Selling investment property differs from selling single family residences in a wide variety of ways. Here are some simple guidelines as well as some potential pitfalls.

• While prospective buyers of single family homes view the inside of the property prior to writing an offer, most investment buyers write the initial offer "subject to interior inspection." This means the prospective buyer will not view the interior of the property until a contract has been negotiated. Once the offer has been accepted, the seller notifies the tenants and the buyer conducts a visual inspection of the interior of the property. If the buyer "disapproves," the buyer's deposit is returned. Generally, physical, geological, and other types of inspections are completed after the initial interior inspection.
• Rent Controls are packed with pitfalls for the inexperienced investment agent. Restrictive rent control laws in some places in the country may not allow an owner to evict existing tenants even if they are going to owner-occupy the property. When they do evict a tenant to "owner occupy", the owner may have to pay the tenant a sizeable "relocation fee." Other provisions do not allow the owner to raise the rents more than a preset amount each year. Each local rent control provision is different. Be sure you know the details of your rent control ordinance before attempting to represent a buyer or seller.
• Smoke detectors, asbestos abatement, and a host of other requirements may befall your seller/buyer when an investment property is sold. Your local ordinances may require older properties to be "brought up to code" when they sell. Some places require the mandatory installation of smoke detectors, low flow shower heads, and low flow toilets. Before you begin negotiating a contract, it is absolutely imperative you are aware of the local requirements in order to determine who will be handling the costs of these items.
• Estoppel certificates are a must in every residential income transaction. Be sure to include this provision in the contract if you're representing the buyers. An estoppel certificate "stops" the tenants from making unwarranted claims about the amount of the rent, deposit, an/or property included in the rental price. The owner and each tenant "certifies" the amount of deposit being held by the lessor, the amount of rent, whether or not the lessee's rent is current, the length of any lease, lease renewal provisions, as well as an inventory of property covered in the lessee's lease. The completed "certificate" is deposited with the closing agent/escrow. In general, it's a good idea to make sure the rents agree with the amounts represented by the Seller on the listing agreement.
• Beware of "bootlegged" units. Before listing or writing an offer on a piece of residential property, contact your local title company, tax authority, or courthouse to determine how many "legal" units are on the property. Lenders do not use income from "bootlegged" units as part of their calculation of the property's worth. Furthermore, local zoning ordinances may require the new buyer to return the property to its "legal" use.
• 1031 Exchanges. The Federal tax code (provision 1031) allows investors to "trade like for like" property. In other words, any income producing real estate investment may be eligible for "trade" under the 1031 provisions of the tax code. 1031 tax deferred exchanges are packed with potential pitfalls and must be handled by a closing agent expert in handling this type of transaction. Also, have the buyer and seller check with their tax advisor to determine the tax consequences BEFORE finalizing the contract. If one of the principals wants to do a "delayed exchange," make sure you get expert advice immediately.
• Tenants are tenants. If the tenants are at all unhappy with the lessor or are concerned about their rents being raised, you can be pretty confident they'll do what they can to botch the sale. It's very common for them to leave their unit in a mess, not show up when they say they will, and to be openly hostile to everyone in the transaction. Whenever possible, have your physical inspection and walk-through during the middle of the day rather than when the tenants are at home. This will minimize tenant problems as well as giving the buyer and seller the opportunity to thoroughly investigate any problems that might arise during the course of the inspection.

Given the current economic slowdown in conjunction with the bear stock market, now may be the best time in years to become a "niche specialist" in real estate investment properties.

Published: April 17, 2001

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Bernice L. Ross, Ph.D. operates RealEstateCoach.com, with her husband and co-trainer, Bryon Van Arsdale. A Professor of Psychology at Los Angeles Pierce College, Bernice also is a faculty member at Coach University and holds the designation of Master Certified Coach. She served as Executive Director of Training from 1993-1997 for Prudential Jon Douglas Company, and also pioneered the first real estate/coaching teleclasses for Continuing Education credit in California. E-mail Bernice at bernice@realestatecoach.com.