A good deal can turn sour if you do not understand the risks and mitigators of buying and selling real estate, the due diligence process. Do you know how omitting one checkbox can cost you tons of money? Here are some basics on how to protect yourself, your assets and avoid litigation.
The Most Common Real Estate Lawsuits
First, let’s consider the most common reasons for litigation. 1)Suing for specific performance: This requires the sale to go through regardless of issues outside the contract. 2) Closing cost responsibility: This determines which party will pay. 3) Commissions: Determining which party will pay. 4) Roll-back tax responsibility: Who must pay these often-overlooked taxes? 5) Issue with 1031 Exchanges: When a property of interest falls through and who bears the burden of the taxes?
Knowing that any of these could arise, you can prepare yourself before the transaction.
#1: Perform Due Diligence Up Front on The Property Regarding the Tax History and Implications
When a property is purchased with the intent of doing a zoning change, you must know this. For example, an agricultural piece of land is going to be developed into a retail space. The city can do a roll back up to 5 years and charge tax on the property for the previous years as if it were a retail property. The party responsible for those taxes must be determined in the contract.
Always have more than one property of interest when doing a 1031 exchange. The 1031 exchange rules are very time specific so if one of the properties is unable to close, you have back up choices to avoid the tax liability.
#2: Look for A Title Company with Attorneys Who Specialize in Real Estate Law
Not all attorneys specialize in real estate law. Every aspect of the contract is negotiable. If you are paying for the title, you can negotiate the title company of your choice. There is no law saying who must pay the title insurance. Typically, in Texas, the seller will pay the typical title insurance policy. Endorsements are typically paid by the buyer. These impact the function of the land, not the ownership, such as surveys and encroachments.
#3: Errors and Omissions (E&O) Insurance Is Critical for Brokers And Agents
This type of insurance can cover when you make mistakes of error or omission like leaving something off a contract. It is your failsafe. If you are an active real estate broker and are doing deals, you should have E&O insurance. Do not wait too long with an E&O claim as they allow 30 days to address the claim. Brokers and Agents are sued over issues regarding land use like zoning. The buyer must know the intended land use as this is not covered by the title policy or Broker/Agent.
#4: Be Aware of Cyber Fraud
Cyber criminals will attach to realtors with unsecured emails. They grab the password information, follow the entire transaction and the moment wiring instructions go out, they intercept the email and sent different wiring instructions. If it happens, call the bank immediately. Call the escrow officer that you know personally and make sure you recognize their voice. Wiring instructions must be left in person at the title company. If this procedure is not followed, something is amiss.
A pretty good rule of thumb is to always hire a real estate attorney for large real estate transactions. Being a healthy skeptic can save you a ton.
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