The Real Estate Investment Legal Red Flags You Need To Be Aware Of

Image Source

Investing in real estate remains a top investment choice because it offers numerous potential benefits with few cons. Real estate is one of the most stable investments you will find, with historical trends showing that housing prices increase over time. There will be down periods (as there is in every market), but the housing market tends to stabilize and become profitable for patient investors. 

Additionally, real estate investments give you dual ways to earn money. You can improve your investments, influencing their market value, and sell them for a profit. Or, you can take your investment and rent it out, generating a monthly income source that adds to your overall profit margins. 

It’s easy to recognize why so many investors dip into this market, but what should you be aware of before buying property? Any budding real estate investor will be aware of how to buy a house and what to check – but do you know the legal red flags to watch out for? They often go unnoticed, so here are some of the biggest red flags from a legal perspective: 

Sellers Are Keen To Use Quitclaim Deeds

What is a quitclaim deed? Essentially, it’s a way of transferring ownership from the seller to the buyer during a real estate transaction. The core concept of quitclaim deeds is that they transfer ownership without putting a guarantee in place about the title itself. This sounds confusing, but it’s effectively like someone selling you a house buy they’re saying that they can’t guarantee other people will have a claim to the title, there’s also no guarantee that they own the title, and so on. 

Knowing what this means isn’t that important – what’s important is that you avoid any real estate investments with a quitclaim deed in place. 

You simply cannot trust the seller in this situation because they’re most likely hiding something. Deeds like this are widely used when transferring property ownership between family members or spouses, because there’s already an element of trust there. If you invest in a property with a quitclaim deed, there’s a strong risk of someone else coming along and saying, “Hey, I actually own the title to this house, what are you doing with it?” 

Avoid the risk; don’t buy when the seller wants to use a quitclaim deed. 

You Discover Clouded Titles

Speaking of titles, they cause a host of legal concerns when they’re not clear. A clear title is one that doesn’t have any potential claims for ownership from other parties, isn’t subjected to any liens, and generally comes up clean when you conduct a title search. 

On the other side of things, a clouded title could have all of the following problems attached to it, plus other issues like: 

• Boundary disputes with neighbors
• Unpaid property taxes

Clouded titles turn a great investment opportunity into a terrible one. For starters, it may impact your ability to purchase the home because of any extra ownership claims. Then, it could take years to get rid of other problems on the title – like those unpaid taxes or boundary disputes. You’re investing in a property that comes with lots of additional legal baggage, and it’s just not worth it. 

Always carry out title searches before making your real estate investment, and always avoid properties with clouded titles. 

No Paperwork For Renovations & Repairs

Most properties will undergo work of some sort during their lifespan. This can fall into one of two categories: 

• Renovations/home improvements
• Repairs

Investing in a home with previous work done on it isn’t a bad choice at all. Sometimes, running repairs are beneficial for you because you don’t have to do them yourself. The red flag in this scenario comes when you can’t find any paperwork documenting the renovations or repairs. A house may have had an extension added to it, but can you find the paperwork showing that all the electrical and plumbing installations met the necessary building codes? 

Did the house you’re looking at get the right legal permissions to convert its garage or extend its attic? These are enormous red flags because you’ll feel the brunt of them if you buy the house. It’s especially crucial if you’re investing with the goal of renting to tenants. You could be in serious legal trouble if a tenant discovers that old work wasn’t carried out to the correct standards. Expect a lawsuit with almost no leg to stand on. 

With that in mind, always look for paperwork or legal documents explaining everything that’s been done to a house before you invest. 

You Request Disclosures, But The Seller Denies Them

In the majority of states, you have the right to request that a seller disclose any known issues on their property. If a seller point-blank refuses to do this, then you’ve got one of the biggest red flags staring you in the face. It’s fairly obvious that they’re hiding something – and while you do have the legal standing to force them to disclose any information, it’s not worth it. 

The same applies when a seller delays any disclosures. Everything’s been moving smoothly until you ask them to disclose any known property issues, such as: 

• Mold
• Pests
• Insurance claims
• Extensive structural repairs

If you have to chase them up and ask again, you know there’s probably an issue here or there. Investing is all about measuring the risk versus reward, and in a situation like this, the risk is too high. Don’t spend your money on a property if you don’t receive a list of disclosures – or if the seller is hesitant to reveal things to you. 

When you consider the benefits of real estate investing, it’s no surprise to see it as a top choice for most investors. The majority of financially literate people will encourage you to invest in real estate at some point – it’s also a great way to diversify an investment portfolio. Still, don’t dive headfirst into this investment without considering some of the biggest legal red flags that could come your way.