multifamilytransactions

MULTI-FAMILY REAL ESTATE TRANSACTIONS - GETTING PREPARED

Peter Mark Heintzelman, Esq.

Visit my webpage: www.Heintzelaw.com

As we approach Spring, the volume of multi-family real estate transactions rises once again, as does most of the residential real estate market. Buyers and Sellers alike, gear upfor the exchange of information and properties; be careful to do it right. Buyers particularly will have a more successful introduction to landlording, if they set themselves up right to begin with.

I usually suggest to a Buyer to link up with a good buyers' broker, to help them sort through the rental properties for sale. Buyers' brokers traditionally split the brokers' commission, paid by the Seller, with the listing broker; most times two brokers are involved in the transaction. Picking a realtor is like choosing a lawyer; there are a LOT of them be careful to associate with one who knows the rental property market, and the ins and outs of this unique kind of transfer.

A good professional broker can help a Buyer sort out the better deals on the market; ones more likely to turn a quicker profit and/or less likely to require immediate cash flow to repair substandard properties.

Sellers are wise to not only bring their properties "up to Code" before putting their properties on the market, but also to wrestle with nonpaying and difficult tenants, who may quash an otherwise good real estate deal. Many a deal falls through, and tempers may fly, while the parties await eviction or other action necessary to vacate a tenant prior to closing, as some buyers require. Sellers should also be very careful to properly complete the Property Transfer Notification Form, which is the state lead paint disclosure form - make sure you READ the document, and thoroughly fill it out and attach all necessary reports/records called for by that form. Sellers should also generate "rent roll" information, which smart buyers insist to be included into the terms of the Purchase and Sales Agreement. Sellers who have this information readily available, are more likely to see Purchase and Sales Agreements signed timely, and closing dates come earlier than later. Rent roll information includes not only copies of the written tenancy agreements, but also of security deposit/last month's rent information and forms in the possession of the Seller; if a Buyer is to inherit these deposits, they should be cautious to verify the Seller's compliance with the law and documentary requirements so that the new Buyer doesn't inherit liabilities. Did you know there is a specific notice form required to be given to tenants when the property sells and there is an assignment of last month's rent and/or security deposits from former owner/landlord to new owner/landlord? Who pays for utilities?; another good question to answer by a written rent roll.

When I'm represent the Buyer's side, I generally recommend Buyers check out with the Code Department what, if any, existing code violations exist at the property which a new owner/landlord may have to immediately address. A Buyer might also be wise to grab a copy of the State Sanitary Code 105 Code of Mass. Regs 400.001 et. seq., to use as a home inspection guide. Particularly, Buyers should beware lead paint in properties, electrical cross metering (i.e., 3 electric meters in a three decker), substantial substandard conditions which may require immediate cash flow to remedy, and substandard rents and/or long term leases locking in a low market rent. I even like to add to my offers to purchase provisions that the Seller will not amend, extend, or create new tenancies prior to closing, at least not without Buyers' prior written consent, not unreasonably to be withheld. What about including provisions in the purchase and sale contract to require the Seller to notify the Buyer in the event the Seller, prior to closing, receives any notice from tenants or the code department and the like, relative to alleged "bad conditions" in the apartment. Written assignments of tenancy agreements and leases, particularly section 8 leases, should be prepared and delivered by Seller to Buyer at closing; their untimely execution can, for example, hamper Section 8 rents from reaching the new owner/landlord in a timely fashion. By the way, did you know a Buyer can "tenant screen" the tenants they are inheriting, to try and reduce inheriting the proverbial tenant from hell?

Many mortgage lenders will also allow a Buyer to purchase the rental property, not in the Buyers' own name, but in a realty trust, corporation or some other liability-protecting entity. The initial set-up legal costs are less costly than being personally sued for slip and fall accidents and other liabilities that may surface in owning rental properties. Multi-family property owners may be quickly subjected to liabilities under the state's consumer protection laws, which can double and treble damages, and award legal fees against the "offending" landlord, among other things, due to the existence of sanitary code violations. If a tenant is personally injured at the premises due to a condition which also violates the code, insurance coverages typically do not insure the landlord from the risks of double/treble damages and attorney fee awards, such that owning property in the Buyer's own name also subjects the Buyers other assets to the claims of such potential creditors.

Access to the premises, to show to buyers, lenders, appraisers, home inspectors, can also be challenging to both Seller and Buyer alike. It might be wise to get the listing realtor to videotape the apartments, so that if the tenants are not available after reasonable advance notice, to show premises to prospective Buyers and the like, a videotape may be a quick-fix solution. Buyers should, however, make sure they eventually inspect the entire premises, particularly including but not limited to the day of closing inspection. "Kick the tires" of what you're buying before you pass the cash, because after the closing, once you open the doors, you own it, and all that is good and bad about it!

These are just some initial suggestions for Buyers and Sellers alike to consider in multi-family real estate transactions. Be careful to know what your doing, so you don't find out the hard way. If you are going to hire an attorney, which might not be an unwise investment given the substantial amount of money and liabilities which pass hands at closing, it might be better to hire that attorney "from soup to nuts", instead of after signing an Offer to Purchase, "jumping off the cliff, and hiring a lawyer on the way down!"

Another great suggestion for Buyers particularly, is to join your local property owner's association!