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Real Estate Investment: Law Everywhere

Apart from possibly medicine, there's no area of human endeavor more intricately intertwined with legal trappings than Real Estate. Because of the larger amounts of money involved, and the centrality of property for living and carrying out so many commercial transactions, the rules have become complicated and many hands are in the pie.

The history of property law goes back millennia, to at least the Sumerians in 3000 BC — and it's been evolving ever since. Every aspect of property is ruled by a dizzying array of laws worldwide. Financing, buying and selling, tenancy and use, environmental aspects, tax considerations, even defining where and what is property is governed by laws, many of which are as clear as coffee.

But for the investor it's essential for long-term profitability to gain a healthy familiarity with property-related law.

One good place to start is: The Contract.

In any real estate contract there must be 'mutual assent'. Each party has to agree to an exchange — in writing. The old saw is true: a verbal agreement isn't worth the paper it's written on.

The contract has to identify who those parties are and the property being exchanged and for how much. And to be enforceable, consideration — the benefit that induces a promise — must exist. Then the contract has to be signed by parties of legal age and sound mind. This latter must be loosely defined, given the inherent insanity of real estate investing as a business.

As part of the consideration aspect, the property itself must be worth what the seller and lenders claim, as determined (at least approximately) by appraisals and other means.

Flipping (buying and rapidly re-selling property) for example, is perfectly legal —— until an unscrupulous investor buys a cheap, run down property and conspires with a mortgage broker to doctor documents to bring an inflated price. When government bodies guarantee the loans on such properties, you can be assured they'll take an interest in the transaction. And they don't look favorably on fraud.

Commercial properties have whole other sets of regulations covering their exchange and use.

Tenants in almost all countries have certain rights independent of specific contractual clauses. Even Communist China, for example, has recently adopted legislation defining and protecting property rights. As an example, even in triple-net leases — an arrangement in which the lessee is responsible for maintenance, repairs, insurance, etc — landlords have to do more than simply collect a check each month.

Lenders are governed by complex rules that direct or restrict how much can be loaned, what paperwork is required in terms of title, insurance, even what kinds of advertising offering financing can be made.

Tax law introduces yet another layer of complexity into real estate investment. Very few autos or boats end up with tax liens against them, but it's hardly unknown in real estate deals to have to clear them before title can be passed.

So for those considering real estate investing, or beginning to become involved in one of the lowest risk, most potentially lucrative businesses around, one can offer no more sound advice than this: When it comes to real estate law, do your homework — before it's needed. It's much more expensive to do afterward.