Sponsored by Bay Property Management Group
Closing on a rental property is the dream of many Americans. There is nothing like the challenge and reward of investing in real estate.
But real estate is a competitive, tough market, made even more difficult by the growing number of liabilities in real estate transactions. If not attended to, these can sink your deal- or your finances! We detail some of those liabilities and how you can deal with them:
One of the most common liabilities in real estate transactions are hidden repairs or damage to the property. These are problems that are not disclosed by the seller but crop up soon after the property changes hands.
An example is a basement that is prone to flooding during heavy rains, or a structural flaw in an apartment building that puts residents in danger and needs to be fixed.
It is important to get a full inspection done by a professional before you buy any property. To avoid a situation like this, it can be good to have a property manager handle your investment properties.
Real estate transactions can also be affected by liens. Liens are a form of liability in real estate transactions. A lien occurs when there is a legal claim on a property, for example, by a bank, by the IRS, or by a former partner for unpaid child support. Liens can be created by the common law, through statute, or through contract.
There are three common types of liens:
Judicial liens are claims that are created by a court order. They are created when a court orders a debtor to pay a creditor. In real estate transactions, a judicial lien can affect a property owner when they fail to pay a creditor.
Statutory liens are claims that are created by statute. They are created when a statute requires a third party to pay a specific creditor. A statutory lien commonly affects real estate transactions when a property owner fails to pay taxes or a type of contractor who is protected by statute to put a lien on a home or property.
Contractual liens are claims that are created by contract. They are created when a contract requires a third party to pay a specific creditor. In real estate transactions, a contractual lien can affect a property owner when they fail to pay a contractor or if they enter into a contract with a third party that does not pay them.
How to Deal With Liens
Before you sign a contract, look for liens on the property by conducting a title search. If you see a lien, ask for an explanation. Determine if the lien is valid- If you see a lien on the property, make sure that it is valid. If the lien is valid, ask the seller to pay off the lien or reduce the price by the corresponding amount so that you can pay off the lien.
Disclaimers are a form of liability avoidance in real estate transactions. A disclaimer is a document in which a property owner transfers their real estate but disclaims any future liability for the property in question.
A disclaimer can be a powerful tool in real estate transactions. It can protect a seller in a transaction from future liabilities. But it can also put a buyer on the hook for things a seller should be responsible for. Here’s what to look out for when negotiating disclaimer:
Avoid Blanket Disclaimers/ “as is” Clauses
If you do not want to be liable for future liabilities, do not sign a contract that transfers all future liabilities to you. If you do, you can be responsible for all future liabilities, including, but not limited to, hidden faults in the structure, unpaid taxes, and even debts!
Another type of disclaimer is an “as is” clause, saying that the buyer agrees to buy the property “as is”. The fairness of this clause depends on how it is worded, but unscrupulous sellers may conjecture it to mean the same as a blanket disclaimer. This ambiguous wording brings us to our next point…
Consult an Attorney
Before you sign a disclaimer, consult an attorney to make sure that you understand all of its terms. An attorney can also help you understand the risks involved in the transaction. Many disclaimers will limit your ability to sue in the case the seller misrepresented the property.
Consider the Seller’s Motives
Ask the seller why they want to transfer their liabilities to you. If they tell you that they want to transfer all of their liability to you. If they do not give you a satisfactory answer, do not sign the disclaimer as they may have something to hide.
Conduct a Title Search
Before you sign a contract, conduct an intensive title search. When you conduct a title search, you can see if there are any outstanding liabilities or claims related to the property in question. If there are, you can try to mitigate the risk of liability in the transaction.
If you are interested in learning more about disclaimers and other common financial issues that crop up during real estate transactions, go to http://onlinefinancesolution.com/.
Although liabilities like hidden repairs, liens, and disclaimers are increasingly common and are hard to deal with, having a professional can help protect your real estate investment.