You’ve watched HGTV and read all the online forums. You’ve decided real estate investing is for you, and you’re salivating at the potential profits and wealth building opportunities. Maybe you bought a fixer-upper with grand plans to slap some new paint on the walls, swap out countertops, and then sell for a sizeable profit. Or maybe the passive-income landlord approach caught your attention. Either way, you’re probably intrigued by the potential of becoming a real estate investor, and it’s not hard to see why: real estate has consistently outperformed the stock market.
As a real estate investor, there are many hats to wear and multiple moving parts to reach success. An investor must constantly monitor accounting, deadlines, taxes, project management, local laws, marketing…to name just a few. But if you’re wise, you’ll add hiring an attorney to the top of your list. Investing in an experienced attorney can offer numerous benefits to a real estate investor from contract creation, conducting closings, offering legal advice, and creating LLCs and partnership.
One of the critical points in investing is utilizing a contract that offers you the most protection. If you’re utilizing a licensed Realtor, they may have access to attorney approved state forms; however, if you’re buying off-market or selling For Sale By Owner, you need a comprehensive contract that will protect you as the buyer or the seller. Even if you are utilizing state Realtor forms, you have the right to have your own attorney review and approve them.
Seeking out an experienced Real Estate attorney to draft contacts will be worth the expense with the protection it can offer. Prior to buying- or selling- consult with your attorney about your goals, your needs, and even your fears. He or she can take those into account when drafting a contract that gives you the most benefit.
In some states, closings are routinely held at title companies; however, many states still utilize attorneys to conduct closings. Regardless where you live, you have the right to hire an attorney to conduct your closing. During the closing process, the attorney will review all the numerous documents you will sign and thoroughly explain them (and their risks!).
Title companies charge you to conduct closings but can’t offer legal advice. Your attorney, however, can do both. Consult your attorney about his or her fee to conduct a closing- and you may be surprised by how affordable it is!
Offering Legal Advice
As a seasoned real estate investor myself, I rely heavily on my attorney’s advice. Prior to starting any project, I consult my attorney about my future goals, potential risks, and reducing liability. These meetings do not have to be formal. In fact, the vast majority of communication is done via emails and phone calls.
While you may think you know what you’re doing, there are far more risks and liabilities looming than you may be aware of. A seasoned attorney can identify and mitigate those on your behalf. Kendel Grooms, Member Partner at Campbell & Grooms, PLLC in Little Rock, Arkansas reminds investors: “If the investor had any reason to be aware, or had the opportunity to become aware, of a defect or other situation with the property that was not immediately and adequately addressed, which later resulted in someone getting injured or having their property damaged, there is a high likelihood of exposure to legal liability.” Both landlords and house flippers operate with the potential for liability, but seeking competent legal advice can help you to mitigate those before they land you in court!
Creating LLCs and Partnerships
For both financial and liability reasons, a real estate investor should consider forming a partnership. There are multiple types and consulting an attorney can provide you with the most logical choice for your situation and goals. Grooms says that while “the primary benefit is for tax deductions and benefits…the secondary benefit is shelter from liability.”
The primary tax benefit of an LLC, according to Grooms, is that it “can use pass-through status to create above-the-line deductions that would not normally be available to a sole proprietor or individual not using a corporate entity for business dealings.” Hiring an experienced real estate attorney can help your bottom line by setting up partnerships to offer you more favorable treatment on your taxes.
The other substantially appealing benefit of an LLC is mitigation of liability. However, setting up an LLC or partnership does not immediately relieve an investor of all liability. Grooms states that “This is limited depending on how the LLC is to be operated.” The counsel of a real estate attorney can provide you with direction on how to set up your LLC, how to run day-to-day operations, and where the potential risks lie in the process.
Greater the Risk, Greater the Reward
Ask any experienced investor or attorney, investing in real estate can be risky…not just financially, but legally. Don’t let the risks hinder you from starting your real estate investing journey, however. Operating wisely and legally will offer you the most protection. Recognize you aren’t capable of doing it all or knowing it all and surround yourself with those that are knowledgeable and experienced to help you. Mr. Grooms’ final words of wisdom to real estate investors: “If you have any doubts about making a specific deal or transaction, do not do it. You cannot get burned by a bad or risky deal if you back out of it.”
Reminder, when seeking legal counsel, seek out a seasoned real estate attorney. Not all attorneys specialize in real estate, so finding one that is experienced and knowledgeable in this field is essential!