Locking Up the Property

Controlling property is the first step in purchasing and profiting from real estate. So once you find a good profitable property, “lock up” the property as quickly as possible and make it yours. An oral agreement with a seller who says you can have it at a specific price means nothing legally until you have the deal in writing.

Controlling or locking up a property means you have the property under some type of written contract (e.g., a signed purchase agreement or option contract). While neither a purchase agreement nor an option contract convey title to you, they do state that the seller will transfer title of the property to you on a future date, so long as both buyer (you) and seller meet the specifications written into the contract.

This allows you to control the real estate for as long as your contract specifies the period of limitations. Then, once you “control” the property, the seller cannot surprise you by selling the property to someone else. You, on the other hand, can resell the property to someone else prior to the closing date.


Negotiating a Contract

Negotiations on a contract to control the property begin with you first locking up the property with a contract. Again, without a contract, the seller has the right to sell the property to someone else, pulling the carpet out from underneath you.

When you negotiate a contract, you’re really negotiating a deal. One of the most important things about negotiating contracts – as well as one of the best ways to ensure that the final deal is favorable to you – is to understand what it is the seller really wants or needs.

As previously discussed, never assume you know what the seller wants and needs. Be sure to ask the seller what these are… you might be surprised at what you learn during your conversation with them regarding this... and what you find out can help you as you negotiate.

Below is a list of some of the questions you may ask:

·    Why is the owner selling?
·    What is the owner going to do with the money?
·    Does the owner need the money?
·    How long has he/she owned the property?
·    Is there a time frame in which the owner must sell the property?
·    How long has he/she been trying to sell the property?
·    What avenues has the owner used to try to sell the property?
·    What type of neighborhood is the property in?
·    Is there a mortgage on the property?

As you negotiate, establish an early win/win financial strategy with the seller so that he/she will quickly see you as a partner rather than an opponent. This is a key element in negotiations.

Take an efficient and professional approach to negotiations and try to seek out everyone’s position in the selling decision. Be persistent, but never be forceful or overbearing. The seller should view your proposal as the logical conclusion to be drawn from the data you’ve provided. If you take this professional approach to working toward a winning result for all parties, it will set you apart and make your offer more compelling.

The Weasel Clause
Never enter into a real estate purchase contract without a weasel clause (also called a mother-in-law clause or contingency clause). This clause is key to reducing your risk during this period.

A weasel clause is a contingency clause that allows you to legally back out of a contract should you decide not to go through with the purchase of a property for specific reasons. Closing can be contingent on anything you can think of, as long as the seller allows it – just make sure it gets in the contract.

If a seller will not let you put a contingency clause into a contract, walk away… unless the deal is an absolute steal and you are completely confident you can profit on the property. But in most cases, if you have a motivated seller, you should be able to include weasel clauses with the contingencies you deem necessary.

Assignability
When signing a contract, be sure to ensure yourself the right of assignability. This means that not only should you put your name on the contract, but “assigns,” as well (e.g., “John Doe or assigns”). This legally gives you the right to assign the contract to another buyer before the close if you want to flip the property for fast profits (i.e., sell the property to another person before you’ve officially closed on the deal).

File Your Contract to Protect Your Claim
Because having a contract alone may not always be enough to protect you from unscrupulous sellers, file your contract and protect your claim.

Sometimes a seller may sign a contract with you and then underhandedly try to sell the property to someone else, totally disregarding your offer and the work you’ve done thus far toward getting the deal done.

To protect yourself against something like this happening, after signing a contract, go to your local recording office where documents regarding real estate are recorded and file a letter or affidavit stating that you have a contract with the seller on the property. In your affidavit, specify the property address, the sellers’ names, your name, and the purchase price of the property.

To have an affidavit recorded, you may need to submit a copy of the contract to be recorded and pay a transfer fee or tax for doing so. But the small cost and minimal time involved could be worth it in the end if the seller tries to sell the property out from under you.

Recording your deals – and having that affidavit to refer to them should this happen – is much easier and more effective than suing. As a reminder, once you have a contract, you enter into the phase of controlling the property.

Holding a Property

Once you close on the property, take title, and transfer ownership to yourself or to your business, you hold the property (unless you flip or sell it immediately).

You can hold a property one of several ways:

·    Sole proprietorship
·    Corporation
·    Partnership
·    Limited Liability Company (LLC)
·    Land trust

Sole Proprietorship
In a sole proprietorship, you hold the property in your name or your spouse’s name. This is the simplest method of ownership, as taxes are easier to handle, property is easier to transfer, and you can put the property in your will to leave to an heir.

Corporation
A corporation allows you to hold as many assets as you want, including property, under the name of a business so that it is not in your name. This gives you personal liability protection so that the property is not directly in your name. You can, however, still give away or sell the property fairly easily. You are still in control, just using a different method by which to do so.

To form a corporation, you must follow all incorporation procedures, as well as be adequately insured and maintain proper records and meetings. (Note: the corporation must be insured separately.) If you don’t do these things, your corporation can be nullified. Also to get a loan from the bank for a property under a corporation, the bank may require a personal guarantee.

This ownership method provides for many tax advantages, though they can be complex and it is a MUST that taxes are done properly. If everything is done correctly – as far as taxes, papers, filing, and business dealings – a corporation will limit your liability… meaning it will limit your risk! Thus, if the corporation is sued, the only things at risk are what the corporation owns.

If you decide you’re going to keep the property and rent it out, thus taking on the responsibilities of a landlord, a corporation is a good type of ownership under which to do this. You’ll want to set up a property management corporation, which will carry out the job of collecting rent, paying bills, hiring help, managing property, and procuring insurance.

Note: If you rent the property, keep in mind that owning property and managing property are two different things.

Partnership
When two or more people run a business together, whether officially or by their actions in doing business, they are considered partners. This means everyone in the partnership is involved in making decisions and managing the partnership (unless it is a specific partnership that states otherwise).

Note: In a partnership, all partners are liable for the actions of any other partner. Because of this, a partnership is not the preferred method in which to do business.

Limited Liability Company
A limited liability company (LLC) is a type of corporation that combines all the advantages and flexibility of a partnership and corporation. Not only does an LLC carry many of the same benefits of both, but it also limits your liability. Because of this, most attorneys and accountants seem to agree that an LLC is probably the best way to conduct a real estate business.

With an LLC, you can have as few as one person in the company (yourself), or as many as you want. You can also decide how you want to be taxed (individually or as a partnership or corporation). Just keep in mind that this type of ownership is not available in all states, though it is being recognized in more and more states all the time.

Land Trust
A land trust is a special kind of trust that is specifically designed for real estate. The way it works is that a trust holds a piece of property and a trustee (the person who manages the trust) has a high legal duty to the beneficiary(ies) of the trust: you, your children, your heirs, etc.

The key benefit of a land trust ownership is that the real estate is not in your name, which offers you some liability protection from losing that property in a lawsuit. So if someone sues you, they cannot sue for what is kept in the land trust. For the most part, trustees have no legal obligation to show the trust and its components to anyone; they can lock it up in a safe and only refer to it at your request. A land trust protects you from frivolous lawsuits and litigation by setting up a roadblock that most litigants will have trouble knocking down.

However, there are ways for good lawyers to find loopholes in a land trust, which could attach liability to you. But the only way someone can find out who owns the property is for him/her to obtain a court order that dictates the trustee must divulge the trust information, thus revealing the name of the beneficiary. But this is a major hassle for anyone to do, which plays in your favor.

Keep in mind that a property can be traced to you if you transfer a property into a trust after it has already been in your name, though it will still require some tedious research on the part of attorneys. When someone is suing you, many attorneys’ efforts are limited to calling the tax assessor’s office or taking a quick trip down to where deeds are recorded to see what comes up in your name. So although land trusts cannot absolutely guarantee privacy and protection, they do ensure that it will take litigants longer to find out what you own… so much longer that it may discourage them to do so.

Land trusts also provide you with anonymity when you buy and sell properties. Many real estate investors do not like having the whole world know what they own, what they buy, and what they sell. This trust gives them that privacy.

Also, with a land trust, you can transfer property into a trust without triggering the due-on-sale clause in your mortgage. The federal banking law confirms that a transfer of a property into a trust does not trigger this.

Protecting Your Property

Every property must be protected... protected from bad titles and lawsuits. There are two important ways in which you need to protect your property:

·    Title insurance
·    Liability, property, and casualty insurance

Title Insurance
Title insurance insures title by guaranteeing, once the purchase has taken place, that you have a good, clear title. You absolutely must get title insurance whenever you buy property. Usually, sellers pay for title insurance – insuring the title they are giving you is free from any problems.

Title insurance protects you from any liens or other encumbrances put on the property prior to your purchase. And if there is a problem, the title insurance company will defend you in any actions concerning this title.

At every closing, make sure to read and understand this title insurance policy, as it may have exceptions. Most of the time these exceptions are called utility easements, which allow utility companies to run power lines, water pipes, or sewers across your property. Such exceptions are necessary, as you’ll want these amenities available to the property. Just make sure you understand all the exceptions and that they are kept within the proper boundaries.

Note: You can use land trusts to title some of your properties. Use them when you flip or lease-option a property to keep your name out of it for liability purposes. If you plan to buy a lot of real estate, you’ll probably want to contact local counsel about forming a limited liability company if it is available in your state.

Liability, Property, and Casualty Insurance
Every title must be insured against damage, loss, or potential liability. What this type of insurance does is it actually protects you and your profits. Then, should an Act of God, vandalism, or lawsuit threaten that property investment, the insurance will step in to take care of it.

When applying for liability, property, and casualty insurance, tell the broker what you’ll be doing to the property (buying, renting, fixing, selling, etc.) and see what he/she recommends – but make sure you get it all in writing. You’ll want to make sure everything is protected for as long as you hold the property and for whatever you decide to do with it... just in case something goes wrong, especially when you remodel and rent out the property.

You’ll also want to be sure the insurance covers anything attached to the property: central heating, air conditioning, hot water heaters, etc. Again, this protects you and your profits.

Insurance Coverage Checklist
Below is a checklist of things that should be insured and when:

- Insure every property every time. Never buy or close on a property without having your name on an insurance policy that will protect you and the property.

- Have all recommended insurance policies in place. For example, if you are doing repairs on a property, you may need to have worker’s compensation insurance or builders’ risk insurance.

- Have the proper amount of insurance you need. If you’re not sure what the proper amount is, your insurance agent will know based on the property and your in-depth description.

- If you own a property in a partnership, corporation, or trust, make sure the name of the entity is what’s on the insurance policy so that the property and title are properly protected.

- If you are having repairs done to the property, make sure your workers and contractors are insured. Get proof of insurance from them, such as a copy of a valid insurance policy.

- Have replacement value insurance on your property. This type of insurance keeps up with the value of the property. For example, property will appreciate over time in most cases, and should something happen to your property and you don’t have replacement insurance, you may get less than what the property is worth to cover the damages.