A Guide For California Real Estate Investors
Real estate investors are prevalent in the California real estate market, and they have driven the values for the past few years. What, then, should California real estate investors look out for when purchasing real property as an investment?
The most common question we get is, “what should I look out for to make sure I’m protected when buying real estate?” It largely depends on the method of sale: short sale, foreclosure sale, partition sale, or purchase-money sale.
A short sale involves a real estate transaction where the homeowner wishes to sell the home for less than the amount owed on the mortgage and deed of trust. In a short sale, you are at the bank’s mercy to approve your purchase offer, and even if approved, it could take months, if not years, to complete a short sale. Investors should therefore be sure to conduct a thorough comparative market analysis to determine the true value of the home in comparison to the offer for purchase, and the mortgage.
This is because when investors purchase short sale homes, some mistakenly believe that since the sale price is less than the mortgage, the deal must be great and, in fact, it is one heck of a bargain! Or is it?
A comparative market analysis will help you avoid purchasing a short sale for far more than the property is actually worth. A qualified real estate agent can prepare this document for you, which will give you insight into the home’s true value. This holds true for foreclosures, however, there are even greater concerns related to a purchase at a Trustee's foreclosure sale. If you already purchased it, immediately record the Tristee's Deed Upon Sale so there can be no subsequent bonafide purchaser.
Title. Title. Title. It cannot be stressed enough. Do a thorough, in-depth, analysis of the title history of the foreclosure property, as the foreclosing lender does not give any warranties or assurances as to the genuineness of title to the home. Investors buy “As-Is.” A title search will identify any liens or claims to title, and you can avoid properties where your interest may be subordinate to a senior interest.
Visit the property before you purchase a foreclosure. Ask neighbors what the condition is like inside and out. What are the owners like? Any bad habits? Viewing the property will put you on constructive notice of any structural defects, and questioning neighbors will give you insight into whether there are ground leases attached to the property, which require you to pay a monthly fee. A land lease must be recorded, and the previously mentioned title search will enlighten you as to whether you are potentially purchasing a leasehold interest at the foreclosure sale.
The partition sale usually occurs after s trustee has fully administered an estate. Two people will be on title, they do not get along and cannot agree on selling the home, and a partition action occurs. Watch out for the statute of limitations for potential heirs to contest the administered estate. It is one year in California. This could lead to long, expensive court actions that will eat away at your profits.
Purchase-money sales involve the purchase of a home with a mortgage and deed of trust. The deed of trust give the lender authority to collect a debt, and thereby foreclose upon default. Aside from the previously mentioned tactics you should implement, also do a thorough inspection of the property for any material damages. You are required to do your research, and if a reasonable inquiry would unveil a defect, then you have no recourse. Always do as much inspecting as possible.
As an investor it is crucial to review all potential purchases with attention to detail, and informally audit the purchase for any problems that may arise related to title, leases, warranties, property values, and much, much more.
An experienced real estate attorney can help you avoid the pitfalls of purchasing real property. Always speak to an attorney before making a large real estate investment, as your attorney will save you from either completely losing your investment to a superior title interest, or substantially over-paying. We wish you the best of luck with your next real estate investment!
ABOUT THE AUTHOR: Blake E. Wilson
Mr. Wilson is a San Diego civil litigation attorney practicing real estate, corporate, estate planning and personal injury. He is the owner and managing partner of Blake Wilson Law Group, a San Diego-based law firm with an office in Imperial Beach. He is licensed in California and Nevada.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.