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Tag: property management

What Real Estate Investors Need to Know to Reduce Litigation Risk in Transactions 

When done correctly, investing in real estate can be a wise decision. It offers the potential for steady cash flow, tax advantages, diversification, a hedge against inflation, and the opportunity to generate passive income. But real estate investing also comes with its share of risks, including some that can lead to costly litigation. 

The point of investing is to make money, so spending money in court battles is not what any investor wants to do. Investors must know some risks to watch out for when entering a deal. 

Title Issues That Can Affect a Real Estate Investment

Title work may seem like a routine part of a transaction, but this seemingly mundane step can reveal a range of issues that can derail a deal and jeopardize the value of an investment. Title-related risks include the possibility that someone else:  

  • Owns an interest in the property  
  • Has rights affecting title arising from leases, contracts, or options 
  • Claims a right to the property through forgery or impersonation 
  • Has an easement on the land 
  • Has a recorded right to limit the ways the property is used 
  • Has a recorded lien or encumbrance on the title 
  • Tried to enforce a discriminatory covenant, condition, or restriction based on things like race, religion, ethnicity, or other unlawful grounds

These defects and others may require legal steps, such as filing a quiet title action in the court where the property is located. A quiet title action is a lawsuit to clarify who owns the property. However, even if the suit is uncontested (meaning the other party doesn’t defend their side of the case), it can still cost thousands of dollars to resolve.  

It only gets more costly if a defendant actively opposes the investor’s ownership claim, turning what should be a money-making opportunity into a sizable money-consuming battle. 

Risks Related to Zoning, Building Permits, and Improvements 

Investment properties also carry risks related to zoning and permitting. Therefore, before investing, it is a good idea to do some digging to discover these potential liabilities with the help of a qualified real estate lawyer.  

The land or building may violate a zoning law or subdivision regulation affecting the property’s use. For example, the violation could make obtaining a building permit to modify or improve the property challenging or cost-prohibitive or cost-prohibitive to obtain a building permit to modify or improve the property. For example, the investor could be required to spend money to correct or remove the violation or bring the property up to new code requirements.  

In some cases, buyers have even been required to remove or alter structures because they violated existing zoning laws or were built without permits.  

Sorting out issues like these can require appearances before local zoning boards, municipal authorities, and possible lawsuits. This takes time and money, which the investor would rather spend in other ways.  

Risks Stemming From Lien Claims 

Existing liens may encumber properties. They can be legitimate liens or spurious claims that don’t hold water. Either way, they cost money to resolve, eating away at returns on investment. Some examples of liens that may exist on a property are: 

  • Mortgages: It is common for a seller to have an outstanding mortgage on a property. Typically (but not always), there is little risk associated with these because the mortgage can be paid off as part of the sale. 
  • Contractor liens: A previous owner may have failed to pay a contractor who placed a lien on the property (mechanic’s lien), requiring payment before the property can be sold. 
  • Tax liens: A purchaser may become liable for unpaid property taxes. Additionally, if the previous owner owed federal income taxes, the IRS may have placed a lien on the property in an attempt to collect. 
  • Judgment liens: A seller may have a court order requiring payments to satisfy a judgment to someone which, when recorded in the county, has to be satisfied or addressed as a part of selling the property. For instance, a judgment lien could be placed because the owner owes alimony or child support. Or, the owner could have lost a lawsuit, resulting in a lien on the property.

Consider Protecting Your Investment By Retaining an Attorney 

Investors purchasing property in Colorado should consider working with a qualified real estate attorney during the purchase process. Yes, hiring a lawyer upfront is an expense. But, it pales in comparison to the cost of litigation.   

Ideally, involving a lawyer early on can go a long way toward avoiding those large litigation bills, allowing you to reap the benefits of your investment sooner. 

For more information about avoiding real estate litigation in Colorado, contact Hackstaff Snow Atkinson & Griess, LLC, at 303-534-4317 or visit our website. 

 

John T Snow
John Snow
Aaron
Aaron Atkinson

Aaron Atkinson and John Snow of Hackstaff Snow Atkinson & Griess, LLC, are top Denver business attorneys and litigators with expertise spanning various industries. Specializing in business law, litigation, intellectual property, tax law, and dispute resolution, John Snow and Aaron Atkinson offer an in-depth understanding and knowledge of general real estate and litigation rules and regulations and are a trusted resource for business owners throughout Colorado.  

What Is the Difference Between Class A, B, C and D Properties?

Looking for investment rental properties can be a huge challenge, especially for a novice investor. It’s not just a matter of finding a real estate agent to help you buy, or looking up property values on Redfin and Zillow. You need to think broader, and understand what type of investment you really want — and can actually handle.

That’s where property classes come in. Property classes are a quick way to get an idea of a property’s quality, whether it’s commercial or residential. While the sale price helps you calculate mortgage and commission payments, the property class gives you an idea of the everyday texture and future prospects of a property and neighborhood.

So what’s the difference between, say, a Class A property in downtown Denver, and a Class C property on the outskirts of Colorado Springs? Let’s look at what distinguishes each property class, the upsides and downsides of each, and what type of investor should target each respective class.

Class A

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Class A properties are the gold standard of real estate — new(ish) and in excellent condition.

Generally, they are either historic properties or built in the past 10 to 15 years, have top-quality amenities and finishes, and are located in a very desirable area. Because of these characteristics, they generally have high-earning tenants, very low vacancy rates, and are professionally managed. They’re well-maintained, and the new owners won’t have to deal with deferred maintenance.

If there’s a downside here, it’s that the buy-in for Class A properties is very high — few investors have enough cash on hand to buy a Class A property, which means they’ll need investment property loans — and overall cash flow could be low. But you get what you pay for. Class A properties make great “buy and hold” investments, as they maintain their value extremely well over time.

Class B

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These properties are slightly less desirable than Class A properties, but still fairly solid.

Class B properties are generally older than Class A properties (up to 30 years old), and feature medium-quality finishes and amenities. These properties often have deferred maintenance issues that the new owner will have to deal with on day one, and may have lower-income tenants.

On the plus side, Class B properties are often in very desirable locations, and only need minor work done. That means that with a little investment and polish, they can often be upgraded into Class A properties. Smart investors with a discerning eye can often get themselves a future Class A property at a much lower price than an established Class A property, just by shopping for Class Bs.

Class C

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Properties in Class C have moderate to serious issues. They’re often more than 20 years old, generally in less desirable locations, and need significant renovations and repairs. Core systems like plumbing or electrical may need replacing, appliances are usually subpar, and they have high vacancy rates. Upgrading them to a Class B property will be difficult and costly.

All that being said, Class C properties have a relatively low buy-in, which makes them attractive to investors who may just be starting out. And while they come with low rents, those low acquisition costs mean you’ll have a healthy cash flow.

Class D

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These properties are old and often show signs of serious neglect. They need a lot of repairs and renovations just to meet the minimum level of habitability and are located in undesirable locations with high crime rates. Tenants can be unpredictable, and Class D properties often have high vacancy rates.

There isn’t a ton of upside here, aside from very low acquisition costs. These properties are often targeted by flippers who are either anticipating gentrification, producing quick and easy rentals, or by investors who don’t have a ton of funds.

Which Class of Properties Is the Best Investment?

The obvious — and, in some ways, correct — answer here is that Class A properties are the best investment. But the reality is more complicated than that.

Class A properties are great investments because they require very little upfront work or deferred maintenance, and they generally hold their value extremely well over the long term. On top of that, the typical Class A tenant also stays for a long time, which gives the landlord some stability. However, in the event of an economic downturn, these high-income tenants are often the first to be affected. And even under normal circumstances, it can take a while to fill vacancies in Class A properties, since qualified tenants will be relatively rare.

But there can also be significant upside for savvy investors who put money into Class B, Class C, and even Class D properties. The fact is, many Class A neighborhoods and properties started out as Class B, C, or D before being rehabilitated and gentrified. This 2019 list from Realtor.com details several neighborhoods that experienced remarkable appreciation over short periods of time — headlined by one Detroit neighborhood that went from Class D to Class B or A in just half a decade, seeing a staggering 526% increase in median sale price.

If you’re an investor who has access to granular neighborhood data or can access MLS (even though you don’t have a real estate license) to see listings before the public, this can be a great way to uncover hidden value.

The bottom line is that the best class of property for you is going to depend largely on your appetite for risk. If you have a lot of capital to invest, and you want to preserve that capital, Class A is the choice for you. If you’re more of a speculator, Class B, C, and even D can be great bets if you have an eye for the market.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.

6 tips for managing a vacation property during Covid-19

The coronavirus pandemic has radically impacted the economy—and ruined basically everyone’s summer vacation plans. With most countries still closed to holders of US passports, more and more Americans are rediscovering the getaways and amusements in their own country.

More often than not, these in-country vacations have taken the form of road trips to vacation homes or campsites—after all, a car is a sealed environment, and rentals and campsites don’t require passing through potentially hazardous common areas like hotel lobbies or airport terminals.

In the past couple months, there has been a huge increase in rental home reservations; Airbnb says it actually received more bookings in the early summer than it did over the same period in 2019. According to a survey by travel company Expedia, 85% of Americans anticipate taking at least one road trip this summer.

This trend has especially benefited Colorado. The Centennial State has long attracted tourists and investors alike, but in 2020, the state is currently the top road trip destination in the US, up from 10th last year. And it’s easy to see why—with low rates of coronavirus, amazing national parks, and endless opportunities for social-distancing-friendly activities such as hiking, rafting, or climbing, the state is an ideal destination for a pandemic vacation.

But that doesn’t mean everything is business as usual. Managing a vacation property during a pandemic has its own unique challenges, as hosts need to not only keep their guests comfortable but to keep them safe, too.

Let’s look at a few easy ways to make sure your Colorado vacation property is welcoming, reassuring, and safe.

Space Out Your Reservations

Doctors have noted that the coronavirus can live on surfaces for a day or two. For that reason, many experts recommend that travelers seek out accommodations that have been empty for at least two or three days to give any viral traces time to become non-viable. In fact, Airbnb is now offering a “buffer” feature, which ensures that your rental has been vacant for 72 hours before a guest’s arrival.

Colorado hosts should consider doing something similar. Although it might cut into your bottom line, leaving the rental empty for 72 hours between bookings can go a long way toward reassuring your guests.

Spacing out your reservations will also keep you safer if you don’t have to clean a unit immediately after it was vacated.

Provide Cleaning Supplies

Even if you provide a buffer period between stays, it’s a smart policy to provide your guests with plenty of cleaning supplies, as many travelers make a point of cleaning their surroundings upon arrival.

At minimum, you should provide sanitizing wipes for door handles, counters, and miscellaneous surfaces, hand sanitizer (with at least 60% alcohol, per the CDC’s recommendations) for general use, plenty of soap, and sterile, wrapped masks in case your guests want to go into town.

Consider Relaxing Your Cancellation Policy

One of the big draws of Colorado is its low rate of coronavirus infection, especially when compared to other popular vacation states such as Florida or California. But that can change, and guests know that. Even if guests fall in love with your property after viewing it online, they might worry about losing their deposit if an outbreak prevents them from traveling.

Adopting a more flexible cancellation/refund policy in the event of an uptick in statewide coronavirus cases — or if the guests themselves end up contracting the coronavirus and can’t safely make it to your rental — can make potential guests feel much more confident about making their reservation.

Adopt a No-Contact Check-In Policy

Many hosts were already conducting a no-contact check-in before the pandemic, with lockboxes, keypad locks, or other means, but this has become exponentially more important in the pandemic. Devise a secure way for your guests to acquire keys to the property so they don’t have to come into face-to-face contact with you. The technology for this already exists — many cutting-edge real estate companies were doing no-contact showings even before the pandemic.

And remember— this isn’t just for their protection, it’s for yours, too.

If you can’t avoid a brief physical meeting, make sure you stay six feet away from your guests as much as possible and to wear a face covering (and to ask them to wear a mask, too).

Remind Guests of New Policies

Many vacation rentals have gotten rid of some included items and extra amenities as a result of the pandemic. Experts suggest removing soft or hard-to-clean shared objects from your rental, such as blankets, throw pillows, and some floor coverings. The same goes for complimentary food or drink; the risk of contamination is just too high.

Guests will understand and appreciate these new safety policies, but make sure you remind them, ahead of their arrival, that you no longer provide these amenities, so they can bring their own supplies and furnishings.

Provide Socially Distanced Recommendations

Your guests might be coming from across the country, so it’s possible they won’t know the area. Along with your usual recommendations for dining and recreation, you should try and provide information about local possibilities for social distancing.

There are some great resources out there about Colorado social distancing — and a lot of the information is pretty counterintuitive. For example, a lot of rural areas and small towns may seem like they’d offer high degrees of social distance, but studies have found that their public spaces are actually very dense, with a moderate to high degree of risk for viral transmission.

And if you’re surprised by this information, it’s safe to say that a guest will be, too. Hosting and renting in a pandemic can seem very stressful, but it’s doable — if you just take the time to educate not only your guests but yourself, too.