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One of the most important responsibilities a real estate investor has is often the most overlooked – keeping their business on the right side of the law. Dismissing legalities along the way can not only ruin a deal, but could also ruin an investor’s finances and career. Whether a commercial development or a residential investment, the legal side of a real estate investor’s business is important and should not be ignored.
Here are six of the most common legal mistakes real estate investors make which could land them in serious legal or financial hardship.
Failing to obtain legal advice. Many investors feel they know enough on their own without the benefit of expert advice. Nothing could be further from the truth. Every good business person knows the value of being frugal, but being frugal should be limited to grocery shopping or traveling on a budget. Frugality has no place when it comes to protecting one’s business and assets. Deciding to forego expert legal advice could prove to be a costly mistake in the long run. Budgeting enough for a few consultation fees up front and on a per diem basis might prove to be a wise decision.
Unwittingly Discriminating. Knowledge is power and ignorance is inexcusable, especially when it comes to discrimination. Today, more than ever, it’s critical for investors to be aware of Fair Housing and ADA (American with Disabilities Act) laws. Enforcement of these laws are at an all time high, as agencies have increased their numbers of testers and introduced new digital reporting in the form of an app.
Discriminating against someone today could result in an investigative officer showing up at your front door within hours. There are a number of protected classes on the Federal level as well as statewide with which investors should become familiar to avert any kind of discriminatory behaviors in their direct dealings with prospects or in their advertising for them.
Illegal solicitation of money (violating SEC rules). Securing funding is second nature to some investors and advertising to the masses is commonplace, but should be approached with care and concern for any securities violations. Experts say those involved in crowd funding should be especially careful to follow the guidelines for this type of funding. Here is a more in-depth look at what is required when determining whether your funding efforts meet securities guidelines.
Use of non-compliant or incomplete legal forms. The number one source for information and documents today is online, but investors should know that not all online sites are created equal. When it comes to obtaining critical documents such as sales contracts and rental agreement forms, one size does not fit all. Investors must take the time to scrutinize these sites for what they need. Every U.S. state has their own requirements and using contracts and lease agreements from another jurisdiction with laws completely different from yours could land you in some serious legal troubles. The same rules apply to all other sources of inadequate forms such as those from friends, neighbors, and the neighborhood office supply store.
Violating IRS rules about contractor/employee documentation. It may be extremely tempting to hire an assistant or someone to show your properties “off the record” or as an independent contractor, but be warned that doing so could lead to a world of complications with the IRS. The IRS has very strict requirements for reporting employees and documenting contractor relations. All contractors must be given a 1099 form and all employees must be provided W-2 forms and other paperwork. So-called contractors who work solely for you may very well be considered your employees. The IRS is always on the lookout for employers who fail to report accurate information on payments to employees and contractors. Hire an accountant who’s adept at dealing with these issues to save yourself time and potential headaches in the future.
Failure to include privacy policies on websites and other ad materials. This item on the list is very much overlooked by most business owners, but experts say anyone collecting consumer information of any kind on the internet should include a privacy statement on their website. That information should include the reason for data collection, how that information will be used, as well as who will have access to the information. A quick random review of websites from various industries will provide proof that this is a widely neglected practice, but an important one. Clients and prospects on your site want reassurance that you will not sell any of their private information and that you have a means of keeping that information secure.
In short, an investor’s job is never done, but is best executed with full legal compliance to ensure peace of mind along with maximum profit.
Can you think of some legal considerations for real estate investors not included here?
