I wish I could say we are entering a time of financial and real property uncertainty. Unfortunately, that is not true. We know too much to claim uncertainty. Houses and condo units are sitting on the market with high mortgage balances, probably with increasing interest rates, and many of those were purchased at prices which were never sustained by the rental market. Now that the market has changed, investors will find these loads to be heavy.
We have been in stressed real estate markets before. Those stresses were caused by high interest rates, sometimes by lack of product on the market, and sometimes by lack of purchasers. We have never had, in my memory, exactly the same stress we are likely to feel over the coming months. The devices that will be proposed to help owners who have bought property they can’t afford to hold are unlimited. We know those devices include contracts for deed, rent-to-own agreements, assumption of mortgage efforts, joint ownership opportunities, and countless others.
All the devices to creatively own and finance real estate have one thing in common. All are more complicated than an outright conveyance with mortgage transaction, and all have risks. The television, radio, and book presentations of all the ways to own real estate without paying money down, thereby creating immediate wealth and cash flow, create immensely destabilizing possibilities in the real estate market. Most of those ploys should be reserved only for fools and real estate gamblers.
The other common denominator between past stressful real estate times and this one, is that the Courts will soon swell with the effects of economic desperation.
In this space I wrote last year that “Flip” contracts, (by which I intended the documents to assign rights to purchase not yet completed condominium units), were treacherous documents that needed a lawyer’s attention and time. The Court system is now showing evidence that those contracts are resulting in lawsuits to determine who loses when those contracts are not fulfilled.
Many of those assignment contracts made no provision for failure to perform by the Developer, or by the end Purchaser.
Remember that title companies are not licensed to draft documents more creative than standard deeds and mortgages, and only then when title insurance is issued. The importance of that is there is no defense for the title company if the document they prepare happens to be inadequate. (For instance, I cannot defend a medical malpractice action if I hold myself out to be qualified to give medical advice, even if the advice is good!). Only a lawyer whose compensation is not dependent upon that transaction can be absolutely independent in assessing the risks involved in your real estate deal.
When a lawyer advises a buyer or seller of the down side of a proposed transaction, don’t shoot the messenger. The time, expense, and embarrassment of litigation, especially litigation that could have been predicted and avoided, is overwhelming. Lawyers must be independent. If people seeking to do creative real estate financing, don’t seek their advice, the Courts will once again be called on to straighten out the mess.
Learn to love your lawyer.