You Must Know Your Real Estate Laws!
Real estate investing is serious business. Like any business it is subject
to all manner of unethical practices. Many real estate investors never
take the time to learn the laws that govern their activities. This is
a dangerous way to invest! At a minimum you should educate yourself on
the following items if you are considering or are already an active real
Although your attorney can assist you with closings, and you could hire
a licensed agent to assist you with the contract, lease, etc., it is still
critically important that you understand the basic documents involved
in real estate investing. For example, some questions you might consider
- What form of contract, deed, note, lease, and so forth is commonly used
in my area?
- Am I required to use special forms if I am an agent acting as a principal?
- Which forms should an attorney prepare, and which ones can I prepare
In addition to learning the local forms, you should consider tailoring
them to your particular needs. Not all standard forms will meet your needs.
You should have an attorney review any legal forms you customize to ensure
they are legal and correct, and remember that real estate agents cannot
draft legal instruments - only attorneys should perform this activity
Most states have laws governing Landlord-Tenant relationships. If you
invest in real estate and lease or rent to tenants, you MUST be familiar
with these laws. Some examples of things you must know include the following:
- What exactly does it take to evict someone?
- How much does it cost?
- How long does it take?
- Can I serve notices myself, or do I need a process server?
- Are there special housing rules that apply in my city?
- Is there a limit to the amount of rent increases I can ask for?
- Is there a limit to security deposits?
- Do I have to give interest on a security deposit to my tenant?
- How long can I hold a security deposit after the tenant leaves?
- Is there a minimum grace period before I can charge a late fee?
- What limits are placed on late fees?
- Do I have to set up special trust accounts to handle security deposits?
Review your state’s general statutes, and work with a knowledgeable
real estate attorney to get the answers to these questions.
Most legal documents such as deeds, promissory notes, and deeds of trust
need to be recorded after closing. You should understand what this means,
what is recorded, and the importance of the recording process. Some questions
to consider are
- Where do legal documents get recorded?
- What are the filing fees?
- What format must the documents follow?
- What taxes must I pay on the transfer of real property title?
You can contact your local title company, attorney, or the county recorder’s
office for more information.
There are certain disclosure laws that must be followed. For example,
if a property was built prior to 1978 you must complete a Lead Based Paint
disclosure, and must convey information to assist the tenant or buyer
in understanding how to avoid the hazards lead based paint my present.
It is important to research and understand what you must disclose to a
tenant or buyer.
You can find out more information from knowledgeable licensed agents in
your area, or by contacting the local real estate commission.
Lending, Interest Rate Limits, Other Loan
Real Estate investing and money, especially leverage of money, go hand
in hand. Therefore, understanding the lending process is essential. Establish
relationships with several banks and other funding sources, and learn
what their needs are and what they can offer you. You may also consider
doing some seller financing, in which case there are other rules you must
understand, such as limits for charging interest (usury). Regardless of
the lending institution with whom you work, be sure to practice full disclosure
of material facts in all transactions.
If you violate the Fair Housing laws, you can end up in serious trouble.
You MUST learn about this to ensure you do not violate the rules. Obviously,
you cannot discriminate against people based on race, religion, sex, age,
etc. However, some state and cities have more peculiar restrictions.
Learn Real Estate Agent Licensing Laws. In fact, I recommend you enroll
in and complete a state approved licensing course, even if you do not
wish to actually take the state exam to obtain a license. Many activities
you will perform as an investor can tread dangerously close to those activities
requiring an active real estate license. Check with your state licensing
agency, often known as the state's real estate commission, for more information.
If you are rehabilitating homes, you will likely need to comply with building
regulations and depending on the type of job, you may need to be licensed
as a homebuilder or developer. Also, be aware of Consumer Protection laws
that regulate high-pressure sales, foreclosure purchases, sale-leasebacks
and other distress real estate transactions. Finally, check with your
state department of revenue and your local city tax office to see if any
special permits are required before you conduct business in the city or
state in which you or your business reside.
Please do NOT contact us for legal advice
- contact an attorney specializing in the area of law in which you need
assistance. We STRONGLY recommend that have a good real estate attorney
on your team of advisors.
We hope that you have found this article useful and
we welcome your comments.
Copyright © 2004 Key Business Institute,
Inc. All rights reserved.