If you’re new to real estate investment, you’ll find out pretty quickly that the learning curve can be steep. One of the most important parts of real estate investment is to educate yourself on the legal aspects of the business. The last thing you want to happen is to find out you’ve made a legal mistake...after you’ve already made one.
Falling into legal pitfalls can lead to significant costs and setbacks for real estate investors. Among other things, your reputation can suffer — and an investor’s reputation is everything.
Avoiding the Legal Mistakes of Real Estate Investors
Operating As An Individual Without An Entity
This is one of those legal pitfalls that any investors fall into and is hard to distinguish the right decision. I have never believed that an entity was necessary for small investors buying their first property(ies). I have changed my mind. The biggest problem for me has always been the fear that is instilled in investors. The fear of being sued. In my experience as an investor, it is a real possibility, although a remote one.
For me, I changed my mind about the need for an entity after talking to investors and entrepreneurs that are smarter than me. They pointed out that I had things to lose. They did it by asking questions about my bank accounts, my house, my cars, my investments and pointed out that if I had something to lose - anything to lose - it made more sense to invest as an entity and not as an individual. It is not about fear. It is all about being a smart investor and protecting yourself and the things you value most.
Illegal (Even Accidental) Discrimination
The Fair Housing Act is something every investor should know backwards and forwards. An investor cannot discriminate against tenants in regards to race, color, religious belief, nationality, familial status, age or gender. Local and state anti discrimination laws may protect tenants from discrimination on the basis of sexuality, source of income and disability.
Where investors get tripped up is in accidentally discriminating when specifically targeting a demographic for their properties. Investors must be very careful about their wording in advertising and interactions with potential tenants.
For instance, highlighting that your property is in walking distance of a church, mosque or synagogue, even if the surrounding community is largely composed of a specific religious community, it could be interpreted as an exclusive offer to those of that religion. By the same guidelines, not giving a college student or an unmarried couple equal consideration is discrimination.
Learn not only the ins and outs of the Fair Housing Act and Americans with Disabilities Act, but also your local anti discrimination laws. Accusations of discrimination can be the most damaging to an investor’s reputation.
Inadequate Legal Forms
Know your own legal forms. Don’t go to the Internet, a friend or office supply store for your legal forms. It’s worth it to invest in high-quality, thorough legal forms that won’t leave room for disputes or loopholes.
Make use of real estate attorneys to be sure that your contracts are in order. If there’s one place you don’t want to cut corners, it’s with legal documents. An up-front investment in doing it right can save you a lot of time and money in the long run.
When selling or renting out a property, proper disclosure is an absolute must. People must be informed of, for instance, the presence of lead paint in any property built prior to 1978, according to federal laws. State and local laws may have further requirements for disclosure. The rule of thumb is to disclose anything that could be dangerous or harmful to buyers or renters: including plumbing and electrical issues as well as mold and other dangerous conditions.
Making mistakes is a natural part of investing in real estate. For everyone, real estate investors included, legal mistakes are best avoided from the get-go by doing thorough research. There are far more legal pitfalls for investors to contend with than the ones we’ve listed here — so be careful!
What legal mistakes do you see most in real estate investment? We know there are more and your comments could help other investors! At the same time...watch our free video on the '11 Mistake To Avoid In Real Estate Investing'. Share with us in the comments.