Joshua Dorkin of The BiggerPockets recently reposted one of his earlier blogs emphasizing the importance of forming a team of advisors when getting started in real estate investing. He suggested that the team include a Mentor, Mortgage Broker, Title Officer, Accountant, Contractor, and an Attorney, among others. Many of the comments posted to Joshua’s blog were highly supportive of the concept. I also have posted similar comments in the past on the importance of using a team to consult as part of one’s due diligence.
Yet investors often choose to ignore this advice! Time and time again, I get phone calls from investors who decided to wait untilafter the disaster to get professional advice from an attorney. The reasons are simple: time and money. Most new investors get anxious about doing a transaction and feel compelled to rush or risk losing the “deal of the century.” Also, mindful of their budgets, the thought of paying for one or two hours of legal advice simply does not compute as a cost-effective strategy. Except in hindsight!
A few days ago I received a phone call from a very upset investor who had purchased a REO property with a bad history. It was an abandoned gas station (BIG Red Flag Warning!), and the city had proceeded under a nuisance abatement action to remove the deteriorated buildings, attaching a lien for the costs. The buyer ignored the notices from the City demanding payment, and penalties and interest costs mounted. (More Red Flag Warnings!). The buyer, upset at the City, chose to ignore notices of hearings and deadlines for appeals. Finally, after paying an attorney $8000 to make a phone call and write a letter to the City Attorney — which accomplished nothing, apparently — the buyer called me asking for a free consultation! Needless to say, we never discussed whether he had hired a consultant to determine if the abandoned gas station property was zoned for his intended use, whether there were any underground tanks remaining, or whether anyone had tested the soil for contamination — the typical due diligence questions that any competent real estate broker, attorney, or contractor should discuss with their client before making a purchase!
A couple of hours of legal advice before you make the investment can be a valuable investment in itself! But be realistic: most attorneys (including me) cannot read minds or forecast the future. Explain your investment goals and objectives, so that the attorney can tailor the advice to your needs. That alone will save you lots of time and money! Provide the attorney with all the relevant information and documents, if you have them. Leaving something out because you thought it wasn’t important is not a good idea! Also, let the attorney know what your deadlines are; it is often possible to negotiate an extension of time in order to complete the due diligence.
Lastly, don’t ignore the attorney’s advice. Chances are good that you can use it to negotiate a better deal, and even better that you can use it again in the next transaction, and the next. And that will prove to be a very valuable return on your investment!