Real estate flipping from the legal perspective

Are real estate flips safe for the investor?
  • Real estate flips usually consist in obtaining financing, purchasing real estate, increasing its value and selling it for a higher price. Such an investment involves many legal risks that may block or significantly extend the entire procedure.
  • Investors should have extensive knowledge in the field of real estate law or use professional support to carry out planned transactions efficiently and safely.
  • A complex tax concept of real estate flips should be an essential element of each investor’s business plan.
  • There are many possible variants and tax solutions that should be adjusted for each investment separately. The only exception are house flipping models, where one tax concept can be applied to most transactions.

What are the most important steps in the real estate flip process?

  • The investor should carefully analyze the legal status of the real estate before purchasing it. Before buying a property, the investor should verify whether there are any legal problems that may complicate the entire process.
  • The investor must also take care of an appropriate preliminary contract that will cover the most common risks, such as: seller’s withdrawal from the transaction, delaying the transfer of ownership of the property, attempts to obtain a higher price than that set in the preliminary contract, etc.
  • The content of the sales contract is also very important, as it transfers the ownership of the property to the investor. The contract should regulate the situation where the seller, despite the sale of the flat, will not move out of the apartment on the agreed date. This refers to a relatively common practice when the seller stays in the property for a few months after the sale is done in order to find a new apartment. The investor should secure his interest by including in the contract provisions that will discourage the former owner from illegal occupation of the apartment.

How can a lawyer help you with real estate flips?

Investors use legal assistance most often to find out what legal form of business will be best for their real estate flipping business plan, what taxes should be paid, how to secure financing, and what to look for when verifying the legal status of a property.

The lawyer’s job may also be to increase the value of a property by dealing with formal issues such as inheritance matters, encumbrances in the land and mortgage register, or usufruct conversion issues.

I most often consult investors on the following matters:
Contracts
  • Agreement with an investor – I prepare an agreement for the financing of the real estate flip which addresses the interests of both parties and I advise on the security measures to be applied in order to carry out the process efficiently and avoid blocking the real estate
  • Preliminary agreement for the purchase of real estate – in preliminary agreements I use proven in practice solutions, which protect the investor against the most common risks, such as the seller’s withdrawal from the transaction
  • Property ownership transfer agreement – I prepare the agreement in such a way as to make sure that the investor will hand over the property on the agreed date
  • Contract with a renovation company (or other contractors) – I implement solutions protecting the investor in case of delayed or defective renovation
  • Final sales contract – I prepare the contract with a buyer in a way that ensures safe closing of the last stage of investment
Audit and regulation of the real estate legal status
  • Verification of the legal status of real estate
  • Verification whether the real estate is encumbered with mortgages or in any other way
  • Verification whether the planned merger or division of premises will be legal
  • Advisory how to safely buy a property with debts or a property which is not registered in the land and mortgage register
  • Analysis of additional documents from the authorities and the land and mortgage register court in case of serious doubts regarding the legal status of the real estate
  • Verification of other legal risks – depending on the specificity of a certain real estate
  • Regulation of the legal status of real estate in order to make it possible to carry out an investment
Investment companies
  • Advisory concerning the form of business activity proper to conduct real estate flipping
  • Legal assistance in establishing the company and drafting the contract to be concluded by the partners, so that it contains appropriate solutions regarding possible conflicts or other issues
  • Company audit for the purposes of facilitating external investors’ decision on entering into cooperation with a particular company
  • Preparation of company internal documents (minutes of meetings, resolutions, notices)
  • Preparation of amendments to the articles of association, documents necessary to implement changes in ownership (sale of shares or stocks), change of registered office, change of management board members, increase in share capital, etc.
Frequently asked questions regarding real estate flips
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1. How many real estate flips can be done without registering a business activity?

It is assumed that the first real estate flip can be done without setting up a business activity. However, there is no universal answer to this question. Tax authorities consider each case individually.

Most often I advise to register a business activity at the earliest possible stage in a form appropriate to the size of planned investments, as this is the safest solution.

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Is an investor responsible for defects in a sold apartment?

Yes. Often investors do not consider the financial risk resulting from the liability for defects in a sold property.

The seller is liable for defects in a property even if he or she did not know about them and had no control over their appearance. This applies to both primary and secondary property market.

The seller is liable even if the contract of sale does not contain any provisions that would determine such liability. The seller is liable for defects in the property on the basis of the provisions regarding the warranty for defects.

The risk associated with liability for defects can be minimized and, in some cases, even eliminated altogether.

First of all, the investor will not be responsible for defects the buyer was aware of. The seller should ensure that the sales contract includes a detailed description of the condition of the property being sold and individual defects of it. This will allow to prove in the future that the buyer knew about all the defects and still decided to buy the property.

Secondly, the seller’s liability for property defects may be excluded by entering appropriate provisions in the sales contract. However, this does not apply to contracts concluded by an investor with a buyer who has the status of a consumer. In that case exclusion or limitation of liability is not possible.

There are also other solutions, which allow limiting the liability for defects of the sold real estate. It is recommended to include the above issues in the investment plan, because the scale of the investor’s liability may turn out to be significant.

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3. Is it safe to buy a property which is not registered in the land and mortgage register?

Yes, not all properties in Poland have to be registered in the land and mortgage register. However, if the property is not registered in the land and mortgage register, you should carefully examine the legal status of the property before buying it.

It is essential to verify the documents that will confirm that the current owner of the property has properly acquired its ownership. Depending on the specific situation, this may be: a notarial deed, on the basis of which the current owner acquired rights to the plot or premises, an administrative decision, which grants rights to the property or a document that confirms the inheritance.

It is often a good solution to enter into a preliminary agreement with appropriate provisions that will allow you to withdraw from the purchase in the event that the analysis of the legal status of the property reveals any issues.

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4. Does the preliminary agreement have to be concluded in notarial deed form?

No, a preliminary agreement can be concluded in the standard written form, however it involves certain consequences.

In most cases a preliminary agreement for the sale of real estate is concluded in the form of a notarial deed or in the standard written form.

The difference between a notarial deed and a written agreement appears when either party changes its mind and does not want to conclude the final agreement. It happens usually when a new investor interested in buying the property appears and offers a higher price. It also happens when the buyer loses financing (e.g. does not receive a loan) and therefore wants to cancel the final agreement.

If the preliminary agreement was concluded in the form of a notarial deed, either party may bring the case to court and demand conclusion of the final agreement. The court ruling supersedes the final agreement and allows the new owner to be registered in the land and mortgage register.

However, if the preliminary agreement was concluded in standard written form, court action is not possible. The parties may then use other securities provided in the preliminary agreement (e.g. contractual penalties, obligation to return double the deposit, etc.).

This does not mean that concluding a preliminary agreement in the form of a notarial deed is always the best solution. A notarial deed implies additional costs and, moreover, on the basis of a preliminary agreement concluded in the form of a notarial deed either party may pursue legal action, which means that it is a solution that may turn out to be risky for both the buyer and the seller.

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