| eFunding, Inc. 2007-09-03, 8:25 pm |
| What Real Estate Investors Should Know About Local Customs
As a commercial real estate investor, there is a good chance that you
will invest in a property located in another state in which local
customs may be very different from where you live. Knowing some of
these customs may help you avoid mistakes that may cost you money.
When you are in Rome, you should do what Romans do. However, just
make sure you know what you are doing! This article discusses some of
the common customs that you should know. It may or may not explain
why these customs are what they are which could be a very long story.
Independent Consideration
You often see this independent monetary consideration in contracts in
Texas (TX), Georgia (GA), and North Carolina (NC) but not in
California (CA). Listing brokers in these states often insist that
you pay the seller $1000-$5000 as independent consideration for the
right to cancel the contract during the typical 30-day due diligence
period. As an out-of-state investor, you have to pay for air fare,
hotel, food, and car rental to visit the property as part of your due
diligence. So if you decide that the location is not as good as it
appears from satellite map or whatever reasons, it does not make sense
to pay another $1000-5000 to cancel the contract. While the law in
these states requires an independent monetary consideration, it does
say what that amount must be. So you should pick a big number between
$1 to $10 to make the contract legal!
Nonrefundable Earnest Deposit
In CA, there is no such thing as nonrefundable deposit per a CA court
ruling. Most if not all real estate contracts in all states have a
paragraph addressing damages due to contract breaching by either
party. This is often sufficient. However, listing brokers and the
sellers outside of CA often insist that all the earnest deposit "going
hard", i.e. becoming nonrefundable and released to the seller, after
the expiration of due diligence period. While the purpose is to make
sure you think twice about breaching, it could be difficult to get any
of earnest deposit back if
=B7 You, for unforeseeable position, e.g. hit by a truck or have a heart
attack and go to heaven or wherever, cannot close the transaction.
=B7 The property is partially damaged, or even burned down by arson.
=B7 The seller spends it all and your loan is not approved due to soil
contamination discovered later on!
You are in a bad position to negotiate with nothing to offer when the
money is in possession of the seller. It is therefore advisable to
keep the deposit in escrow until closing. However, sometimes you have
to make a tough choice, especially when there are multiple offers so
you can buy a desirable property.
Property Taxes
In CA, the property is automatically reassessed at the purchased
price. The property tax rate is about 1.25% of the purchased price.
Due to the Proposition 13, property taxes can only increase by a small
percentage annually unless there is change in ownership.
In TX, the property tax rate is about 3% of the assessed or taxable
value. However, the taxable value may or may not be the purchased
price which is often higher. If the higher purchased price is reported
to the county then you will pay property taxes based on the higher
purchased price. So it's a good idea not to report this higher
purchased price since it is not required. Lately in TX, the local
government tries to raise revenue by aggressively reassess the
property values. The new assessed value could be significantly higher
than, e.g. 100% the old assessed value. Should this happen to your
property, you may want to hire a professional company to protest this
property taxes increase even on a property with NNN leases. The
success rate appears to be fairly high. As an investor, it's wise and
prudent to keep the NNN expenses as low as possible for your tenants.
You definitely want your golden goose to keep laying eggs.
In Florida, there is a monthly state sales tax for commercial
properties, so make sure you know who is supposed to pay it. In
Illinois, the property taxes rate is fairly steep at about 5%. The
property tax rate for NC is about 1.45% of the taxable value which is
not changed after the sale.
Attorney States
In CA, an escrow company can handle the closing of a real estate
transaction. In GA, FL, TX, or NC, escrow companies can only hold the
deposit for you and you must hire an attorney licensed in that state
to do the closing. These states are often called "attorney states".
The proponents say that a real estate transaction is very complex so
it must have an attorney to assist you. For opponents, it's all about
job security for lawyers. If you invest in a property in an attorney
state, you want to hire an attorney who charges a flat fee since the
amount of work is very much predictable. You will receive an estimate
based on what you need the attorney to do. He or she won't start
working until you authorize him or her in writing to do it. The
attorney will review all the documents and give the blessing before
you sign them. It is advisable to avoid an attorney who charges you
by the hours. Most likely you are dealing with someone who is looking
for a big pay day!
In CA, the buyer automatically receives the Preliminary Title report
which shows the owner and various information, e.g. liens and loan
amount on the property. If you cancel the transaction, you normally
don't pay escrow any fees. In attorney states, the attorney will do
the title search and review. The title company then issues a title
commitment to insure against any title defects. Should you cancel the
transaction, the attorney and Escrow Company may charge a fee for the
work done.
Closing Costs
When you make an offer, you often state that buyer and seller split
closing costs based on the custom in the county where the property is
located. In CA or TX, the sellers customarily pay for owner's title
insurance premium based on the purchased price which guarantees the
buyer of a clear title (technically you should not have to buy owner's
title insurance when you refinance the property because the title was
already insured when you bought the property.) The buyer pays for the
lender's policy premium based on the loan amount. This lender's
policy is required by the lender to protect it against losses
resulting from claims made by others against the property. Of course,
if you pay cash for the property then there is no lender's policy. In
GA, it's customary for the buyer to pay for both owner's and lender's
policy. So make sure you have sufficient fund to close the
transaction.
Deeding Instrument
In CA, the sellers often transfer his interest to the buyers by a
grant deed. In other states, the seller will transfer his interest to
the buyer by a general or special warranty deed.
=B7 General warranty deed is used to convey the seller's interest in
real property to the buyer. The seller certifies that the title on
property being conveyed is free and clear of defects, liens, and
encumbrances. The buyer may sue the seller for the damages caused by
the defective title.
=B7 Special warranty deed is also used to convey an interest in real
estate. However, the grantor does not warrant against the defects
arising from conditions that existed before he/she owned the
property. So the special warranty deed is not as good as the general
warrant deed. However, most sellers will use this deed for obvious
reasons.
About the author:
David V. Tran is the President/CEO of eFunding Inc., a commercial real
estate & loan brokerage, property management & leasing and TIC sponsor
company in San Jose, CA. His website is www.efundingcom.com. He may
be contacted at (408) 288-5500. eFunding does business in all 50
states. He is the #1 among over 120 Commercial real estate expert
authors on www.ezinearticles.com, a premiere internet magazine. He is
also Pensco Trust's (a major self-directed IRA custodian) Preferred
Professional. David currently offers 3 FREE real estate investment
seminars till 12/2007:
1=2E How to invest in commercial real estate for retirement income NOW.
2=2E How to maximize cash flow with 1031 tax-deferred exchange.
3=2E TIC: strategy for small & self-directed IRA investors to acquire
high-valued properties.
(c) eFunding, Inc. 2007
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