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Essential Legal Issues in Buying Multi-Families

Investing in multi-family property is a great way to build wealth. Multi-families are also great first investments for new investors looking to make a smaller purchase to get their feet wet before buying something bigger. However, when buying a multi-family property there are a number of legal issues that every real estate investor should be aware of that do not arise when purchasing a condominium or single-family home. I have outlined three important issues to consider when purchasing a multi-family property.

ZONING: IS THE PROPERTY A LEGAL MULTI-FAMILY PROPERTY?

One of the first things I advise clients buying multi-families is that they need to understand whether the property is a legal multi-family. This comes in two forms: it must be either a permitted use under the current zoning regulations or a “legally non-conforming” property. If it is neither, then the purchaser may be in for serious problems down the road. That is why every investor should understand the zoning issues that can arise when purchasing multi-family property and how to navigate through them.

If the multi-family property is a permitted use under the zoning regulations, then you can rest comfortably that the use of the property does not violate the zoning regulations. However, what if the multi-family is in a zone where multi-family property is not a permitted use? Is it an illegal use and therefore a buyer should shy away from the purchase? Not necessarily.

The multi-family property may be a legally non-conforming use. In the world of land use law, a property may not be a permitted use under the current zoning regulations but multi-family may have been a permitted use in the past. A property is considered legally non-conforming if the use complied with the zoning prior to the date that the town changed the zone to remove such use from the zone. For example, if a multi-family was a permitted use in the R2 Zone in 1999 and the town thereafter removed multi-family from the R2 zone, as long as the property was in use as a multi-family prior to the change of zoning it can continue as a multi-family property after the change of zoning as a “legally nonconforming” property.

However, it is possible that an owner illegally converted a property to a multi-family property in a zone that does not permit it. This would mean the property is an illegal multi-family that you do not want to purchase. This is why it is important to explore the zoning and the history of the property to make sure you do not purchase an illegal property. As long as the property is in a zone that permits multi-family or the property is legally – nonconforming, you can safely purchase the property.

I have experience helping clients purchase multi-family homes and can help you with your zoning due diligence to make sure you do not purchase an illegal property.

PROTECT YOURSELF: CREATE A LIMITED LIABILITY COMPANY (LLC) TO LIMIT YOUR LIABILTIY

Buying a multi-family, or any property with tenants, is a transaction that comes with risks and potential exposure to liability that are not inherent in purchasing a residence for you and your family. For example, what if a tenant slips and falls and files a lawsuit against you arguing that her injuries are a result of you failing to comply with your obligations under the lease? What if a tenant accidentally starts a fire that spreads and causes damage to other homes in the surrounding neighborhood? These are examples of the inherent risks in buying multi-family properties. This is why it is imperative to do everything you can to minimize your liability if something goes wrong. One important thing you can do to limit your liability is to create a Limited Liability Company (LLC) and take title in the name of the LLC.

Taking title in the LLC instead of individually will insulate you from personal liability and limit your exposure to the assets of the company – the real estate (there are several narrow exceptions not discussed in this post). In other words, any Plaintiff that obtains a judgment will only be able to look to the company’s assets to satisfy the judgment, which is the real estate. If the property was owned by you individually, a plaintiff could look to the real estate and other personal assets (such as personal bank accounts, other real estate, etc.) to satisfy the judgment. This is why setting up the LLC minimizes liability.

It is of course prudent to also carry an insurance policy on the property. However, an insurance company could deny the claim or its policy limit may be inadequate to cover the claim. Therefore, you should not rely on insurance and setting up the LLC will provide you another layer of protection.

Setting up the LLC may seem like a simple process but there are various things to consider. For example, if you are creating the LLC with more than one member, you should think about creating an operating agreement. This document will essentially detail how the members will manage the company and how they will make decisions. A carefully drafted operating agreement will include provisions that explain the authority of each member; whether the company will be managed by a designated manager or by its members; the process that decisions will be made; the process to be used in taking on new members; how the company will decide a tie vote of its members; along with other important provisions relevant to the operation of the company. Drafting a detailed operating agreement will prevent problems between members in the future.

I have experience setting up limited liability companies for investors and drafting operating agreements for the companies. I can help you set up your real estate holding company and create a detailed operating agreement so you and your partners are protected and avoid problems down the road.

TENANTS AND LEASES: DO YOUR DUE DILIGENCE

When buying any property with tenants, it is essential to do your due diligence with respect to the tenants and the leases. As an investor, you want to make sure that the tenants are current on the rent. You do not want to purchase the property only to learn that the tenants are six months behind on the rent and are vigorously fighting an eviction lawsuit. Therefore, it is prudent to request that the seller and tenant(s) sign a document called an estoppel certificate. This document will require the seller and tenant(s) to make a representation that the leases are in full force and effect and that the tenant is not in default. This will provide you some assurance that the tenants are not behind on the rent.

It is also prudent to thoroughly review each lease. You should be aware of the termination date of each lease and whether the tenant has the option to renew. If the leases are set to terminate a month after closing, you should be prepared for the possibility of vacancies. Moreover, if the tenants have an option to renew, this may interfere with plans to lease to other tenants. Similarly, some leases have options to purchase or “lease to own” arrangements. This type of provision is problematic for any investor as the tenant would have the option to purchase the property after you closed. You would likely not want to move forward with the investment if there was such a provision in any of the leases.

In summary, multi-family properties are great investments to build long-term wealth. However, such investments come with certain risks. Careful planning and proper due diligence will mitigate risk and help prevent future problems.

Top 5 Issues that Every Real Estate Investor Should Know Before Investing in Vacant Land

  Investing in vacant land may be an excellent investment if the investor is aware of the risks and can knowledgeably assess the issues unique to developing vacant land. I have helped various real estate professionals purchase and develop vacant land and the following is a list of the key issues that every investor should be aware of before buying and developing vacant land. 

  1. Zoning and Subdivision Regulations. What Can I Build? – Before purchasing and developing vacant land, a prudent investor will research the zoning and subdivision regulations to fully understand they can and cannot build on the land. Subdivision regulations will likely impose restrictions on how many lots can be carved out of the vacant land and possibly certain other requirements like requiring open space. Moreover, zoning regulations govern what types of property can be constructed. It is imperative to understand what can be build there before moving forward with the acquisition to understand whether the planned development is feasible. For example, if you would like to construct an apartment building on the lot, make sure that the zoning regulations allow this. Working an attorney sooner rather later may save you a big headache down the road. 
  2. Will You Need Any Type of Permit for Your Planned Development? –Your intended project, no matter how big or small, may require some sort of permit to make it become reality. For example, if you want to construct a building of a certain size or use, it may be permitted but you may need to obtain a special permit, which will require additional legal and professional fees. If the permit is imperative to what you want to build, you should know this ahead of time so you can make the deal contingent on obtaining the permit. It better to know before you sign rather than after you close whether you need a permit for your project.
  3. Sewer and Utilities –Prior to purchasing vacant land, another important component to understand is whether the land is connected to the sewer line and utilities. If not, this could impose additional cost on your budget. Moreover, the ability to connect to the sewer is important to understand which could increase the development potential and value of your property. If the land is not connected to the sewer, a septic system will not only increase the cost of your development but may limit the square footage of development potential. Accordingly, it is important to understand to what extent the land is connected to utilities to assess the development potential and costs of the project. 
  4. Environmental Concerns – Environmental Concerns are always an issue when purchasing real estate. However, they are more of a focus on vacant land, especially in commercial areas, when the land is going to be dug up and developed. If you are contemplating purchasing vacant land, particularly in a commercial area, you should strongly consider consulting with environmental professionals and conducting environmental testing to make sure there are no hazardous contaminants on the land. If you discover such contaminants after the purchase, you will have a big problem on your hand. 
  5. Due Diligence Provision in Land Acquisitions –Due to the unique issues involved in purchasing vacant land, it is important to have a broad, carefully drafted due diligence provision, that allows you to conduct due diligence on zoning, utilities, environmental and so forth. The standard due diligence provision in a residential real estate contract is likely insufficient. Before you sign a contract for land, make sure you review the due diligence clause carefully and make sure it includes your right to conduct due diligence broadly.

5 Important Legal Issues in Wholesaling Real Estate Contracts

Wholesaling is becoming a more and more popular way that investors do deals. Wholesaling, like any real estate investment, has positives and negatives aspects. As a lawyer who has handled a fair amount of wholesale deals, I made a list of five legal issues that every investor should be aware of before getting involved in a wholesale transaction.

  1. Make Sure The Contract Is Assignable – Not every contract is assignable, which is the mechanism that wholesalers use to sell their interest in the contract for a fee.  Every county in Connecticut has a slightly different purchase and sale agreement, and many have also been tinkered by real estate agents and attorneys. Moreover, I see more investors using forms they have downloaded from various websites. If you are going to wholesale a contract, you need to make sure the contract is clear that you, as the Buyer, have the right to assign the contract to anyone in your sole discretion. If there is no such clause, arguably you may have to perform and you cannot sell the contract. Make sure the contact has a clear provision that you have the right to assign your interest.
  2. LLC – Any real estate transaction has risks. Wholesaling a deal is no different. Therefore, it benefits you and mitigates risk if you enter into the contract with a limited liability company instead of as an individual. In the event that something goes south and there is litigation, it is much better if your LLC is a party and not you, and hopefully your LLC does not own many assets.
  3. Due Diligence Items – Due diligence items in the contract are essential even in a wholesale deal where you ultimately will not close. You should include the same due diligence items in the contract as if you were planning on purchasing the property. These due diligence items at a minimum are an inspection contingency clause and a mortgage contingency clause. I always advise clients wholesaling that they should push the contingency dates out as far as possible to allow you time to find a new buyer and give the new buyer enough time to do an inspection and/or apply for a mortgage. Keep in mind that the new buyer who you wholesale to will essentially step into your shoes and will have the same due diligence rights as when you signed the contract, so think carefully about them with the help of an attorney.
  4. You May Have To Perform – If you cannot find a new buyer by the closing date, you may have to close on the property depending on how you draft the contract. If the Seller will not allow an exit provision if you cannot wholesale the contract, you will have to close or breach. If this is unacceptable, make sure there is a contingency clause that addresses this.
  5. If you are the Seller, Make Sure Buyer #1 on the hook if Buyer #2 does not perform –The Seller may allow you to assign the contract to a new buyer but insist that if that new buyer does not close, you are then required to close. When I represent sellers in wholesaling deals, I insist on this provision to protect the seller. Be prepared for this type of negotiation. Putting more money down may make the Seller more comfortable and not insist on such a provision (then you can seek reimbursement for the deposit from your new buyer).

What Must Be Included In A Home Improvement Contract?

I have had a number of clients who are both homeowners and contractors ask me to review a contract for home improvements (addition, pool, deck, etc.) and request that I review the contract to make sure it contains all of the necessary information. They are surprised to learn that their contract is woefully deficient and in fact, may not be enforceable unless certain provisions are added. It is particularly important as a contractor to make sure your contract is enforceable by a court of law if you get stiffed for the final bill.

Under the Connecticut Home Improvement Act, all home improvement contracts must comply with nine (9) requirements in order to be enforceable. Court cases have ruled that failure to include some of the lesser important provisions will not render a home improvement contract unenforceable, but it is still a good idea to include all of these provisions. 

The first statutory requirement is that the home improvement contract must be in writing and include the scope of services. Therefore, if you are a contractor, it is a good idea to take the time and have a standard written contract to use with clients and have it executed before you start work (although the scope of work will change). If you do not, it may be very difficult to enforce your agreement.

The contract must also be signed by the both the contractor and homeowner to be enforceable. This is a little bit different than standard contract law which only requires the signature of the party you are trying to enforce the contract against. The contract must also contain the company name of the contractor and registration number. The registration number ensures that the contractor is registered.


The contract must also contain a start date and completion date. Some contracts only include start dates and fail to include completion dates. This is a mistake. As a contractor, you want to include an estimated completion date. If you do not, and you do not get paid, the home owner may argue that it is not enforceable because the contract does not comply with law. On a related note, the contract must also contain the date of the transaction.


The law also requires certain provisions in the contract, including a notice of cancellation. The contract must also include a provision providing information about other ownership interests in other home improvement companies. These disclosures are important and failure to include them allows an argument that the contract is unenforceable.


In short, if you are a contractor doing any type of home improvement work, you should be aware that there are statutory requirements that must be included in each contract or you expose the company to an argument that the contract is unenforceable. The last thing you want is to make a demand for the final payment and to give the home owner an argument that they do not have to pay you because you failed to comply with the statutory requirements.


Conversely, if you are a homeowner in dispute with a contractor, you may have leverage if they don’t have the right contract.