5 Ways To Protect Yourself And Your Business
By Paul Esajian on June 17, 2016
In the fast paced world of real estate investing everybody wants things done yesterday. There is such a rush to get things done that it can be easy to forget about getting them done right. One oversight can set your business back months. Instead of focusing on new deals you will spend most of your time rectifying your mistake. It is critical that you slow yourself down and never neglect tasks that are designed to offer protection. Spending a few minutes reviewing your lease or reading through an inspection can be the most important things you do for your business. Here are five actions you can take to protect yourself and your business.
- Review all business documents. When is the last time you reviewed your lease? Do you read all of your purchase contracts? How about your partnership agreement? Have you read your homeowners policy lately? These are just a few of the documents that are in place to offer protection. It is not enough to go with a generic version you find online. In the case of your lease it is the document that can mediate tenant disputes or help you avoid litigation. If your tenant suddenly decides to stop paying their rent you will be glad you spent the time and money for this protection. Every one of these documents, and more, should be reviewed by your attorney. Not only does your attorney act as an extra set of eyes but they know the right language and structure you need to use. These documents are often binding and are too important to be neglected.
- Inspections. One of the final acts of protection you have in a purchase is the inspection. As much as you may want to expedite the purchase process you should never skip the inspection. The only reason you would ever do so is if you are knocking down the property and willing to start from scratch. With any other purchase scenario you need to value the inspection. The physical inspection can be long and tedious but it is done for your benefit. You should want to know exactly what you are getting into. Defects with the foundation or the structure can be costly and time consuming to fix. If you don’t catch these items during the inspection you will end up with a property completely different than you anticipated. It is also important that you listen to the advice given by your inspector and contractor. If they tell you that the property carries a certain amount of risk or will cost a certain amount to remedy you need to listen to them. As much as you may be starving for a deal buying a bad property with excessive risk often leads to disaster. Always spend the time to review the inspection and know exactly what you are buying.
- Contractor Advances. A good contractor is worth their weight in gold. Conversely dealing with a bad contractor is a nightmare. For as many great contractors that are out there are out there all it takes is one bad one to cause a problem. What you never want to do is pay to have work done twice. There are times and jobs where you need to pay for the materials in advance. You should always have a good idea of what these items cost before issuing any funds. Additionally you need to have a system in place to ensure that the money is being used in the right places. Like any other profession there are unscrupulous contractors who will ask for advance money and you will never hear from them again. Instead of providing cash advances you can offer to pay for materials with a credit card. However you decide to pay for these items you need to know exactly who you are dealing with before any money changes hands.
- Multiple Exit Strategies. The more exit strategies you have going into a deal the less risk there is. One of the ways you can protect yourself is by having multiple exit strategies on every deal you entertain. Where many investors get is trouble is assuming that everything will go a certain way on a deal. When the slightest change occurs they are often lost. Figure out what you will do if something unexpected comes up that forces you over budget. Have a after repair value number in mind but make contingency plans in the event the property doesn’t sell at your price. You should have four or five different backup plans on every deal. Knowing these scenarios allows you to make assertive decisions regardless of what is thrown your way.
- Tenant Security Deposit. The security deposit your tenant provides can be your last line of defense if your tenant leaves unexpectedly or damages your property. This is too important to delay in collecting or negotiate a lower amount. There will be times when your tenant will ask to move in without the full security in place. They may ask you to refund their security deposit back early so they can apply it to their next rental. Both of these scenarios provides too much of a liability for you to take. If you discover property damage after your tenant moves out it is too late to ask for it back. If you don’t have sufficient security in place and your tenant moves out you have no financial recourse. You always want to be fair and balanced with your tenants but you can’t bend your rules when it comes to the security deposit.
You can never fully prepare yourself for the unexpected. The best you can do is take measures that offer protection for when they do happen. You work too hard not to do the little things that can provide the greatest protection for you and your business.