You should get answers to the following questions before signing a purchase agreement:

• What services is the seller providing to the tenants (e.g., heat, parking, gas, electricity, oil, water, garbage collection, snow plowing, and general maintenance)?

• Is the seller holding security deposits or cleaning deposits? A seller commits a criminal misdemeanor in some states for failing to transfer security deposits to the buyer and/or failing to inform the tenants of the buyer's identity.

• Are there any written leases? What are their terms? Because you will be bound by any leases between the seller and his or her tenant(s), you should study the lease terms carefully and note expiration dates, the landlord's rights to enter the property, the tenant's responsibility to comply with the Americans with Disabilities Act (see Chapter 17), rental amounts, the tenant's right to sublet or assign the lease, and whether the lease is renewable. If there is no written lease, you can evict the tenant or raise the rent after giving 30 days' notice.

• Is the property operating profitably? Require the seller to provide you with an operating statement showing rental income and all operating expenses.

• How expensive are utility and heating costs? Ask for fuel bills for the past two years. Are the utilities separately metered?

• Does the seller have any service contracts on appliances or equipment? Are they assignable?

• Who are the employees or agents of the seller, and what are the terms of their employment?

• What personal property (equipment, supplies, and appliances) is included with the sale?

• Are there any liens against the real estate or any of the personal property you expect to receive?

• Is there any work or remodeling in progress? If so, will it be completed before the closing? Has the seller made all decorations and alterations required by the lease?

• Are there any legal actions pending against the seller?

• What repairs must tenants make?

• Are the rents paid up to date?

• Is the present mortgage assumable? Will the interest rate increase if the mortgage is assumed?

• Is there a tenants' association?

• Is the property zoned for the use to which you intend to put the property?

• What are the relevant building and housing codes? Have any complaints been lodged against the seller for alleged violations of those codes?

• Are there any assessments for special improvements to the property?

• What is the assessed value of the property? What is the equalization rate?

• Is a certificate of occupancy required, and does the seller have one?

• Is there rent control?

• What are the sewer charges and water rates?

Avoid Costly Mistakes When Purchasing Rental Property

If you are considering buying rental property, avoid the following seven costliest mistakes.

Mistake #1: Bad location. The property should be in an area where the demand for rental housing exceeds the supply and there is access to public transportation, churches, schools, and stores to ensure good rents and a good resale price.

Mistake #2: Failure to check utility costs. Under the Truth-in-Heating Law, sellers and landlords of residential buildings, including one- and two-family residences, condominiums, cooperatives, and apartments, must provide prospective buyers and tenants with a summary or a copy of heating and/or cooling bills for the preceding two years and a statement of the type and location of insulation installed by the current owner and previous owners. Determine whether the utilities are separately metered.

Mistake #3: Zoning or building code violations. Determine whether the building and planned renovations conform to zoning ordinances, building codes, deed restrictions, and loan requirements of the bank, the Veterans Administration (VA), or the Federal Housing Administration (FHA). Also, inquire as to whether a certificate of occupancy is necessary.

Mistake #4: Assuming personal property stays with the real estate. The contract of sale should state which appliances, equipment, furnishings, and other personal property are included with the sale.

Mistake #5: Defective or dangerous property. The contract of sale should contain a clause that the sale is contingent on an inspection by a professional inspector, licensed engineer, or licensed architect. Ascertain whether the property contains lead paint, asbestos, or other hazardous materials.

Mistake #6: Assuming there are no leases. The seller should be required to furnish copies of all leases, tenant applications, and move-in/move-out checklists prior to closing. Since the purchaser will be bound by any leases between the seller and his or her tenants, the purchaser should study the terms of the lease very carefully for such items as the expiration date, rental amount, the tenant's right to sublet, and whether the lease is renewable. If there are no leases, the contract should specify whether the units must be vacant at the time of closing, include assurances that the seller will not enter into any new leases, specify the amounts of security or cleaning deposits, list the names of the tenant(s), and specify the amount of the monthly rent.

Mistake #7: Expecting to close on the closing date. The closing date stated in the contract is merely a target date unless it is specified that "time is of the essence."

Vacant Land

If you are looking for a vacant lot on which to build, take the following precautions:

• Check with the town planning board to determine what type of development is planned in the area.

• Determine whether there are oil or gas leases on the property.

• Determine which utilities (gas, electric, water, and sewer) will service the property.

• Ask the owner if a percolation test has been done for a sewage disposal system. If not, have a percolation test contingency clause inserted in the contract of sale.

• Check with the town building or zoning department to find out which building and other permits are required and the zoning requirements that will have to be satisfied (e.g., minimum square footage, minimum lot size, and minimum frontage).

• Check to see if the property is in a flood zone.

• Determine whether state, county, and local subdivision regulations have been met.

• Make sure that the contract of sale indicates the lot's dimensions and size. The contract should also require the seller to have the lot staked by a surveyor.

• Check for signs of hazardous waste dumping by having an environmental study done.

• Insert a contract provision stating that the contract is subject to your attorney's approval as to form and content.

Financing Real Estate

If you have less available cash than you believe you will need to make a down payment on property even if you have no available cash don't be discouraged. The lack of a cash down payment should not be a hindrance to buying real estate.

There are 12 techniques that will enable you to buy commercial or rental properties without a cash down payment. These methods can be used either to finance the entire purchase or in combination with a first mortgage or an assumed mortgage. They are as follows:

1. Professional services. Enter into a contract with the seller to provide him or her with professional services (e.g., medical, legal, accounting, plumbing, etc.) that the seller may need in the future.

2. Partnership. If you and one or more other persons expect to create a partnership to buy property, your effort and expertise in forming a partnership could serve as your contribution for your interest in the partnership. By organizing a partnership, you receive an ownership position and the cash is furnished by your partners (see the "Cotenancy Agreement" form at the end of this chapter).

3. Corporate stock. Form a real estate investment corporation and issue stock to the other investors for their equity in the property and issue stock to yourself based on the work you expended promoting and forming the corporation.

4. Second mortgage. Give the seller a second mortgage on your residence or other real estate you presently own.

5. Assign rents. Assign the rents (in whole or in part) of the property to the seller, giving the seller the right to impound them if you are in default on a mortgage the seller has given you in lieu of a down payment.

6. Advertise for a private loan. Look for a private lender who is interested in receiving a high interest rate on a first or second mortgage.

7. Use your commission. If you are a real estate broker, the seller may be willing to apply the commission owed you as all or part of the down payment.

8. Real estate equity. Your equity in other investment property may be used as a down payment by deeding an undivided interest to the seller. This may qualify as a nontaxable exchange. The seller would obtain a partial interest in your property in exchange for your obtaining full ownership of the seller's property. The seller then becomes your partner in the original property.

9. Installment down payment. Acquire the property now, but arrange to make the down payment in installments over the first year of ownership.

10. Broker as lender. Ask if your real estate broker would like to make a good investment at a high interest rate by holding a second mortgage in the amount of the sale's commission. The broker may prefer holding the mortgage to losing a good sale.

11. Friend as lender. Consider the possibility of borrowing from family, friends, business associates, or your retirement plan.

12. Shared equity arrangement. This technique, although easily set in motion, involves several planning procedures and is described in the following subsection.

Before embarking on the use of any of these 12 techniques, make certain it is economically feasible. Review the particular cash-flow and tax consequences carefully. You should consult a real estate attorney for details regarding these and any other financing techniques.