If you don’t know much about the town or city your target property is located in, it's best to start by getting in the car and taking a drive. This sounds obvious, but investors frequently make poor investment choices by assuming the area where their investment property is located is just like another community they're familiar with. By visiting in person and at length, you can learn things like where the access routes to the highway are, and get a sense of the traffic. You can see whether there is an adequate town center, accessible public transportation, good shopping, or other factors important to your potential renter or buyer.
Does the area appeal to you? Do the nearby properties look well maintained? If you don’t like what you’re seeing, chances are that a renter or future buyer of the property won’t, either.
While you're at it, hit the town hall and find out whether there’s any development going on in the community. Understanding local development plans, and whether a flood of people and businesses are moving in or out, can give you a gut check on the current property inventory and future market potential.
In addition to driving around, you’ve got to explore by foot to truly get a feel for an area. Go into local stores and restaurants and talk with the managers about what it's like to do business in the community and/or live there. Call local friends and get their thoughts on the area. You’ll be surprised how much people will tell you.
Before you even sign up with a Realtor, you can find out what properties have recently sold in the area that match up with the size and amenities you're looking for. A simple Zillow search will show you sold properties within a particular town or city. You can also ask your real estate broker to produce a list of more specific, comparable properties in the area. Knowing how much an investment property is worth will help you gauge its value and determine potential growth.
If you’re going to rent out a residential property, know its true rent potential before you buy. Your Realtor can help with this, and provide comparable sales data. For more information on determining the financial implications of renting out an investment property, see Evaluating Cap Rate: Is That Residential Real Estate Investment Property Worth It?
Find out the current mortgage and last sale price of your target property, and see if there are any liens on the property. These are all public records, most of which can be found online. Knowing this information will help you understand your negotiation boundaries for buying the property, and the price the sellers will likely be willing to accept.
In addition to the property taxes, ask your Realtor to obtain data on the current, everyday (or every year) expenses of the property, such as utilities and insurance. If it’s a commercial property, this should be no problem. For a single-family home, a seller might provide this information if they know there's an eager investor looking for it.
You might feel that a particular property is the one, but it's best to look at a number of properties before making an offer on one. Ask your Realtor to show you several within your price range, including properties you don’t like the look of, so you can assess different neighborhoods and have a better sense of your target property’s value. After all, the list price is not necessarily the amount the seller expects or would accept, so it's worth getting a sense of the range.
Look at how the town or city compares with other localities in the area. How do the schools stack up? What’s the median income? Unemployment rate? What’s the population count, and is the community growing? How do the real estate taxes compare to nearby towns?
All this will help you better understand the relative attractiveness (or lack thereof) of your target town or city. Don't forget to check the official website of the town, city, or county where the property is located; many government websites include demographics, crime statistics, and other data. For links, check out State & Local and Municode. Another useful resource is Sperling's Best Places which provides a wide range of statistics by zip code.
Understand how the property is zoned. Would you be able to expand the existing structures? Convert them for some other use? What are the setback regulations from the street and bordering areas of the lot?
If you have visions of developing the property, you need to know how the town classifies it and the limitations that come with that. If, for example, you want to turn a residential property into a commercial one, a consultation with town managers about zoning concerns is imperative. See, for example, Home Businesses and Zoning Laws.
Towns, counties, and municipalities are increasingly making data about a property’s physical history available online. Or, a trip to the local government administration building can yield results and personal help. Knowing when a permit was actually pulled, perhaps for a furnace installation, or a new roof, will help you determine the seller’s honesty when those matters come up during the negotiation. Discrepancies learned can result in actual dollars saved.
]]>The answer is yes, as we'll explain here.
The I.R.S. will actually expect depreciation to eventually be calculated from the sale of an investment property in order to increase the amount of taxable gains the owner realized on the property. This is true even if you didn't claim the deduction. Thus it’s in your best interest to make sure you take advantage of depreciation during ownership.
Not only can you depreciate the building, but you can depreciate any additional capital investments you made as well, which carry a minimum depreciation schedule of three years. These are commonly referred to as capital expenditures or CAPEX improvements. Here are examples of what can be depreciated besides the building itself:
(For more on how your investment property can be depreciated, see Landlords Guide to Tax Deducting Long-Term Assets.)
You will note that land is not included in the list. Land is not a depreciable asset and you cannot take deductions on it. After all, the land was there before the buildings and improvements were put on it, and it will remain once they are long gone.
You also can’t depreciate repair costs or service contracts. Those can be deducted from your net income as expenses, but are not depreciable items.
The timeline for deducting depreciation depends on the type of investment. If the property is a commercial property, then the depreciation period is 39 years (as opposed to 27.5 years for residential property). Using a straight line depreciation method for a commercial property costing $2 million dollars, for example, you would receive an annual deduction of $51,282 ($2M / 39 = $51,282). Your annual net income is thereby reduced by that amount, for tax purposes, reducing the amount of taxes you owe to the IRS.
Unlike the building itself, items such as appliances or equipment typically fall on a shorter 5- or 7-year depreciation schedule, because of their expected life. Furnaces, on the other hand, typically carry a depreciation schedule in line with the building itself, whether it is a residential or commercial property.
For a breakdown of depreciable items and their corresponding schedules, see Chapter 2, Depreciation of Rental Property, in IRS Publication 527, Residential Rental Property. Chapter 2 is relevant for commercial properties; however, additional detail can be obtained on commercial investments from Chapter 4 in IRS Publication 946, How to Depreciate Property.
]]>Each of these options has benefits and drawbacks, largely related to the scope of the owner's anonymity and liability protection. In making this choice, you might also wish to consider the type of property you are buying, the number of tenants you will have at that property, and your time horizon for holding onto the investment property before reselling it.
A trust is a legal vehicle used to pass assets, in which trustees hold title to the property for the benefit of one or more beneficiaries. This arrangement is widely used as a tool to disguise owner names, to help with estate planning, or to allow a group of people to invest in a property without getting taxed differently.
Here's why a real estate trust can be a good option for some investors:
The downside to a trust is that the rules around how much can be put into a realty trust for estate planning purposes change frequently, and partners of a realty trusts will also have modifications they need to make in the future. These possibilities will require additional legal fees to manage down the road, on top of the original fees.
An LLC is a business entity that is separate from its owners, like a corporation. But unlike a corporation, which must pay its own corporate taxes, an LLC is a "pass-through" tax entity, which means that business profits and losses pass through to its owners, who report them on their personal tax returns (just as they would if they owned a partnership or sole proprietorship). Because of an LLC's unique benefits, an LLC is often the best way for some investors to purchase property. Here's why.
The key drawback to an LLC is financial: Most states charge a fee to file an LLC, normally anywhere between $75 and $500.
For details on LLCs, including how members are taxed, state rules on LLC protection for members' personal debt and asset protection, and more, see Nolo's LLCs section. Nolo also offers a comprehensive online LLC package to form an LLC.
Of course, the most obvious way to purchase real estate (like any other form of property) is simply in your own name, without any other legal vehicle. Here are factors to consider:
The key drawback to buying under your own name is liability; your personal home and other financial assets are exposed to lawsuit risk. Be sure to obtain an appropriate insurance policy to limit your level of risk in case someone is injured on the property.
]]>Understand the full pros and cons of investing in commercial properties is important so that you make the investment decision that’s right for you.
Commercial properties might refer to:
There are nuances to managing each of these types of properties. To paint a general picture, let’s examine the pros and cons of investing in a single-story commercial retail building, such as a community “strip mall.”
Here are some of the pros of buying commercial real estate over residential property.
Income potential. The best reason to invest in commercial over residential rentals is the earning potential. Commercial properties typically have an annual return off the purchase price between 6% and 12%, depending on the area, current economy, and external factors (such as a pandemic). That's a much higher range than ordinarily exists for single family home properties (1% to 4% at best).
Professional relationships. Small business owners tend to take pride in their businesses and want to protect their livelihood. Owners of commercial properties are usually not individuals, but LLCs, and operate the property as a business. As such, the landlord and tenant have more of a business-to-business customer relationship, which helps keep interactions professional and courteous.
Public eye on the property. Retail tenants have a vested interest in maintaining their store and storefront, because if they don’t, it will affect their business. As a result, commercial tenants and property owner interests are aligned, which helps the owner maintain and improve the quality of the property, and ultimately, the value of their investment.
Limited hours of operation. Businesses usually go home at night. In other words, you work when they work. Barring emergency calls at night for break-ins or fire alarms, you should be able to rest without having to worry about receiving a midnight call because a tenant wants repairs or has lost a key. For commercial properties, it is also more likely you will have an alarm monitoring service, so that if anything does happen at night, your alarm company will notify the proper authorities.
More objective price evaluations. It's often easier to evaluate the prices of commercial property than residential, because you can request the current owner’s income statement and determine what the price should be based on that. If the seller is using a knowledgeable broker, the asking price should be set at a price where an investor can earn the area’s prevailing cap rate for the commercial property type they are looking at (retail, office, industrial, and so forth). Residential properties are often subject to more emotional pricing. See Evaluating Cap Rate: Is that Residential Real Estate Investment Property Worth It? for more on the subject.
Triple net leases. There are variations to triple net leases, but the basic concept is that you, as the property owner, do not have to pay expenses on the property (as would be the case with residential real estate). The lessee handles all property expenses directly, including real estate taxes. The only expense you’ll have to pay is your mortgage. Companies like Walgreens, CVS, and Starbucks typically sign these types of leases, as they want to maintain a look and feel in keeping with their brand, so they manage those costs, which means you as an investor get to have one of the lowest maintenance income producers for your money. Strip malls have a variety of net leases and triple nets are not usually done with smaller businesses, but these lease types are optimal and you can’t get them with residential properties. For more on common lease terms, such as net leases, see Commercial Leases: Negotiate the Best Terms and related articles in the Your Business Space & Commercial Lease section of this site.
More flexibility in lease terms. Fewer consumer protection laws govern commercial leases, unlike the dozens of state laws, such as security deposit limits and termination rules, that cover residential real estate.
While there are many positive reasons to invest in commercial real estate over residential, there are also negative issues to consider.
Time commitment. If you own a commercial retail building with five tenants, or even just a few, you have more to manage than you do with a residential investment. You can’t be an absentee landlord and maximize the return on your investment. With commercial, you are likely dealing with multiple leases, annual CAM adjustments (common area maintenance costs that tenants are responsible for), more maintenance issues, and public safety concerns. In a nutshell, you have more to manage; and just as your tenants have to worry about the public eye, you do as well.
Professional help required. If you are a do-it-yourselfer, you'd better be licensed if you are going to handle the maintenance issues at a commercial property. The likelihood is you will not be prepared to handle maintenance issues yourself and will need to hire someone to help with emergencies and repairs. While this added cost isn’t ideal, you’ll need to add it on to your set of expenses in order to properly care for the property. Remember to factor in property management expenses when evaluating the price to pay for a commercial investment property. Property management companies can charge between 5-10% of rent revenues for their services, which include lease administration. Evaluate beforehand whether you want to manage leasing and the relationships yourself or outsource those responsibilities.
Bigger initial investment. Acquiring a commercial property typically requires more capital up front than acquiring a residential rental in the same area, so it’s often more difficult to get your foot in the door. Once you’ve acquired a commercial property, you can expect some large capital expenditures to follow. Your property might be humming along for a few months and wham, here comes a $10,000 bill to address roofing repairs or a new furnace. With more customers there are more facilities to maintain and therefore more costs. What you hope is that the gains in revenue outweigh the gains in costs, to support purchasing a commercial property over a residential one.
More risks. Properties intended for commercial use have more public visitors and therefore have more people on the property each day that can get hurt or do something to damage your property. Cars can hit patrons in parking lots, people can slip on ice during the winter, and vandals can spray paint the sides of the building. Incidents like these can occur anywhere, but chances of experiencing something like these events go up when investing in commercial properties. If you're risk adverse, you might want to look more closely at putting your money in residential properties.
]]>One of the most common measures of a property’s investment potential is its capitalization rate, or “cap rate.” As we'll discuss below, the cap rate is a calculation of the potential annual rate of return—the loss or gain you’ll see on your investment. We'll also discuss:
There is more than one way to calculate an investment property's cap rate, but we’ll look at the most common here. The basic formula is:
Cap Rate = (Net Operating Income)/(Current Fair Market Value)
Let’s break that down:
Net operating income: Your net operating income is your gross rental income (the total amount of money you receive from rent) minus your operating expenses (such as payroll and costs of repairs). To arrive at this number, do the following:
Current fair market value: You can use either the asking price or the price you’d offer.
Example: You’re considering a two-bedroom house that’s listed for $325,000. The current tenants pay $2,000 per month. Gross rental income is 12 (months) x $2,000 (monthly rent) = $24,000.
You anticipate annual operating expenses to be $5,800: $3,800 in property taxes and $2,000 in maintenance and other expenses.
Your estimated net operating income is $24,000-$5,800 = $18,200.
You then divide your net operating income by the property’s current fair market value (we’ll use the list price of $325,000) to get the cap rate: $18,200/$325,000 = 5.6%.
If your estimates are correct, this two-bedroom property would give you a cap rate return of 5.6%.
The cap rate calculation above assumes that you’re receiving full rent each month—in other words, that the property is 100% occupied 365 days of the year (and that your tenants keep up with the rent). While 100% occupancy might happen regularly for a single-family home, it’s less likely for a multiunit building with more turnover. So, whenever possible, you’ll want to account for a less-than-100% occupancy rate when calculating your cap rate. Here’s how:
Adjust the formula for net operating income to the following:
Net Operating Income = [(Gross Rental Income) x (Occupancy Rate)] – (Operating Expenses)
Most real estate investors build a 5-10% anticipated loss of rent into their calculations. So, if you were to assume a 90% occupancy in the above the example:
Net operating income = [($24,000) x (.90)] - $5,800 = $15,800. (Note that a 10% reduction in occupancy results in $2,400 less net income.)
Cap rate = $15,800 / $325,000 = 4.9%
When you consider reduced occupancy, the two-bedroom house now has a cap rate return of roughly 4.9%, making it a slightly less attractive investment.
The cap rate is a helpful metric when you’re assessing a property that you expect to yield regular, relatively predictable income. For example, you’d want to calculate the cap rate for a 4-unit apartment building occupied by tenants with year-long leases.
You’ll want to calculate and compare the cap rates of similar potential investment properties you’re looking at. For example, if you’re weighing the pros and cons of two duplexes located in the same downtown area, comparing their cap rates can help you determine which property will be a better addition to your portfolio.
Knowing the cap rate of a potential investment also helps you decide if the asking price is reasonable—if it’s overpriced based on your cap rate calculations, you might be able to negotiate a lower price.
Calculating the cap rate of a property isn’t particularly useful if you’re planning to flip it, offer it as a vacation rental, or rent it out on a short-term basis. When you flip a property, one of your goals is to hold onto it for as short a time as possible—making the cap rate’s 12-month frame of reference less relevant. For vacation or short-term rentals, you’re likely going to experience swings in income and occupancy, not to mention operating expenses that fluctuate due to seasonal maintenance or repairs resulting from high tenant turnover. These factors combine to affect your net operating income, which in turn results in an unreliable cap rate calculation.
Also, the cap rate is calculated on the assumption that you’re paying all cash for a property—not taking out a loan. Therefore, it doesn’t take into account any costs associated with a mortgage, such as interest or points paid. It also doesn’t take into account the other costs of acquiring the property, such as closing costs and brokers’ fees.
When you’re looking to buy an investment property, most of the time you want to see a higher cap rate. The higher the cap rate, the better the annual return on your investment. If you are looking to make at least a certain percentage of income off your investment each year, you should let that drive your decision to invest. You can divide your calculated net income figure by your target cap rate to determine the price you’d be willing to pay for a particular property.
The “cap rate” you should buy at depends on the location of the property you are looking to buy in and the return you require to make the investment worth it to you. In other words, you’ll want to gauge your aversion to risk. For example, professionals purchasing commercial properties might buy at a 4% cap rate in high-demand (and therefore less risky) areas, but hold out for a 10% (or even higher) cap rate in low-demand areas. Generally, 4% to 10% per year is a reasonable range to earn for your investment property.
Continuing with our two-bedroom house example from above, dividing the net operating income by a minimum acceptable cap rate of 5% will give you the top price you would be willing to pay:
$15,800/ 5% = $316,000. Because the current asking price is $325,000, this would not be a good investment for you—you’d be paying $9,000 more than you should to get your goal cap rate.
Whatever rate of return you are aiming for, make sure the projected income leaves you with a healthy amount of cash after the mortgage payment has been paid. If you have a tenant who doesn’t pay for a few months, and the cap rate on your prospective property is 2% or less, your investment property might quickly become a liability. Be sure to consider worst-case rent loss scenarios when calculating your potential return—that way, you’ll have a good sense of whether you can afford to carry the property when it’s unoccupied.
]]>I’m buying a condo with a great property management association, which should free me from a lot of the maintenance responsibilities of owning and renting out a single-family home. Is it true that the maintenance and repair of condos are easier to handle than other investment properties?
Assuming you’ve run the numbers and the condo provides a good return on investment or “cap rate,” you may have a good deal.
But there’s a lot more to buying and renting out a condo than assessing the management responsibilities for maintenance and repairs.
While a condo, particularly a detached property located in a newly developed cul-de-sac, may look like a low-maintenance opportunity for your money, you should take a careful look before investing.
Here are five extra things you’ll have to manage with a condo that you wouldn’t have to with a single family home:
As with all real estate investments, the answer depends—on the particular property, location, market, and other factors, such as the annual return you expect on the investment, or cap rate.
Some of the relative pluses of single-family homes over condos include:
With all the above said, some condos are better investments than single-family homes, including the following:
If you are going to live in the condo yourself and the low-maintenance lifestyle that condo ownership presents is worth the added cost to you, you might want to buy a condo instead of a single-family home. But if you are looking to use a property as a college fund for the kids, retirement fund, or additional income generator, your money is much better served looking into opportunities for single family homes, multi-family homes, or commercial real estate.
]]>There's no guarantee that your property will appreciate in value, but presuming you did your research and the property is in a desirable location, you can reasonably assume the value will hold, if not increase, by at least 1% per year. Economists suggest 3% to 5% is reasonable to expect, but conservative forecasting approaches are better to avert financial concerns down the road.
Ultimately, the return on your investment (ROI) will depend on many factors, including fluctuations in the market, your costs to maintain the property (such as taxes, maintenance, and insurance), the amount of rent you receive, the interest rate you obtained on your loan, and the type of property you purchased (such as a condo instead of a single-family home).
Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential. Whether they are looking to develop these investments or sit and hold them, these companies are aiming to maximize the return for their investors in the shortest amount of time.
As an individual investor, however, you do not have that pressure hanging over you and can determine what’s more important to your needs. Say in five years your property is worth 10% more than what it is today and you decide to hold. If the subsequent five years earn no additional appreciation on your property, certainly, the additional five years you waited to sell would result in a worse return on your investment when it comes to raw percentages. But although there was no appreciation, your property was hopefully still actively earning you cash with which to pay off your mortgage and provide you a stable income.
Before buying investment property, it's wise to determine what your goal is for this particular investment and stick to that plan, pretty much regardless of where the market goes. Panicking and shifting course can be worse than riding out tough times.
Some goals to consider for yourself regarding when to sell are:
Whatever your goal is for your investment property, it’s important to remember that real estate is not a liquid asset. Always consider the worst-case scenario of not being able to sell your property within the time frame you want.
If your investment property is a single-family rental home, see Nolo's book First-Time Landlord for guidance on purchasing and managing residential rental property.
]]>Of course nothing is perfect, and while resort home ownership sounds dreamy, it also poses challenges. This article will address the pros and cons, focusing in particular on homes in places where tourism is a major part of the local economy.
Since resorts are typically situated in the most beautiful of places, they can offer advantages like:
Resort living can be great, but it typically doesn’t come cheap. Resorts commonly attract people with money to spend, and property prices tend to reflect this. To get an idea of the current price range of homes in the area you are interested in, contact a knowledgeable real estate professional in that area, or do some online research on Zillow or a similar site.
How good an investment your prospective resort-community home might be depends on many factors. You might wish to query a real estate professional in the area to get an idea about how the housing market in the community you are interested reacts during upturns and downturns in the economy. You also might try independent research to pick up pricing trends for the area (this will take some digging, however, since there is no central place to look).
The daily cost of living in a resort is typically higher than average in a resort area, for everything from gas to groceries. Since these communities are less likely to have large chain discount stores (some actually ban chains or franchises), you’ll likely need to shop at smaller, more expensive stores (or use up fuel and time travelling to nearby cities to do your shopping).
Taxes are often higher in resorts, as well. In many states, in addition to any state and county sales taxes, tourist areas (places with a high number of visitors as compared to full-time residents) are allowed to impose a “resort area tax” on goods and services sold within them.
These taxes are meant to avoid overburdening the residents of tourist areas with individual expenses stemming from the impact of tourists on the infrastructure. The good side of the higher taxes is that resort communities tend to keep their infrastructure up to date. They work hard to put on a good face for visitors, so you will likely get to enjoy clean streets, no potholes, smooth sidewalks, and fresh flower baskets or seasonal decorations on the main streets.
Normal home-maintenance expenses are necessary for any home, of course. Many homes in resorts are part of planned developments, in which case the homeowner must also pay periodic dues and assessments. In return, the common areas around your place will be maintained. These ongoing expenses are necessary even if the home is only occasionally occupied.
A part-time homeowner might also need to hire an on-site manager to handle ongoing maintenance. Some part-time owners also choose to hire a property manager to ensure that their vacation home is cleaned, stocked with groceries, and heated upon their arrival.
While resort living might be just what you’re looking for during peak season, you might find the area unattractive during the off-season. Many resorts have “shoulder seasons,” where the weather is uncooperative and the activities scarce. “Mud season” in the Colorado mountains, for example, means there is no snow for skiing and the mountain paths are too muddy for pleasurable hiking or biking. And while lying out at the pool at your Arizona condo might be fabulous in December, in August you might avoid going outside for fear of heatstroke or burning your hands on the swimming pool railing.
If you plan on using a resort home part-time, such seasonal fluctuations might be fine. But keep in mind, your expenses will continue while the home is vacant, and the chances of renting it out during the off-season are slim.
Even during peak season, weather is an issue worth a careful look at. Blizzards, below-zero temps, and black ice can make life in a mountain area hazardous and uncomfortable, while homeowners at beach resorts might suffer from temperature spikes and intolerable insect swarms.
It’s easy to overlook these issues when looking at a gorgeous home in beautiful weather. It’s wise, therefore, to visit the resort in all seasons before buying, to get a taste of what the area is like in many different conditions. If possible, renting a property in the community and living there awhile before making a purchase is an excellent idea.
Accessibility can also be an issue with resort areas. A secluded mountain home might seem charming, for example, until you are stranded in it for weeks due to spring flooding or winter snow drifts. Some areas have no airports nearby and require lengthy drives over poor, slick, or windy roads—which get backed up on Fridays and holiday weekends. Resort homes on islands, of course, must be accessed by expensive flights or boat journeys.
Reaching these areas once a year might not be a big deal, but owning a home in an inaccessible place is a different story.
If a resort home is used only as a vacation home, an owner might expect to recoup some expenses by renting it out. While this can be a great solution, renting can also pose challenges.
Some developments will not allow its owners to use the property as a rental. Renting might also give rise to tax issues (for example, you might have to pay a lodging tax if you rent out your home, or renting the home might jeopardize a future 1031 exchange).
Finding reliable renters can be an iffy proposition. You might need to hire a good rental management agency to coordinate the rentals and check out potential renters. This expense, of course, takes a chunk of your profits. Also, the times you are most likely to rent the property successfully are usually the times you’d wish to use the home yourself (such as holidays and during peak seasons). Learn more about legal and practical aspects of Short-Term Rentals of Your Home.
Owning a home in a resort community definitely has both benefits and drawbacks. Before buying, take the time to look into the area and thoroughly weigh the pros and cons. Enlist the help of real estate professionals in the area to show you around and answer your questions. By doing your research before buying, you’ll increase the chances that the benefits will outweigh any problems and you can spend your future enjoying resort living.
]]>Riders are extremely common for purchase and sale agreements. The reason why attorneys add in a rider (or “addendum”) to the P&S agreement is because they are accustomed to certain language, which has covered their clients’ interests in the past better than a stock P&S form would normally account for.
When you look through the P&S rider, it might appear that some sections are redundant; in other words, that the topics covered match sections in the main P&S form. This is okay. These provisions might include buyer’s obligations, seller’s warranties, or instructions on when notice has officially been given to the buyer or seller. Upon a closer look, however, you'll likely realize that these provisions are not restatements but rather expansions on what’s in the original P&S agreement, ensuring that you are covered in the manner your attorney sees fit.
Your attorney should account for any dual topic coverage by adding a section in the rider noting that where there appears to be a conflict or a divergence in language between the rider and the original purchase and sale agreement, the rider wins out.
Example: “In the event of a conflict between the terms and provisions of the attached Purchase and Sale Agreement and Rider, the terms and conditions in the Rider shall prevail.”
If you are purchasing a commercial property you should fully expect to see a rider to the P&S, as it will cover nuances in the transaction that are likely not covered in the standard P&S forms. These might include, for instance:
While at first glance it might look like an attorney is padding the bill by adding more pages to the P&S, they are likely saving themselves time, and thus you money, by including the rider. Rather than having to revise every section of the standard form, attorneys can utilize rider provisions that have been appropriate in other transactions they’ve handled and reference them when creating the rider for your P&S.
In fact, a well-written rider is an indication that your attorney has experience. You may have more to worry about if a rider were absent rather than present, particularly when buying an investment property.
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