REAL ESTATE TRANSACTIONS
Crowdfunding Lawyers has built a nationwide network of regional real estate attorneys to help with the transactional undertaking of your real estate opportunities. We’re here to support you as a one-stop shop for your real estate syndication needs.
Real Estate Investment Basics.
The Income Producer
As a preliminary matter, the first step in selecting your real estate investment is whether you want to seek out income producing properties. Income producing property investments can include a broad spectrum of many types of real estate investments, so long as income is produced. While defining what an income producing property is seems pretty obvious, it is worth noting that potential income from real estate does not just include rents from single or multifamily properties. It also includes other income such as room rates for hotels, rates for storage units and parking lots, and rents for senior living facilities.
The flip side is less obvious. Because how could you find value in a property that is not regularly paying out? The answer is because in booming markets (such as DFW), it is not uncommon to see six figures of appreciation within a 5 to 10 year period for real estate investments. Such an investment is akin to stock in that the investor seeks to buy low and sell high.
The Basic Categories
The type of real estate you choose to invest into will be one of largest drivers for structuring your real estate investment. Among the different classes of real estate investments, each has its own metric for evaluating performance. The markets for these separate real estate investments are generally independent of each other, and a novice mistake would be to conclude that the retail real estate market is superb by virtue of a burgeoning residential real estate market. Further, you can never just assume that a property’s returns and performance will continue down the road.
Residential real estate investments include single family residences, multifamily properties and vacation homes. The standard residential lease is typically for a term of 12 months. Multifamily properties in particular tend to deliver stable returns by virtue of the constant need for housing and ability to substitute in replacement tenants. Further, losing one tenant on a multifamily property typically has a smaller impact on net income for the property as compared against other types of properties. One risk of multifamily properties is that operating expenses are generally borne by the property owner and not the tenants (as they would be in commercial properties). This produces risks because the property owner is locked in at the rental rate while operating expenses could possibly surge and cause losses.
Commercial real estate investments include office and professional space. These investments generally attract small businesses, large companies and governmental organizations. These leases are generally for greater than a year. These longer leases generally provide stability in providing cash flow. Longer leases can also protect the property owner when market rental rates decline because renters are already locked in on their agreements. On the downside, longer leases can lead to negative effects if the commercial real estate market in the surrounding area booms and current tenants are paying below the market rental average.
Retail real estate investments generally include storefronts and even bigger strip and shopping malls. Most retail centers have an anchor, such as Wal-Mart, Macy’s or your favorite grocery store. Anchors tend to make a piece of retail real estate more desirable for investment, due to the perception that large retailers will continue to make their rental payments. The leases for retail real estate investments tend to be longer than other commercial real estate properties because retailers generally tend to avoid relocation. Some retail real estate leases contain terms that provide the landlord with a percentage of revenue generated by the tenants. This provides an inventive for the landlord to maintain the property for consumer attraction purposes.
Industrial real estate properties include a broad spectrum of properties such as warehouses, distribution centers, storage units, car washes and other special use properties. Similar to commercial and retail real estate investments, industrial real estate properties typically involve long-term leases. Major factors to consider for investment in industrial real estate investments include location relative to commercial transportation routes, functionality for one or more uses, building arrangement, loading docks, specialized equipment and features, and covered open space. Some industrial real estate properties may also include significant built in office spaces. These real estate investments are often marked by lower expenses and reduced need for management. Savings are also typically generated on these real estate investments because they require lower operating costs than retail and commercial real estate investments. Additionally, industrial real estate investments can also increase returns on investment by providing additional sources of revenue. Examples of such revenue streams includes coin-operated power washers, coin-operated vacuum cleaners and vending machines.
Understanding Escrow
Let’s start off with escrow and define some simple terms. After the stage is set, we can get deeper. What is an escrow when we’re talking about real estate transactions?
An escrow company is an independent third party where the buyer and seller can come to that party to facilitate the exchange of documents and funds for closing a transaction. Someone is signing away a deed. They want to give that deed or legal document away when they know the funds are available and vice versa. People only want to put their funds up if they know the legal documents are signed. An escrow company then acts to facilitate that process as an independent third party, a fiduciary, or by taking the documents and funds and helping people feel comfortable. It will send the money as soon as it’s received, record that document, and everything’s good. That’s what the escrow services do.
Escrow attorneys are neutral, independent third parties. They won’t release anything until everyone has signed off on it.
Understanding Title Companies
Title companies are the ones that search and do the background searches on the title property title. From that, they determine what documents affect the property and what doesn’t affect the property, then commit to ensuring that transaction. Hence, they’re the company that does the issuance of the title policies.
The title and escrow companies are combined in Texas, so the title companies and escrow companies do both services. In other states, and on a national scope, others bifurcate that. There are separate escrow companies from title companies. You’ll see that more on the west coast, along California and Washington.
When you’re talking about insurance and title companies, it’s indemnity insurance, predominantly found in the US, which insures against financial loss from defects, title to real estate, and from invalidity or unenforceability of mortgage liens or ownership interests. It covers both defects when examining the title, in the event that a document is missed or if something comes up in a document that might present an issue you’re concerned about.
Imagine asking, “Hey, if I own this property, is this easement going to be an issue? Is this encroachment going to be an issue? Is this restrictive covenant going to be an issue?” It insures against those things. It also insures the closing process, so if a mistake is made and taxes are not paid, they’re collected in the escrow process. It also covers the types of issues that come with missing something in the closing statement or process.