As a commercial real estate investor, there is a good chance that you will invest in a property located in another state where local customs may be very different from where you live. Knowing some of these customs can help you avoid mistakes that can cost you money. Whereas people say that when you are in Rome, do what the Romans do. However, there is often a disagreement as to whether the seller or the buyer is in Rome. This article looks at some of the common customs that you should know about. It may or may not explain why these customs are what they are, which could be a very long story.
Independent consideration
You often see this separate monetary consideration in contracts in Texas (TX), Georgia (GA), and North Carolina (NC), but not California (CA), where love and affection are an acceptable consideration. Listed brokers in these states often insist that you pay the seller between $ 1,000 and $ 5,000 as separate consideration for the right to cancel the contract during the typical 30-day due diligence period. As an out-of-state investor, you must pay for airfare, hotel, food, and car rental to visit the property as part of your due diligence. So if you decide that the location is not as good as it looks on the satellite map or for whatever reason, there is no point in paying another $ 1000-5000 to cancel the contract. While the law in these states requires independent monetary consideration, it does establish what that amount should be. Therefore, you must choose a large number between $ 1 and $ 10 to legalize the contract!
Non-refundable security deposit
In CA, there is no non-refundable deposit based on a CA court ruling. Most if not all real estate contracts in all states have a paragraph that addresses damages due to breach of contract by either party. It is usually enough. However, some brokers and sellers of quotes outside of CA often insist that all serious deposit “be hard”, that is, not refundable and given to the seller, after the expiration of the due diligence period. While the purpose is to make sure you think twice before defaulting, it could be difficult to get back any serious deposit if
- You, due to an unpredictable position, for example, hit by a truck or have a heart attack and go to heaven or wherever, you cannot close the transaction.
- The property is partially damaged or even set on fire by a fire.
- The seller spends it all and his loan is not approved due to soil contamination later discovered.
You are in a bad position to negotiate with nothing to offer when the money is in the possession of the seller. Therefore, it is advisable to keep the escrow until closing. However, sometimes you have to make a difficult decision, especially when there are multiple offers in order to buy a desirable property.
Property taxes
In CA, the property is automatically revalued at the purchase price. The property tax rate is approximately 1.25% of the purchase price. Due to Proposition 13, property taxes can only increase by a small percentage annually unless there is a change in ownership.
In TX, the property tax rate is approximately 3% of the assessed or taxable value. However, the taxable value may or may not be the purchase price, which is often higher. If the county is informed of the highest purchase price, it will pay property taxes based on the highest purchase price. Therefore, it is a good idea not to report this higher purchase price, as it is not required. Lately in Texas, the local government has been trying to increase revenue by aggressively reassessing property values. The new appraised value could be significantly higher than, for example, 100% of the old appraised value. If this were to happen to your property, you may want to hire a professional company to protest this property tax increase, even on a property with NNN leases. The success rate seems to be quite high. As an investor, it is wise and prudent to keep NNN expenses as low as possible for your tenants. You definitely want your golden goose to keep laying eggs.
In Florida, there is a monthly state sales tax for commercial properties, so make sure you know who is supposed to pay it. In Illinois, the property tax rate is quite high, around 5%. The property tax rate for North Carolina is approximately 1.45% of the taxable value that is not changed after the sale.
Fiscal statements
In CA, an escrow company can handle the closing of a real estate transaction. In GA, FL, or NC, escrow companies can only hold the deposit for you and you must hire an attorney licensed in that state to perform the closing. These statements are often called “tax statements.” Proponents say that a real estate transaction is very complex, so you should have an attorney to help you. For opponents, it’s about job security for lawyers. If you are investing in property in a law firm, you want to hire a lawyer who charges a flat fee, as the amount of work is very predictable. You will receive an estimate based on what you need the attorney to do. He or she will not begin work until you give your written permission to do so. The attorney will review all the documents and give the blessing before you sign them. It is advisable to avoid a lawyer who charges you by the hour. Most likely, you are dealing with an attorney looking for a great payday.
In CA, the buyer automatically receives the preliminary title report that shows the owner and various information, for example, links and the loan amount on the property. If you cancel the transaction, you normally don’t pay any escrow fee. In attorney states, the attorney will do the title search and review. The title company then issues a title pledge to insure against any title defects. If you cancel the transaction, the attorney and the Escrow Company may charge a fee for the work performed.
Closing costs
When you bid, you often state that the buyer and seller split the closing costs based on the custom of the county where the property is located. In CA or TX, sellers typically pay the homeowner’s title insurance premium based on the price purchased, ensuring the buyer a clean title (technically, you shouldn’t have to buy homeowner’s title insurance when you refinance the property because title was already secured when you purchased the property). The buyer pays the lender’s policy premium based on the loan amount. This lender’s policy is required by the lender to protect you against losses resulting from claims made by others against the property. Of course, if you pay cash for the property, then there is no lender policy. However, in GA, it is customary for the buyer to pay for both the owner’s policy and the lender’s policy. So make sure you have sufficient funds to close the transaction.
Instrument of deed
In CA, sellers often transfer their interest to buyers through a grant deed. In other states, the seller will transfer his interest to the buyer through a general or special security deed.
- The general security deed is used to convey to the buyer the seller’s interest in the real estate. The seller certifies that the property title being transmitted is free and free from defects, ties and encumbrances. The buyer can sue the seller for damages caused by the defective title.
- The special security deed is also used to convey an interest in real estate. However, the grantor does not guarantee defects arising from conditions that existed before he / she owned the property. Therefore, the special warranty deed is not as good as the general warranty deed. However, most marketers will use this script for obvious reasons.