is a package deal — along with the fees. You need to find out if they are paid annually or monthly and factor them into your budget.

2.You can be charged more. If something that’s available for common use — a pool, gym, roof or parking deck — goes up, the HOA can level an assessment. This could set you back thousands when you least expect it.

3. HOAs are designed to protect the community’s quality and style of life. That means it may restrict anything from the type of fence you put up to the color of paint you use on your doors.

4. You want to examine a copy of these important documents:

  • The HOA’s bylaws, which tell you how the HOA operates
  • Any subdivision map or plan, which illustrates common areas and easements
  • The HOA’s Covenants, Conditions and Restrictions (CC&Rs), which are binding documents even if you didn’t sign them. They set the tone for the entire HOA.
  • Association rules, which can be modified by a vote of the HOA’s rules.
  • Delinquency policies, which tell you what happens if you fall behind on your HOA fees.

5. It’s important to remember that the HOA can foreclose on your property for unpaid HOA fees just as easily as a bank can foreclose for an unpaid loan.

HOAs can be wonderful — if you like your world orderly and predictable and enjoy the benefits they bring. However, you need to carefully review all of the HOA’s governing documents, especially the CC&Rs. It may even be wise to seek legal advice before you commit to the real estate transaction.

Source: The San Diego Union-Tribune, “HOA Homefront: What governing documents do (and why you should care),” Kelly G Richardson, Dec. 07, 2017

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