The 10 Biggest Legal Mistakes Physicians Make When Selling Real Estate

Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

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Executive Summary

When deciding to sell investment property, physicians often pay too much attention to the asking price and too little attention to other factors that can have an effect that is just as important on the profitability of the transaction. By focusing more on these other factors, the overall ease and lucrativeness of the deal can be greatly enhanced.

 

Mistake 1        Selling When a Property Is Down

Physicians are often passive absentee owners who may not necessarily be intimately familiar with a property’s physical and financial condition at the time they decide to sell. The only way to maximize the sale price is to ensure, if at all possible, that a property is sold at the top of its performance peak, and that there are no issues involved, such as excessive vacancies or deferred maintenance.


Action Step     If necessary, physicians should spend money to make money. They should make sure that the property is in its best physical condition before it is put on the market. Also, to the extent possible, they should try to time the sale to coincide with maximum occupancy of the property by long-term tenants.

 

Mistake 2        Failing to Consult a Tax Adviser Before Selling

Physicians often fail to consult their tax adviser before selling their investment property and learn of their tax mistakes only after the sale is complete. One of the biggest tax mistakes that can be made in this context is failing to take advantage of Section 1031 of the Internal Revenue Code, which allows physicians to exchange their property for a like-kind property without any tax effect whatsoever.

 

Action Step     Physicians should be sure to consult with their tax attorney or accountant before listing their property for sale.

 

Mistake 3        Not Requiring Enough Earnest Money

Physicians sometimes do not realize the importance of the earnest money deposit. The purpose of the deposit is to show the buyer’s good faith while the seller takes the property off the market and to provide the seller physician with a source of reimbursement if the buyer defaults. The higher the deposit, the greater the incentive for the buyer to go through with the deal and the greater the likelihood that the physician will be adequately compensated if the buyer nevertheless does default.

 

Action Step     Physicians should require a deposit of not less than 10% of the purchase price in the sale agreement.

 

Mistake 4        Overpricing the Property

One of the biggest mistake physicians and other sellers make is overpricing their property. They believe that some foolish or unsophisticated buyer will fall in love with the property and pay the full asking price without knowing its true fair market value. That just doesn’t happen very often. Most investment property buyers are both cautious and knowledgeable. What is more likely to happen if property is overpriced is that it will simply languish, even in a hot market.

 

Action Step     Physicians should do their homework and set an appropriate sales price for the property (which is something the real estate broker should do for them).

 

Mistake 5        Being Inflexible

By adopting a rigid “take it or leave it” attitude, physicians may lose buyers who would otherwise have been willing to give them very close to what they wanted in the first place. Selling investment real estate is a give-and-take process. Even if a buyer’s initial offer is not what the seller physician wanted, the buyer may later return with a better offer.

 

Action Step     Physicians should be flexible and not alienate any potential buyer. They should decide up front what they want and what their bottom line is.

 

Mistake 6        Failing to Use an As-Is Clause

The general rule in commercial real estate transactions is “let the buyer beware.” The law in most states does not require the seller or its agent to reveal anything about a property, including its defects. Therefore, since alleged breaches of representations and warranties concerning a property’s condition are a great source of litigation, seller physicians should attempt to limit any representations and warranties regarding the property and simply give the buyer broad rights to make whatever inspections it desires and then decide if it wants to proceed.

 

Action Step     Physicians should limit their representations and warranties regarding the property’s condition to the maximum extent possible. In any event, they should include a clause stating that the buyer is purchasing the property as is, without any representations and warranties whatsoever, except as expressly set forth in the sale agreement. Over the long term, limiting representations and warranties could prove as critical to the profitability of the transaction as the selling price itself.

 

Mistake 7        Selling by Owner

To save a sale commission and attorney’s fees, some physicians attempt to sell their investment property themselves. While doing so in a residential setting might sometimes make sense, it rarely does in a commercial setting. There is nothing simple about selling investment real estate. Tax, zoning, title, property condition, environmental, entitlement, and other legal issues must be addressed in almost every deal. If they are not dealt with correctly, the physician could suffer extremely adverse financial and legal consequences.

 

Action Step     Physicians should retain a first-rate real estate broker and real estate attorney. This team can then assist them in evaluating the market, providing exposure for the property, negotiating business and legal terms that protect the physician, and creating a strong bargaining position.

 

Mistake 8        Wasting Time With Unqualified Prospects

Physicians often spend a great deal of time and effort with a prospective buyer, only to then find out that the buyer is not qualified. A qualified buyer is one who is ready, willing, and able to buy the property. An unqualified buyer is “just looking,” does not have the necessary financial resources to actually purchase the property, or both.

 


Action Step     As soon as a potential buyer expresses an interest in the property and before wasting any time and money on negotiations, the seller physician should make sure that the buyer is actually ready to purchase and has the financial wherewithal to do so. A good real estate broker will ensure this is the case before an offer is even submitted to the seller physician.

 

Mistake 9        Selling Just to Finance the Next Project

Physicians sometimes forget that real estate is a long-term business. Holding on to real estate increases net value, creates collateral, and increases bargaining power with lenders. Because the media often gives coverage to the occasional person who makes money from the rapid appreciation of a property within a short period of time, many investors do not understand that buying real estate solely for short-term appreciation is a big gamble, and that selling one property just to acquire another may very well deprive the investor of significantly greater gains that could have been realized simply by holding on to the original property.

 

Action Step     Physicians should not flip properties simply for the sake of flipping. Unless they are convinced that the existing property is a bad long-term investment, they should consider carefully whether they might be better off simply holding that property.

 

Mistake 10      Financing the Sale Alone

Many physicians, because they might not have an immediate need for the proceeds from the sale of their property, are willing to finance a portion of the purchase price for the buyer in return for an above-market rate of interest. While doing so might sometimes make sense, it often will not because such financing places the physician in the shoes of a lender and requires the physician to be concerned with issues such as maintenance, waste, ongoing operations, and assignment and subletting in order to ensure the continued integrity of the property in case the buyer defaults. Many physicians simply do not have the time to do so adequately. Moreover, the mere fact that any buyer requires seller financing in the first place should raise a red flag that the buyer may not be completely financially solvent.

 

Action Step     Unless the seller physician can devote adequate time to monitoring the property or is willing to pay a third party to do so (the cost of which may completely negate the value of any above-market interest received) and is willing to take back the property if the buyer defaults, he or she should not agree to finance all or any portion of the purchase price.

 

Conclusion

Physicians who pay attention to these issues and take the recommended actions will be in an excellent position to maximize the return from a sale of their property.

Additional Resources

  • Hoven, The Real Estate Investor’s Tax Guide (Dearborn Trade Publishing 2003)
  • Burges, The Complete Guide to Buying and Selling Apartment Buildings (John Wiley & Sons 2001)

 

Written by:

Robert J. Horvat, Jr., Esq.

Peer reviewed by:

Jonathan V. Barg, Esq.

Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them