When done correctly, investing in real estate can be a wise decision. It offers stable cash flow potential, tax benefits, diversification, inflation hedging and the ability to generate passive income. But real estate investing also comes with its share of risks, some of which can lead to costly litigation.

The whole point of investing is to make money, so spending money on legal battles is not what every investor wants to do. Investors should be aware of certain risks that they should pay attention to when entering into a transaction.

Title issues that can affect a real estate investment

Title work may seem like a routine part of a transaction, but this seemingly mundane step can reveal a host of issues that can derail a transaction and jeopardize the value of an investment. Title risks include the possibility that someone else:

  • Holds an interest in the property
  • Has rights affecting title arising from leases, contracts or options
  • Claiming a right of ownership by counterfeiting or impersonation
  • Has an easement on the land
  • Has a registered right to limit the ways the property is used
  • Has a registered lien or charge on title
  • Attempting to enforce a discriminatory covenant, condition or restriction based on such grounds as race, religion, ethnicity or other unlawful grounds

These and other defects may require legal action, such as filing a silent title action with the court where the property is located. A quiet title action is a legal action to clarify who owns the property. However, even if the lawsuit is uncontested (i.e. the other party does not defend their position in the case), resolving it can still cost thousands of dollars.

It only becomes more costly if a defendant actively opposes the investor’s claim of ownership, turning what should be a lucrative opportunity into a massive and costly battle.

Risks related to zoning, building permits and improvements

Investment properties also involve zoning and permitting risks. Therefore, before investing, it’s a good idea to dig to uncover these potential liabilities with the help of a qualified real estate attorney.

The land or building may violate a zoning law or subdivision by-law affecting the use of the property. For example, the violation could make obtaining a building permit to alter or improve the property difficult or prohibitively expensive or cost-prohibitive to obtain a building permit to alter or improve the property. For example, the investor could be required to spend money to correct or remove the violation or bring the property into compliance with new code requirements.

In some cases, buyers have even been forced to remove or alter structures because they violated existing zoning laws or were built without permits.

Resolving issues like these may require appearances before local zoning boards, municipal authorities, and possible legal action. It takes time and money, which the investor prefers to spend otherwise.

Risks arising from lien claims

Existing liens can encumber properties. These may be legitimate liens or false claims that do not hold water. Either way, solving them costs money, which erodes returns on investment. Here are some examples of liens that may exist on a property:

  • Mortgages: It is common for a seller to have an outstanding mortgage on a property. Usually (but not always) there is little risk associated with these, as the mortgage can be paid off as part of the sale.
  • Contractor privileges: A previous owner may have failed to pay a contractor who placed a lien on the property (mechanic’s lien), demanding payment before the property could be sold.
  • Tax privileges: A buyer may become liable for unpaid property taxes. Additionally, if the previous owner owed federal income taxes, the IRS may have placed a lien on the property in an attempt to collect.
  • Judging privileges: A seller may have a court order demanding payments to satisfy a judgment to someone who, when registered in the county, must be satisfied or addressed in connection with the sale of the property. For example, a judgment lien could be placed because the landlord owes alimony or child support. Or, the owner could have lost a lawsuit, resulting in a lien on the property.

Consider protecting your investment by hiring a lawyer

Investors buying property in Colorado should consider working with a qualified real estate attorney during the purchase process. Yes, hiring a lawyer in advance is an expense. But that has nothing to do with the cost of litigation.

Ideally, involving a lawyer early on can go a long way to avoiding those large litigation bills, allowing you to reap the benefits of your investment sooner.

For more information on how to avoid real estate litigation in Colorado, contact Hackstaff Snow Atkinson & Griess, LLC, at 303-534-4317 or visit our website.

Jean Snow

Aaron

Aaron Atkinson

Aaron Atkinson and John Snow of Hackstaff Snow Atkinson & Griess, LLC, are Denver’s top business attorneys and litigators with expertise spanning various industries. Specializing in business law, litigation, intellectual property, tax law and dispute resolution, John Snow and Aaron Atkinson offer a thorough understanding and knowledge of general real estate and litigation rules and regulations and are a trusted resource for business owners throughout Colorado.

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