Today I am writing you from our annual family trip to the Outer Banks. This week I am SO excited to chat with you guys because I have a VERY special guest on today’s LTRE– my dad. For those of you who may not know, my dad is an attorney with 20+ years of experience in real estate law. More specifically, he specializes in multi-family properties, and as I am also currently working on rehabbing multi-families – I thought it would be PERFECT to sit down, pick his brain, and share with you what I learn.
So, as we do, let’s talk Real Estate, let’s talk MULTI-FAMILIES – an attorney’s perspective…
Before we even dive into this, let’s quickly chat about what multi-family housing actually is. Based strictly on design, multi-family housing refers to a building that contains more than one (1) dwelling unit. As defined in the Law Dictionary, “to house several different families in separate housing units is the specific design for this type of building or structure. The entire building or structure may be owned by one person, a company, or by individuals who have purchased units, as is the case with condominiums. An apartment building is the most common multi-family housing type. Multi-family housing includes duplexes, quadruplexes, and townhouses.” Please keep in mind, all rental housing is not necessarily multi-family housing, and multi-family housing need not be for rent.
Now that we have that all laid out – let’s get straight to the interview between my Dad and I…
FIRST AND FOREMOST, WHAT ARE SOME LEGAL DIFFERENCES BETWEEN INVESTING IN THE VARIOUS MULTI-FAMILY PROPERTY TYPES?
Apartment buildings and condominiums are the most common types of multi-family housing. These complexes contain multiple units, and often have multiple floors with multiple units on each floor. The main difference between an apartment and condo is ownership. Generally, a condominium unit is an individually-owned unit in a multi-family housing complex, with the common element areas. A common element area is normally defined as all parts of the condominium other than the units, in which unit owners have a percentage interest as defined in the Condominium Documents. A Condominium is typically administered and governed by a board of directors of the unit owners association. An apartment building, on the other hand, is wholly owned by a single owner, such as a corporation, partnership or limited liability company, that leases individual apartment units to tenants. Cooperative housing is a different type of home ownership. Instead of owning actual real estate, a person owns a part of a corporation that owns the real estate. Generally, a person purchases stock in the corporation which entitles him or her to occupy an apartment unit in the building or property owned by the cooperative. While the person does not own his or her apartment unit, he or she has the right to occupy his or her apartment unit for as long as he owns the stock. A cooperative is typically governed and administered by a board of directors of the corporation. A townhouse is typically part of a planned community whose walls border neighboring units, and therefore technically falls under the umbrella of multi-family housing. The planned community is often administered and governed by a homeowners association.
WHAT WOULD YOU SAY IS THE MOST IMPORTANT THING TO KNOW WHEN INVESTING IN MULTI-FAMILIES?
The most important thing when investing is to truly understand the following:
(1) Know exactly what you are buying.
(2) The condition and physical needs of the property.
(3) Condition of surrounding properties and the neighborhood in general.
(4) In the case of the condominiums and properties located in planned communities,
a. Assessment of obligations and other fees.
b. Financial health of condominium or homeowners association
c. Restrictive covenants and rules and regulations (e.g. pets)
d. Parking scenarios (we will talk more about this later on)
(5) Real estate taxes and associated fees
Just make sure to do your due diligence and understand all of the above factors.
WHAT ROLE DOES YOUR ATTORNEY PLAY PRIOR TO CLOSING ON A NEW PROPERTY?
As I believe most attorneys will say, it all depends. This is very circumstantial, but will always depend on the state and local jurisdiction in which you are investing, as well as your individual relationship with your attorney. Attorneys can help with a wide range of services including contract negotiation, finances, tax considerations, environmental, zoning, building codes and local law obligations. But again, know that this is very circumstantial and it is important to lay out your needs with your attorney explicitly so that everyone is on the same page.
WHAT ROLE DOES YOUR ATTONREY PLAY POST-CLOSING? LIKE, ONCE THE PROPERTY IS UP AND RUNNING?
Again, really circumstantial, but your attorney can help with the preparation of leases, fair housing concerns, or help resolve issues whether it be with the tenant or the property itself. They are really here to act as your guide and consultant on any legal issues.
HOW SHOULD RE INVESTORS BEST EDUCATE THEMSELVES ON THE LEGAL SIDE OF INVESTING?
Ask questions. You pay your attorney – they are the expert- make sure to fully utilize them and do not be afraid to ask them to review anything you may not fully understand.
HOW MUCH SHOULD AN INVESTOR BUDGET FOR STANDARD LEGAL FEES ON AN ANNUAL BASIS?
Ask your individual attorney to provide you a budget ahead of time. It is critical to both parties to understand what fees to expect.
WHAT IS THE MOST COMMON LEGAL ISSUE THAT POPS UP WITH MULTI-FAMILY PROPERTIES?
We tend to see a lot of violations of the restrictive covenants, which are found in the recorded governing documents for the community. Two of the more common issues people come to us with involve parking and pets.
AWESOME – ARE THERE ANY OTHER LEGAL ISSUES LANDLORDS SHOULD BE PREPARED TO DEAL WITH WHEN INVESTING IN MUTLI-FAMILY UNITS?
We see everything, however a couple of items that may seem simple to you but can actually cause some SERIOUS issues are requests for reasonable accommodations, reasonable modifications, accessible parking spaces, and service/emotional support animals.
WHAT DO YOU BELIEVE TO BE THE KEY TO SUCCESS IN INVESTING IN MULTI-FAMILIES?
There are a few key factors to guide you towards success;
· a good team,
· knowledge of your business,
· understanding your finances,
· knowing your customer,
· and maintaining your facility
… And then my mom chimed in with one final question for my dad (yes, this interview became quite the family affair) she asked… CAN YOU PLEASE EXPLAIN HOW ADA vs FAIR HOUSING WORKS? (Honestly, this question was a bit random BUT the answer was definitely interesting, and important so I kept it here!)
Whether you are a landlord selecting tenants or a person selling houses, it’s extremely important that you and your staff know the basics of federal and state fair housing laws, as well as local anti-discrimination statutes.
Briefly, the federal government adopted two principal civil rights acts that impact housing. The first is the Fair Housing Act (“FHA”), which was adopted in 1968 and which prohibits discrimination in the operation, leasing or sale of multi-unit housing, including community associations. The second is the Americans With Disabilities Act (“ADA”), which Congress enacted in 1990 and prohibits discrimination against the disabled in places of public accommodation. Please note that most of the states and many local jurisdictions have adopted similar fair housing laws and ordinances.
What is the FHA? What is the ADA?
Initially, it is important to understand that the FHA and ADA are civil rights acts, enacted to provide certain protected classes with equal access to use housing and places of public accommodation. Because of the strong public policy concerns underlying the adoption of both Acts, both should be and are liberally interpreted to provide protection for the classes of individuals they cover.
The purpose of the FHA is to provide certain classes of people with equal access to housing and to the facilities and services associated with housing. The protected classes include race, color, religion, sex, national origin, familial status and disability. FHA for example governs the renting, selling, advertising and use of housings.
In comparison, in most cases, the U.S Department of Housing and Urban Development advises that the ADA does not apply to residential housing. Rather, the ADA applies to places of public accommodation such as restaurants, retail stores, libraries, and hospitals as well as commercial facilities such as offices buildings, warehouses, and factories. However, Title III of the ADA covers public and common use areas at housing developments when these public areas are, by their nature, open to the general public. For example, it covers the rental office since the rental office is open to the general public.
…(back to me, Erin!) : OKAY – SO THE COMMERCIAL vs RESIDENTIAL ASPECT OF THESE ACTS AND THEIR RAMIFICATIONS WAS SOMETHING TOTALLY FOREIGN TO ME. Having my dad walk me through this helped further demonstrate to me that there are SO MANY VARIANCES to the law to be aware of. In the event you are in violation of one of these laws, you could LOSE EVERYTHING as a business owner. This is why it is important to have a good working relationship with your attorney.
Anyways, I want to say THANK YOU TO MY DAD, for this interview and for the 1,000 other RE questions I come to him for on a daily basis. I know this week was SUPER TECHNICAL but I, even as the writer, found it to be super helpful and wanted to share it with the LTRE community. If you have any questions regarding an attorney’s perspective on multi-family investing, that we did not cover here, do not hesitate to reach out to me! We can answer it in next week’s post, OR maybe even do an “attorney’s perspective” interview pt II?!
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Data Sources for Today’s Content:
ME & my dad – this week’s post is based on our personal experience and findings
Black’s Law Dictionary
U.S. Department of Housing and Urban Development