In an environment marked by rising digital transactions and complex regulations, the real estate industry faces heightened risks of fraud, with the FBI reporting nearly $400 million in losses in 2022 alone. However, investors can safeguard their transactions and properties by gaining a comprehensive understanding of real estate contracts and laws, which equips them to counter threats from bad actors and frivolous lawsuits effectively.
Legal Considerations Before Buying a Real Estate Investment Property
Land Use Laws and Zoning Regulations
Before you go under contract on a particular property, ensure that you understand the local land development laws and zoning regulations that affect the area you’re looking to invest in. Land use policies are comprehensive and guide the future development pathway of land within a city or county.
Meanwhile, zoning regulations are more granular and define the allowable use of property within a specific geographic region by categorizing land into “zones” that each fulfill a distinct purpose.
Short term rentals have come under increasing pressure from cities across the country, like Honolulu for example, where any rental stay under 90 days is completely banned. Other states like Colorado, California, and New York are initiating harsh restrictions and guidelines on non-owner-occupied housing. The objection from locals is mainly that they’re finding this increasing presence of tourists in their community is raising costs of not only homes but of goods and services, as well. There’s also a lack of concern from tourists about the community or environment, too. For instance, you’ll have a home full of 8 or more adults partying in a Miami Beach home that is zoned residential. Obviously some neighbors might take issue with that! Some of the harshest STR regulations are found in Miami Beach Florida, New Orleans Louisiana, Anaheim California, San Francisco California, and Chicago, Illinois.
Airbnb just rolled out a program called Airbnb City Portal that allows owners and hosts to stay in the know of regulations and community guidelines.
These municipal-based laws may, for instance, restrict the property to single-family residential purposes, prohibiting the construction of multifamily units on that land. Areas that are zoned for commercial or industrial use, on the other hand, may bar residential developments altogether—no matter the density of the proposed project.
While places like California have scrapped single-family zoning across the state, 75% of residential land in major cities elsewhere in the country—including landlord-friendly locales in the southeastern United States—remains ripe for single-family development.
Environmental Regulations
Environmental regulations, governed by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), hold current and past landowners liable for the cleanup costs and any damages caused by the hazardous substances found on their property.
If you intend to buy a single-family home built before 1978, beware that the home likely contains hazardous materials such as lead and asbestos. To protect your investment, you may want to conduct a risk assessment for hazardous materials during your due diligence period.
And while uncommon among single-family transactions, more comprehensive surveys—like Phase I or Phase II environmental site assessments—may be warranted for investors targeting properties built on larger tracts of land.
Deed Restrictions
Deed restrictions, also known as covenants, conditions, and restrictions (CC&Rs), are legally binding limitations commonly drafted and enforced by builders, developers, or homeowners’ associations (HOAs). These provisions are attached to the property’s title and can dictate how you may use, renovate or even lease your property.
For example, some CC&Rs restrict homeowners from changing the style of their rooftops or exterior siding, while others prohibit landlords from listing their properties as short-term rentals. In any case, it’s advisable to conduct a title search to uncover any restrictions, liens, or easements on a property before finalizing your purchase.
Property Deed
A property deed is another real estate contract confirms the property’s legal transfer and ownership from the seller to the buyer. Once the title transfer is recorded in your county’s public record office, the physical deed is mailed to you, serving as the ultimate proof of your ownership.
Contracts You Need to Safeguard Your Investment
Real estate contracts are legally binding agreements that help protect your interests during a real estate transaction and legitimize your claim to a property after you buy it. To be enforceable, contracts must be put in writing and signed by both parties. NEVER operate on a handshake agreement.
Purchase and Sale Agreement
The purchase and sale agreement is a legally binding contract between a property buyer and seller that details the terms of the property’s sale. It includes essential elements such as the property’s description, price, contingencies, financing, and closing details. Without this agreement, you risk losing your entitlements and protections as a buyer.
Seller Disclosures
Seller disclosures provide both past and present details about a property’s condition that might negatively affect its value. Though disclosures vary based on state, they cover aspects such as hazardous materials, pest issues, water damage, roof defects, foundation issues, and unpermitted renovations. If significant undisclosed problems arise after renting the property, these disclosures can serve as a basis for potential legal action against the seller.
Landlord-Tenant Laws
Since investors intend to use single-family homes as rental properties, landlord-tenant laws are especially relevant. These laws govern the rights and responsibilities of landlords and tenants and create rules and restrictions regarding security deposits, rent payments (and escalations), eviction procedures, and lease agreements. Beyond serving as a defense against potential lawsuits, a strong working knowledge of landlord-tenant laws can help foster a profitable and mutually-beneficial relationship between you and your tenants.
Lease Agreement
A lease agreement is a contract that outlines the terms and conditions of the rental arrangement between you (the landlord) and your tenant. The agreement outlines the rights and duties of each party and provides clarity on rent, security deposits, utilities, repairs, late fees, eviction, and other important details. A well-drafted lease agreement not only helps prevent disputes but also ensures a smooth landlord-tenant relationship.
The Law Depot.com recently came out and listed their top landlord-friendly states and Alabama was number one, followed by Arizona, Colorado, Florida, Georgia, and Texas. You want to be sure you are familiar with the landlord-tenant laws because this makes a huge difference when it comes to your investment’s passivity. These states in particular are known for the low property taxes, ease of rent control, and fast eviction process. Atlas Rental Property’s average eviction time is about 90 days in Alabama. Focusing your investments in these types of areas will really help your money go the distance.
Mitigating Risks With a Property Manager
Property managers are licensed and regulated by the state’s real estate commission, ensuring that they prioritize their clients’ needs and comply with all relevant local and state laws. Their responsibilities vary by state (and company), but most deliver several core services.
Tenant Screening
Property managers are required to review and verify tenant applications to assess their ability to pay rent on time and adhere to all the terms and conditions of the lease. Quality tenants reduce risks of rent non-payment, property damage, and lease violations, allowing you to enjoy a steady, hassle-free stream of rental income.
Another element to mitigating these risks is having a full understanding of fair housing regulations. Our team completes Fair Housing training every year to brush up and learn about new practices. Some common fair housing violations include things, not renting to a family with children, incorrect marketing verbiage (walking distance) or it could be as simple as discriminating against race, sex, familial status, disability or nationality.
Also, Mens Rea means that fair housing violations do not require “bad intent”. Ignorance of what constitutes a fair housing violation is neither a defense at law or to an Ethics Complaint.
Lease Management
Property managers ensure lease agreements are in place, properly executed, and comply with local and state laws. They enforce lease compliance, handle lease renewals, and address any violations promptly, protecting investors from potential legal issues.
When it comes to lease compliance, it is crucial to make sure your verbiage is as precise as possible, just in case it is needed during potential litigation. For instance, Atlas Rental Property charges an administration fee to our tenants for delivering their eviction notices. Regardless, to ensure as much money back as possible for the investor. These changes always go through an attorney to ensure that our contracts are as strong as possible.
Repairs and Maintenance
Property managers are charged with overseeing property upkeep and repairs. They conduct regular inspections to identify potential safety concerns and address repairs when needed. By proactively maintaining your property, property managers minimize the risk of damage and bodily injury, ensuring that your rental and its occupiers remain safe and in good condition.
Keep in mind that if the home is not in reasonably good condition, a tenant can evict themselves, also known as a constructive eviction, and the landlord is responsible.
In Alabama, a tenant can go into eviction if they withhold rent for maintenance purposes. They have to follow a protocol in which they provide a 14-day notice of the issue and they have to vacate the home and turn in their keys. They cannot withhold rent unless they have vacated – they would simply go into eviction.
However, landlords are always accountable for maintenance repairs no matter what, so if maintenance is not performed in a timely manner and a tenant is without reasonable use of the home, they would be able to sue the property owner. Any safety concerns that are not addressed could result in huge legal repercussions so it’s crucial that you know what your obligations are according to your real estate contracts.
Eviction
Property managers are responsible for handling the eviction process in case a tenant violates rental policies or otherwise fails to comply with the terms of the lease agreement. They are required to follow specific eviction laws and procedures outlined by the state and local authorities so that the process is carried out legally and fairly.
A judge can throw out an eviction case for a number of reasons but especially if the tenant’s ledger is off by even the smallest amount. In this situation, every detail matters. If the casework has dates that do not match or the tenant was not served correctly, the case is at risk of being in favor of the tenant.
Eviction is the biggest hassle for investors no matter where they live. Yes – Alabama is landlord-friendly but that doesn’t mean eviction is ever easy. All property managers must go through a tough litigation process, which makes practicing a regimented protocol crucial so that nothing is unaccounted for.
Legal Compliance
Property managers stay updated with local and state regulations, ensuring that the property complies with all applicable laws, codes, and safety standards. This helps protect real estate investors from legal disputes and potential penalties.
Conclusion
In conclusion, the role of property managers in ensuring legal compliance cannot be overstated. By staying abreast of local and state regulations and having a comprehensive understanding of real estate contracts, property managers act as a crucial safeguard for real estate investors. They make certain that properties are in compliance with all relevant laws, building codes, and safety standards. This diligent approach serves to mitigate risks, protecting investors from costly legal disputes and potential penalties.
Thus, entrusting your property to a competent provider not only enhances its value but also fortifies it against legal vulnerabilities. Ready to secure your investment? Contact us today to learn more about how our property management services can offer you peace of mind and legal protection.