How to Avoid Costly Legal Mistakes When Financing an Investment Property

Most homebuyers look for properties that only require minor touch ups, if anything. While move in ready properties are attractive to the masses, they are the exact opposite of a house flipper’s dream property. When the market is high, or cost prohibitive for a young first time homebuyer, flipping is one of the quickest ways to gain immediate equity. Flippers have a unique ability to see a property for what it could be, but inexperience or ill-gotten advice can easily lead that same visionary to legal pitfalls.

Cash is king, but what happens when you do not have the cash to outright purchase your first investment property? The world of run-down houses typically means a departure from the world of conventional financing. FHA loans and other conventional loans typically have quality of property requirements that preclude their use in homes best suited for a flip. While you may be able to get some traditional loans, they are usually much harder to obtain. As such, properties acquired for a flip are typically financed by private hard money, seller financing, or cash.

A hard money loan is a loan from a private investor(s). This kind of loan has lower qualifications and can get you funding quickly. However, it should be noted that there are significantly higher interest rates and may incur additional fees. Not to mention, the potential of signing a deal with a predatory private lender. Because of the high interest rates and varying terms, it is important to do your due diligence on the lender and thoroughly understand the terms of financing.

While the safest financing bet is traditional financing, some homes make that an impossibility. If traditional financing is not feasible, and you just don’t have the enough cash on hand, seller financing may be another option. While some sellers are uninterested in this proposition, seller financing can be a good way to accomplish the goals of each party. For example, maybe an owner is looking to sell his investment property because he is tired of dealing with tenants or building upkeep; if he wants to continue to supplement his income in the short term, he may be more than happy to offer a seller financing arrangement.

A buyer may also find financing in the form of a rent to own or contract for deed arrangement. These financing structures should be carefully reviewed as the terms are significantly harsher and can result in a buyer losing everything. Due to the potential pitfalls and harsh consequences these deals contain, it is essential to have an attorney review and draft a contract that clearly establishes the rights and obligations of each party.

With major renovations, comes major legal exposure. While some real estate investment strategies may not necessitate entity formation, a flipper would be wise to form a business entity that protects his personal assets from liability.

Flipping a house may look easy on TV, but it can be a legally complicated procedure in real life. Talk to an experienced real estate attorney if you are thinking about flipping a house.