By: Justin Leverton
With over 6,000 multi-family units sold in 2013 and three years of uninterrupted occupancy growth, purchasing residential rental real estate in the Indianapolis metro area is as popular as ever. Nevertheless, the astute buyer should be aware of several legal issues that can arise in these types of transactions and have a competent attorney resolve them prior to closing on the purchase.
An ALTA Survey is highly recommended prior to the purchase of residential rental real estate. An ALTA Survey is a boundary survey prepared to the minimum standards jointly adopted by the American Land Title Association and the American Congress on Survey and Mapping. An ALTA Survey is often required by Lenders and Title Companies and is a good idea for the buyer regardless of whether it is required by another party due to the comprehensive due diligence involved in its preparation.
Some common issues that may be disclosed by an ALTA Survey are: encroachments, easements, gaps & gores, incorrect legal descriptions, set back violations, property access issues, and flood zone issues. All of these issues can be addressed with the help of a competent attorney.
With Indianapolis’ desire to decrease population density in its urban core, a buyer needs to be cognizant that a property’s proposed use conforms to the zoning ordinance. For example, did you know that the zoning ordinance defines a two family residence (duplex) as “[a] building designed originally for residential occupancy by two (2) families living independently of each other”? Indianapolis Zoning Ordinance Sec. 731-102 (55) (emphasis added). Thus, a property located in a D-5 zoning district that was constructed as a single family residence in the 19th century and converted to a duplex as a result of the World War I housing shortage is non-conforming despite its almost 100 year use as a duplex. In the above scenario, the buyer may need to obtain a legal non-conforming use (LNCU) or a variance to continue renting the property as a duplex. Ensuring zoning compliance is an integral aspect of a buyer’s due diligence.
Title Insurance Issues
An older attorney friend of mine often states that a lawyer commits malpractice if he fails to recommend that the standard exceptions be deleted from a title insurance commitment and fails to recommend endorsements for the protection of his client. Yet residential rental real estate buyers often spend little time negotiating the terms of the title insurance commitment. This oversight can lead to costly coverage gaps down the road.
The standard exceptions to a title commitment are exactly that—the exceptions that are standard to all policies issued by the Title Company. A Title Company will usually delete the standard exceptions if the insured provides an ALTA Survey (another good reason for obtaining an ALTA Survey) and an affidavit from the Vendor in a form sufficient to the Title Company. In addition, a buyer is wise to obtain endorsements that provide additional protection. Common endorsements in a residential rental real estate transaction are: comprehensive, access, survey, and 3.1 zoning. Additional endorsements may be needed depending on the unique requirements of the project.
Residential rental real estate continues to be a popular investment for in-state and out-of-state buyers. Nevertheless, it is vital that a buyer recognize the potential pitfalls with buying real estate. The upfront cost for hiring an experienced attorney to resolve these issues prior to closing is miniscule compared to the litigation costs that could arise after the fact.