As good as real estate valuation software is for rental analysis, no real estate feasibility software or real estate software solution has been made that can to read the fine print inside documents connected to the property you are purchasing.
Here are 7 things that, if not understood, examined, and dealt with, can easily turn any real estate opportunity into a real estate pitfall.
- Accrued Interest: This represents unpaid interest, either in agreement or in default. When buying real estate investment property obtain an estoppel letter from the lender that indicates the status of the mortgage and shows the outstanding principal and any unpaid interest or other charges.
- Adverse Possession: A claim someone else might have to the property resulting from actual, hostile, notorious, exclusive, continuous, and under claim of right– locations of buildings and possible encroachments from neighbors, for example. Though the claim is difficult to impose, absentee owners who might not be aware of what is going on have had it raised.
- Cloud on Title: This results from an unsatisfied lien or improperly executed document from a prior sale, mortgage satisfaction, or other legal action in the chain of title (or history of ownership). These items represent a cloud (or title defect) that you should remedy prior to taking title.
- Due on Sale Clause: Lenders insert this clause into a mortgage when they want the seller to pay off the loan in the event of a sale. Unless the lender agrees to some other circumstance, as a buyer assuming the obligations of that loan, you must satisfy the lender’s requirements.
- Grandfather Clauses: Changes in local rules and regulations cause some properties to become nonconforming but allowed as a grandfather right. Always discuss the use and zoning of a prospective property with the local planning department. If a grandfather clause affects the property under consideration, be sure you understand what the restrictions are, and, especially in the event of a fire, whether you can rebuild and use for the property for the purpose you are purchasing it.
- Peculation: This refers to water drainage. If a property requires a septic tank or green areas to absorb rainwater, problems and unanticipated expenses could arise due to poor peculation.
- Subordination: A provision that allows a lien to become payable ahead of one already recorded. For example, you sell a property and hold back a mortgage, and then later agree to subordinate it to another loan obtained by the buyer. In this case, you allow that new mortgage to become payable ahead of your mortgage and thus, make yourself vulnerable: Should the buyer default on the new first mortgage and the property goes into foreclosure, you might not be able to collect anything owed to you.
This is by no means a complete list; however, they do address terms that any prudent real estate investor should be acquainted with and understand. Calling attention to only the tip of the iceberg at least cautions real estate investors not to sail real estate investment waters with their eyes shut.
