Find Out If You Prequalify

Get Organized! Download our Free House Flipping Business Plan Template Today!

The Legal Work

Paperwork will be flying around like a small tornado, make sure you're prepared!

Title Search

It is essential that a title search be done on a property before ownership is transferred, as a seller can only sell the rights they own to a property, nothing more. It frequently happens, especially in the distressed property world, that seller's do not always have a clear title to a property, and in some cases they don't even own the property. For example, a common situation is that a property is being sold by the heirs of the prior owners. Unfortunately, the "seller" may be only one of a few heirs, and does not have the consent of all of the heirs to sell. Other situations may involve liens placed on the property by other creditors, taxing authorities, municipalities, utility companies, etc. In those cases, the liens need to be paid off at the time title is transferred, as they stay with the property, and become an encumbrance on the title of the subsequent purchaser.

Another frequent occurrence in the flipping world are properties being sold as part of a simultaneous transaction. The scenario is that a middle man puts a property under contract of purchase at one price, and at the same time, enters into a contract to sell the property to someone else for a higher price immediately following his purchase of the property. The goal is to buy the property in the morning, and sell it in the afternoon, making a profit on the difference in the sale price. There are many problems with this type of arrangement, but in the transaction, the end buyer is under contract to buy a property from someone who doesn't actually own it at the time the contract is signed. Avoid these transactions as they frequently result in disaster.

In addition, there are certain restrictions and allowances that are generally found on titles that should be understood before closing. Easements by utility companies and shared driveways and alleyways are common and should not be a source of concern. Deed restrictions related to prohibitions against persons based on race and religious preference should also be ignored, as they are invalid and not enforceable. What should be understood is that rights granted to third parties that might be inconsistent with the owner's standards for the property, such as rights of others to cross over the property without notice and restricts the use of their property. For example, someone might purchase a house by a lake and one of the most appealing aspects of the property is the privacy and solitude it offers. However, the deed may grant the right of access to the lake over the owner's property to members of the community, thus destroying the privacy sought by the new owner. Allowances such as this are considered to "run with the land," meaning they go with the property, not with the owners, and cannot be extinguished without the consent of the affected parties.


Title Insurance

Protection from any title problems that may arise after sale.

Title insurance protects the property owner in the event a defect in the title to a property was missed at the time a title search was done and the property was purchased. It could be that a prior mortgage, another lien on the property was missed, or that there are restrictions to use of the property that the owner was not aware of at the time of purchase. These things are attached to the land, and if they existed at the time of acquisition they become the burden of the current owner, even if the owner was not the cause of the issues.

Almost any purchase that involves a mortgage lender will require that the buyer purchase title insurance. It must be noted that lender's insurance is different than owner's insurance. A lender's policy will only protect the lender's interests, which may be different that the owner's. The owner should make sure to purchase protection for both the owner and lender.

Title insurance is like any other insurance, you may never need it, but when you need it, you REALLY need it.


It’s a good idea to have a lawyer check your paperwork.


Hiring A Lawyer vs. Only Using A Real Estate Agent

In general, it is always a good idea to have a lawyer look over your paperwork. While there are many knowledgeable and helpful real estate agents, it must be remembered that the agent only gets paid if you close the transaction. Advising against things during the process may create a conflict of interest for them, because it is to their advantage to convince you to close a transaction.

The lawyer has different motivation. A lawyer's purpose is to give you the best advice possible, whether that advice leads you to or from the transaction. The lawyer gets paid either way and they benefit from building a relationship with a customer that feels they were well advised, rather than convinced of something. If the client buys a property and has an issue, they will not be going back to the real estate agent for help, they will be going to the lawyer. The lawyer's goal is to prevent that.

As stated above, there are many excellent real estate agents. Use them, listen to them, and take their advice, but double check with an attorney before closing. One or two hours of an attorney's time can save a lot of money and stress down the line.