Residential
Whether you are looking for your forever home, second home or investment property, residential property can be a great investment. Residential properties include single family homes, townhomes, condominiums, tenants in common interests, and multiple unit properties up to four units. There also hybrids of these so it can get a little confusing.
Single family residence (SFR), also called a “single family home,” a “standalone home,” or a “single family detached,” refers to a house that does not share walls with another home. A single family residence also sits on its own parcel of land, has only one kitchen, dedicated utilities, and its own private street access.
A condominium is a housing or residential complex in which there are separate units, with each unit being owned by an individual. Condominiums are often subject to the community rules and restrictions relating to unit modifications especially the exterior, rental restrictions, and monthly homeowner association dues. Typically, a lender will require that you have walls-in insurance to cover certain interior components of the condominium unit.
Tenant in common (TIC) ownership refers to a legal arrangement in which two or more parties jointly own a piece of real property, such as a building or parcel of land. Sales of tenant in common interests are becoming more popular as the cost of SFRs and condominiums have become more expensive. This is similar to condominium ownership but not exactly the same and there is only a select number of lenders willing to lend on TICs.
ADU is a legal and regulatory term for a secondary house or apartment that shares the building lot of a larger, primary home. Recent California laws have made construction of these and junior accessory dwelling units easier. This can help homeowners to increase value, offset expenses and provide affordable housing.
Multifamily residential is a classification of housing where multiple separate housing up to four units for residential inhabitants are contained within one building or several buildings within one plot of land. Units can be next to each other, or stacked on top of each other. Residential loans can be obtained for these properties and can allow an owner to cash flow positive on their investment or provide a large offset to property expenses.
Commercial Real Estate
Multi-family commercial property is a classification of housing where multiple separate housing units of five or more are contained within one building or several buildings within one plot of land. Units can be next to each other, or stacked on top of each other. A common form is an apartment building.
Retail property types are properties used to market and sell consumer goods and services. This category includes single tenant retail buildings, small neighborhood shopping centers, larger centers with grocery store anchor tenants, and “power centers” with large anchor stores.
Industrial property is typically property used for the purpose of production, manufacturing, or distribution. This would include warehouses and distribution centers, manufacturing plants and factories, cold storage and refrigeration, data housing centers, and flex buildings.
Hospitality often refers to hotels or motels with individual rooms principally for short-term rental to tenants occupying the same.
Mortgage Calculater: Can You Afford Your Property?
This mortgage calculator can help you estimate your monthly cost of purchasing a property.
Purchase Agreement / Offer
See the Art of The Offer section about the presentation of an offer or the Purchase Agreement here. The purchase agreement is a binding contract committing both buyer and seller to the purchase of real estate on the terms and conditions specified in the purchase agreement. Some key components of the purchase agreement include:
- Authority
It is imperative that the parties signing on behalf of buyer or seller have the authority to sign on behalf of the named parting in the purchase agreement. If a selling party does not have authority to sign or if not all owners of the property are signing, the purchase agreement may not be enforceable against all owners. If the party signing as buyer is not the one with the funds, then a seller may not be able to practically retrieve the purchase funds from the signing party. Careful investigation of the party on the other side of the transaction will mitigate this risk.
- Contingencies
The negotiation of the contingencies and when they are waived are one of the most crucial elements of the purchase agreement. The waiving of contingencies will often put a buyer’s initial deposit at risk which is often 3% of the purchase price in residential transactions or can be more or less in commercial real estate transactions.
Certain agreements may have contingencies expiring simply by the passage of time while other agreements may require the buyer to actively waive the contingency in writing. It is imperative that the parties understand this as the initial deposit could be put at risk.
The above are just a couple of examples that are of concern at the beginning stage. There is much more to cover with respect to the purchase agreement that may come up during the course of transaction such as when a party does not perform.
Disclosures
Depending on the property and contract, disclosures may be required by law, the purchase agreement and/or are simply customary. Seller disclosures must be carefully completed and may lead to liability of the seller if material information is withheld. The law or purchase agreement may allow the buyer of the property a number of days to review and potentially cancel escrow so it is in the interest of the seller to complete disclosures sooner rather than later. It is important that one navigates these requirements carefully as a seller and that buyers ask the right questions during the diligence period.
Diligence
- Inspections
Having an inspection of property is generally recommended, especially for anyone who does not have construction experience or time to fully inspect a property. A general inspection may not be enough and other inspections such as sewer, chimney, foundation and roof may be required. Moisture or mold testing might be needed if there has been water intrusion. Environmental phase I reports are often required for commercial transactions with a lender. Soil reports may be required for developers of property. The buyer investigation period and diligence period should take into consideration the time needed for these inspections as it may be tough to ask for an extension when in contract.
- Financials
Getting the financials related to a commercial property can reveal the income, expenses, and overall cash flow of the property. Looking at past income and expenses may shed light on the future income and expenses required for property ownership such as potential maintenance, rent growth and reduceable costs.
- Leases
Reviewing the leases on a property is very important especially since revenue is huge factor in determining the value of a commercial property. For example, it is important to know the rent history of the tenants, future income with the tenants, the expiration of the leases, whether there are any termination rights or options, and if there are any defaults. Ascertaining and understanding any guaranty of any leases will be pivotal in determining if the tenant will continue to pay rent. Understanding any applicable rent control laws, eviction moratoriums and rent escalation allowances in the lease can help predict future rent and value of the property.
- Property Characteristics / Permits
While we are not land use specialists nor planners, we can assist with determining if the property you are interested in buying or selling may have unpermitted improvements or square footage. Unpermitted improvements or added square footage to a property happens frequently and can greatly impact the value of a property as it could result in demolition or you having to do the work properly with permits for an additional cost. We can compare the public records with what is present at the property as it is best to address those issues while in escrow as opposed to after closing.
- Title Insurance
A seller is typically obligated to provide good and marketable title to the property and typically the seller pays for title insurance. Many real estate agents do not know how to interpret title issues or will defer to a title company for assurance on matters, which assurance may be based on a light review of the title exceptions. The seller typically pays for a basic title insurance policy for the buyer but the buyer may seek more coverage in the form of a more protective policy and/or endorsements. Title issues can have a material impact on your property and need to be assessed and addressed appropriately. The title report may reveal important things such as the following:
· An easement could exist on the property allowing other parties to access your property or even worse, overlap the structure itself, which would mean giving another party the right to demolish your property.
· Covenants or restrictions against building/development/construction, specific uses, rental, and pets. Violations of these covenants or restrictions could subject the owner to assessments that if not paid, may lead to foreclosure. Sometimes there might even be race prohibitions to ownership!
· Liens relating to debt on the property. The buyer may be subject to these liens upon acquiring the property.
Escrow
An escrow company is a neutral third party in a real estate transaction that holds the required funds and documents involved in the closing process, including the initial earnest money, the loan documents, and the signed deed. An escrow company typically makes sure that any seller liens are paid off prior to closing so that they do not become the buyer’s obligations. Given the important role that escrow plays, it is important for a buyer to know that the escrow company is independent from the seller side since the seller side often choses the escrow company. We can help you choose a professional and reputable escrow company.
Property Insurance
Property Insurance. Property insurance will be required if there is a lender involved in the real estate purchase and is generally encouraged. The policy of insurance will vary depending on the type of property you are acquiring. We can help you choose the appropriate insurance company for your property.
Tax Implications
Sale of real estate may subject you to capital gains tax. There are certain limited exemptions to capital gains taxation of primary homes. Some sellers may elect to defer tax obligations via a 1031 or like kind exchange but you only have a certain time to choose a replacement property. We can generally assist with these issues but more complicated questions may be deferred to a tax specialist such as a certified public accountant. It is important tax planning be accounted for in the purchase agreement as well.
