All Forum Posts by: Edward Schenkel

I am an attorney in CT and work with investors and wholesalers frequently. Feel free to reach out to me. Happy to help. 

Hi Petra, 

I have never specially dealt with this issue, but I would recommend using your own lease for a medium term rental. You can state in the lease that if there is any conflict between the lease and the air b n b contract that your lease controls. It is hard for me to give specific advice without looking at the air b n b contract but that is what comes to mind, generally. 

In terms of maintenance and repair costs, you can try to get a security deposit but i do not know whether that is possible through the air b n b system. Any other questions, feel free to respond or give me a call. Thanks for the question. 

Ed

Quote from @Michol Ston:

Hello Edward Schenkel, I want to ask you that why should we consider a Real Estate Lawyer before choosing any Real-Estate? Can't we do this all by our own? I'm a bit curious to know your thoughts about this? 

Hi @Michol Ston - Most states require a real estate lawyer, either through a private attorney or title company, to represent a purchaser when buying real estate. This is mainly to prepare and sign the title insurance. Moreover, lenders will very likely require you to use a closing attorney and not attempt to do everything yourself. Even if an attorney is technically not required for every transaction, it is still a good idea to have one represent you to make sure everything goes smoothly and the documents are prepared correctly. While a lot of deals or cookie cutter, every now and then you encounter a complicated issue and you want to have your lawyer by your side to help you! 

Quote from @Courtney Duong:

@Edward Schenkel Hi Ed.  Just a quick question.  For commercial lease form do we need to have both landlord and tenant sign and have it notarized?  Or just both parties sign the lease is good enough?  Thanks!

@Courtney Duong - Thank you for the question. Most states do not require a notary or witnesses for that matter. However, some parties, for larger deals, prefer to notaries, although not legally required. Please check with an attorney in your state to make sure you state follows the majority of the states in not requiring a notary for commercial leases. Thanks and have a great day. 

FOUR LEGAL STRATEGIES TO BUYING PROPERTIES WITH UNDERPERFORMING TENANTS AND MAKING IT A MORE LUCRATIVE INVESTMENT PROPERTY

Many investors have encountered the following scenario: after a long search for the right property in the target neighborhoods, you finally find it – but the property has tenant(s) that are either in default or on leases that are well below market, making the investment less attractive. Some investors would pass, but there are several good options to consider to make such a property more attractive and a feasible investment with a better return. As an attorney that works with many investors, my clients have come across this scenario numerous times. I have used the following strategies on behalf of clients in this scenario to make these properties more lucrative and attractive, which are outlined below.

1. Purchase and Sale Agreement Conditioned On Tenants Signing New Leases

If you find property that is perfect except for the fact that the tenants are paying below market rent, this strategy may be effective for you. An investor in this scenario should consider including a provision in the purchase and sale contract that gives them thirty days to negotiate new leases with the underperforming tenant(s) that include higher rents that are consistent with market rates. If the investor is successful in negotiating new leases, then he/she may move forward to closing and the new leases become effective upon closing. Therefore, when you close, you will have tenants that are on better leases and paying market rents. If the investor is not successful negotiating new leases on acceptable terms, then the provision will give you the right to terminate the contract and not move forward.

So, how does an investor sign a lease with a tenant when the investor has not even closed on the property? Is this possible? Sure. With careful drafting and lawyering, this is feasible. The new leases will be expressly conditioned on the closing occurring. Therefore, if the closing occurs, the new leases become legal and binding leases. If the closing does not occur, the leases do not become legal contracts, and the tenants have no obligation to pay a higher rent and remain on the original arrangement.

While this can be an effective strategy to addressing good properties with underperforming tenants, retaining a good lawyer to draft the right provisions is essential to achieve your objectives and properly protect you.

2. Cash for Keys After Closing

Another more common strategy to address tenants in default or paying below market rent is to offer them a sum of money to vacate the unit so that you can find a better tenant that will pay rents more consistent with market rents. However, investors can only use this strategy after closing, so there is a risk that after you close you may not be successful in negotiating a deal where the tenants vacate. You may be stuck with defaulting or underperforming tenants for the near future if you cannot negotiate this deal, so this is part of the risk. This is a consideration in closing and using this strategy.

3. Increase Rents After Closing

Another strategy is to simply raise the rents after you close. However, there are several considerations. First, this may not be legally feasible if the tenants are on written leases. As the new owner, you must honor the term of the lease and the terms agreed upon by the former owner and tenants (until it expires). If the tenants are month-to-month, the tenants may still refuse to pay higher rent. Then you have to decide whether to evict, or keep them. Last, before implementing this strategy, you should check whether the town or city has rent control rules which may impose limitations on how much you can raise rent. While raising rents is a common strategy to improving the cash flow of the property, these are considerations to think about before moving forward.

4. Negotiate a Lower Contract Price

A good strategy that hedges the risk of underperforming tenants is simply to negotiate a lower purchase price. There is a valid argument that an investor should be entitled to a lower price because they may face problems when they try to evict a defaulting tenant or raise the rent on an underperforming tenant. This may be a good negotiation point to lower the purchase price.

@Henry Limon, I would be happy to answer any questions. 

@Jeff Hudak, yes I do this frequently as part of my practice. I work with investors all the time and can definitely help you!

Five Considerations for Landlords During the Coronavirus Pandemic

The Coronavirus has caused financial strain across virtually every industry, and the real estate sector is no exception. While many laws have been passed in many states to protect tenants during these hard times, such as moratoriums on evictions, fewer laws have been passed to protect landlords, who have also suffered during this pandemic. Therefore, a common situation that landlords face is that their tenants are not paying rent, they cannot pay the mortgage and other carrying costs of the property, and they feel stuck because they have no recourse. Below are five considerations that landlords should be aware of if they face this situation.

1. There are Eviction Moratoriums - But They May Expire Soon

In many states there are moratoriums on evictions, both residential and commercial. This means that landlords are not permitted to commence evictions during the moratorium period. However, landlords should realize that this moratorium typically has an expiration date. In Connecticut, the moratorium recently was extended to August 25, 2020. If this deadline is not extended again, landlords will be permitted to commence eviction actions, although it is unclear how long eviction lawsuits will take due to the backlog.

1. Consider Cash for Keys

If a tenant is not paying the rent and you absolutely need the tenant to vacate (for example another paying tenant is ready to move in), a viable option to consider is offering the tenant money to move out, as opposed to waiting for the expiration of the moratorium period and then going through the eviction process. While it may be difficult to pay a defaulting tenant and waive the delinquent rent in order to motivate the tenant to vacate immediately, it is far less painful than having to wait until the moratorium expires and then pursue an eviction. This is a practical solution as the moratorium deadline may very well be extended again.

1. There May Be a Foreclosure Moratorium in Your State

While many laws have been passed to protect tenants that are experiencing hardship, some laws have also been passed to protect landlords that are experiencing financial difficulties. For example, the Federal Housing Finance Agency has extended its foreclosure moratorium for single-family loans backed by Fannie Mae and Freddie Mac until August 31, 2020. Moreover, many states have also passed foreclosure moratoriums on other property classifications such as multi-family and commercial properties. Accordingly, your lender may be prohibited from instituting a foreclosure action if you are unable to make the mortgage payment.

In Connecticut, for example, there are many restrictions on foreclosures. Many banks and credit unions are participating in a mortgage relief program which requires a moratorium on new foreclosures through July 30th, along with 90-day grace periods (only residential properties). This date may be extended. Moreover, other restrictions have been imposed statewide on all foreclosures such as a moratorium on any foreclosure auctions taking place through August 22nd (which applies to foreclosures that began before the Covid-19 pandemic). For a complete list of orders and laws relating to foreclosure moratoriums and restrictions in Connecticut, please view the below links.

https://portal.ct.gov/DOB/Consumer/Consumer-Help/COVID-19-Mortgage-Relief

https://jud.ct.gov/COVID19.htm

https://portal.ct.gov/DOB/Consumer/Consumer-Help/COVID-19-Non-Federal-Mortgage-Help

1. Mortgage Work-Outs / Forbearance

Many lenders are more willing to negotiate work-outs and/or forbearance agreements during Covid-19. Therefore, if you are a landlord experiencing financial hardship, you may want to consider discussing a work-out or forbearance agreement with your lender.

1. Landlords May Still File a Lawsuit for Damages in Superior Court

While evictions may not be filed, a Landlord who wants to take an aggressive approach with a delinquent tenant may still file a lawsuit in Superior Court for damages, including back rent. However, many courts are closed, and cases are not moving quickly – but landlords are still permitted to file the lawsuit. Filing a lawsuit and getting in line to be heard can at least provide landlords some protection, or perhaps motivate a tenant to work out a payment plan if this is feasible. Of course, landlords should be cautious in using this aggressive strategy if a tenant is truly experiencing serious hardships resulting from the covid-19 pandemic.

@Peter Kopchik, would be happy to chat. I am not sure you need to set up a trust for your intended purpose and would be happy to chat about wholesaling. email me here or feel free to give me a call.

Coronavirus Contract Clauses –What Every Real Estate Investor Should Know About Signing Real Estate Contracts During the Coronavirus Pandemic

The Covid-19 health crisis has changed everything for the foreseeable future. How we socialize. How we do business. How we interact with our family. And even how we purchase real estate. While I am confident that we will all get through this together and come out stronger, we can still carefully conduct business and do real estate deals while we social distance and quarantine. However, there are critical contract provisions that must be included in real estate contracts during this crisis to account for delays and contract performance hindered by the crisis. This clause is called force majeure clause (also known now as a Coronavirus clause) which accounts for what happens to the parties’ contractual obligations in the event of unforeseen events such as strike, war, or a pandemic such as the Coronavirus.

What is a force Majeure Clause / Coronavirus Clause?

A force majeure / Coronavirus clause addresses the parties’ obligations in the event that events such as strike, war, or a pandemic such as the Coronavirus interfere with a contract. Sometimes, force majeure clauses do not include pandemics so it is essential to make sure that the clause specifically calls out the Coronavirus pandemic. A comprehensive Coronavirus clause will provide that the parties’ obligations to each other are reasonably delayed / postponed if the Coronavirus interferes with their obligations, and such obligations may be completely discharged if the parties are not able to close the deal due to the outbreak.

How can the Coronavirus Interfere with Real Estate Deals?

The Coronavirus can interfere with a real estate deals in various ways. A common and reoccurring problem is that the title searches and due diligence are delayed due to town hall closures or reduced hours. Accordingly, a title search, municipal search, or zoning due diligence could take significantly longer. It is a good idea to determine whether the town hall of the subject property is closed, has reduced hours, or whatever the case may be, so the parties can plan an appropriate closing date.

Moreover, if environmental testing is required for the deal, such could also be delayed due to the virus. Many companies have reduced staff and are working from home. Similarly, surveys could take longer to complete if required on a particular deal.

The Coronavirus is also causing banks to change their loan packages or even to withdraw certain loans altogether. Borrowers who lose their jobs may not be able to obtain a mortgage. Accordingly, mortgages may take longer to be approved and processed due to the virus, or may even withdraw the loan.

Unfortunately, parties may also contract the virus causing delay. A power-of-attorney may be used if one party is sick but contracting the virus can nevertheless still cause delay.

These are just some of the ways that the virus is impacting real estate deals. Of course, coordinating the closing can be challenging as many law firms are closed and are doing their best to close through the mail, or using very limited office hours.

Do Coronavirus Clauses Protect Buyers, Sellers, or Both?

The Coronavirus clause protects both buyers and sellers, but they primarily protect buyers. Of course, sellers may have to obtain a payoff statement for existing mortgages, resolve title issues, or do repairs, all which could be impacted by the Coronavirus. However, the buyer is typically the party that has much more to do before closing, including inspections, due diligence on public records, obtain a mortgage, and so forth. Moreover, the buyer has a deposit to lose while the seller, although could face a lawsuit in the event of a breach, is not putting up earnest money. Accordingly, the Coronavirus clause protects both parties but primarily the buyer.

Are All Coronavirus Clauses the Same?

Not all Coronavirus clauses are the same and depending whether you are the buyer or seller, you will have slightly different objectives using a Coronavirus clause. As a buyer, you want very broad protection, which includes delaying dates and allowing the termination of the contract if the Coronavirus significantly interferes with the closing. A seller should also want to include the Coronavirus clause, but only to allow the reasonable delay of dates; not termination, so the buyer is locked in the deal and is not provided a way out of the deal. Accordingly, buyers and sellers have slightly different objectives when including such a clause, which is why it is important to retain a good lawyer to negotiate your interests in transactions during the Coronavirus pandemic.

Do I need a Separate Provision for the Inspection and Mortgage Contingency Clauses to Address Delays Caused by Coronavirus?

A good Coronavirus provision will account for delays of the mortgage, inspection, due diligence, and any other contract dates, so typically you will not need a separate provision in the mortgage or inspection contingency clauses, but it cannot hurt to include it anyways.

Should I use a Coronavirus Clause in Other Contracts Such as Leases, Management Agreements, etc.?

Yes. Force Majeure / Coronavirus clauses are not unique to real estate contracts and are important in other types of contracts. They may and should be used in any contract, including leases, management agreements, vendor agreements, buyouts, etc. However, as with real estate contracts, you may want a broader or narrower provision depending on which side of the table you are on.

In summary, real estate deals can still occur during the Coronavirus. However, it is important to include a Coronavirus clause, be ready for possible delays, and be ready to close by mail, or possibly in masks and gloves at your lawyer’s office. 

Feel free to ask any questions about the Coronavirus Clause or doing business during the pandemic. I hope everyone is staying well and safe.