Resolve Investment Property Documentation Issues Before Closing
As a real estate investor, you know the devil is often in the detail and there are many details when buying an investment property. Before closing on an investment property, be sure to carefully check for open housing and inspection report orders that, if not resolved, will become your responsibility (read: expense) after you buy the property.
Unfortunately, these issues can be tricky to dig up as every city has its own reporting and tracking system and you need to know where to look. Some cities do a respectable job of reporting open orders online while others are stuck in the stone age. For these you must often resort to antiquated ways and call or visit to get the information. And as we have all experienced, the information available online is only as good as the people who update the websites, so it is best to do some double checking. In the City of Minneapolis, MN, for instance, we routinely find that the website contains outdated information or doesn’t contain essential information.
Following are a few examples of documentation issues that we have experienced as a real estate investor in the cities of Minneapolis and St. Paul, Minnesota.
Common Real Estate Investor Documentation Issues
1) In one case there was an open city order to replace a gravel driveway with asphalt. Depending on the size of the driveway, this can be expensive, and you may find that a property seller has conveniently “forgotten” to disclose this type of order. Sure, you can sue the seller after closing but who needs that hassle? Better to find out up front.
2) On several properties we uncovered that there were unpaid city fines for un-shoveled snow, uncut grass and excessive garbage on the property. This happens all the time. If you don’t get them paid at closing, they become your responsibility and will eventually be assessed to your property taxes if you don’t pay them directly. Unpaid property taxes will lead to the city foreclosing on your property.
3) Other examples include unpaid fines for fences that violate city code, cars parked on the grass and missing house numbers. Based on our experience in acquiring property in the Minneapolis and St. Paul, Minnesota area, we’ve developed the following tips on how to discover potential documentation issues. If you are a real estate investor working with properties in other locations however, you’ll need to do you own digging.
Real Estate Investor Tips for Discovering Documentation Issues
In the City of Minneapolis, sellers are required to provide potential buyers with a “Truth in Sale of Housing” (TISH) inspection report that details any issues with the property noted by a city inspector. These issues can be marked as either suggested corrections (not mandatory) or required corrections (mandatory). Mandatory corrections become the responsibility of the buyer if the seller doesn’t correct them beforehand. This all sounds simple right? Not so fast! There is a tricky little field on the Minneapolis TISH report labelled “Housing Orders” and the report will either say “yes” or “no”. A “yes” indicates there are separate housing orders pending that aren’t listed on the report that could also impact property value. Why aren’t these issues listed on the report? We have no idea, but we’ve learned the hard way to pay attention to this seemingly innocuous field. If you see a “yes” on your TISH report, dig deeper by asking the seller for more information, by checking out this website AND by calling the City at 612-673-3000 and asking for an explanation. I’ve emphasized the calling part here as we’ve discovered that even if the website doesn’t report any issues, a phone call still might. Don’t skip this step.
The City of St. Paul also requires that the seller provide a TISH report at the time of sale. The St. Paul version of this report doesn’t give any information on open citations or violations but, unlike the Minneapolis TISH, it does show open permits (see how standards can vary from city to city?).
Once you’ve reviewed the TISH report, your next stop should be the city’s website to gather additional information. The website is comprehensive in terms of the types of information that it provides but there is a catch – the city is notorious for being behind in updating the information. You should always call 651-266-8989 to ask for more information on open items that you find on the website and to ask if there are any open items that are not yet listed.
What to do Once You’ve Discovered Documentation Issues
Once you’re sure that you’ve found all the skeletons in the closet, you have a few basic options for dealing with them:
1) Negotiate that the seller addresses all issues prior to close
2) Reduce the purchase price to reflect the amount of money you expect to spend fixing the issues yourself
3) Do nothing – assume the burden of addressing the issues yourself after closing with no help from the seller (financial or otherwise)
Each of the options above has its own pluses and minuses and your ability to negotiate seller concessions can vary by transaction. As a real estate investor you’ll always have to make a business decision on how hard to press and what to accept. This information will at least allow you to negotiate from a fully informed position. Happy investing!
This tip is just one of many items on our pre-closing checklist. Click here to download the full checklist
If you’ve got tips for other cities, please share!