July 19, 2018

JF1416: Real Estate Attorney & Active Investor Tells How To Structure Your Contracts with Paul Sian

It doesn’t take much to realize the value that a conversation with a real estate attorney who is also an active investor, can have on your business. Paul and Joe cover real estate contracts extensively in this episode, a lot of great content in this episode! You’ll want to save this episode and listen again. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Paul Sian. How are you doing, Paul?

Paul Sian: Good. How are you doing, Joe?

Joe Fairless: I am doing well, nice to have you on the show. A little bit about Paul – he is a licensed attorney in Ohio and Michigan, and a licensed real estate agent in Ohio and Kentucky. He’s worked in real estate for 12 years while owning rental property; he helps buyers and sellers in Cincinnati and Northern Kentucky areas buy investment and personal real estate. He is based in Cincinnati, Ohio. With that being said, Paul, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Paul Sian: Yeah, definitely. Like you mentioned, I’ve been in real estate for 12 years. Actually, I originally started off licensed in Michigan for about 8-9 years, and then when I moved down to Ohio for a career change, I was doing real estate part-time there in Michigan, and then let my license go and then got my licenses back.

I was in the Army reserve for a while, and once I got out of that I needed to keep myself busy, so I got my real estate licenses again. I’ve got Ohio and Kentucky; I got both in the 2014 timeframe, and in around 2016 – that’s when I started getting back into real estate investment. We actually owned a single-family ourselves. That became a rental when I was called to active duty with the military… So rather than selling it — it was a brand new development with new construction… I would have sold it at a loss if I tried to sell it. We just rented it out and kind of became remote investors in that sense.

When we came back about a year later, I ended up selling it; development was finished, and the tenants [unintelligible [00:02:28].21] causing some issues, and it was too far away from where we currently lived, so I sold that.

In 2016 I got a fourplex, which I got at a good time. As you probably know if you’re looking in Cincinnati, we’ve kind of seen the prices starting to run up since then.

Joe Fairless: Absolutely. Are you still a licensed attorney and are you still practicing?

Paul Sian: Yes. I do real estate [unintelligible [00:02:49].19] and then I also do my real estate work as well too, helping buyers and sellers, both investors and for people buying their personal home.

Joe Fairless: So what’s a typical transaction as an attorney look like for you, in terms of your involvement?

Paul Sian: If I’m doing a real estate transaction [unintelligible [00:03:06].25] I don’t necessarily have to step in as a real estate agent; if they have a deal they’re buying, either like in a wholesale process or buying directly from for sale by owner, they can just come to me, we can work out a contract review fee, a document review fee, and then if they need, we can go through my work law firm – I work with a local law firm here in Cincinnati. They own a title company, and we can just process everything through there.

So I can help save them some money… It doesn’t have to be through the real estate license sign, but I can work with people as an attorney as well, and I do work with a lot of wholesalers, helping them with their contracts in terms of purchasing, as well as turning around and selling to others who are interested in holding the property, rather than wholesaling.

Joe Fairless: What are some areas of the contract that you believe add a lot of value to the contract? It’s kind of a dumb way of phrasing the question, but basically what I’m trying to find out is what are some areas that you focus in on on real estate contracts that perhaps if an investor wasn’t working with you, that wouldn’t be as buttoned up?

Paul Sian: Yeah, definitely… Especially if they’re not using even some of the state standard contract forms, or some of the ones you can get online, they might be missing appraisal terms, and they’re required to meet a certain appraisal… Which if you’re buying with borrowing money, like through a mortgage, then usually those contracts are required and your lender is not gonna bless that anyways… But if it’s a cash deal and you’re purchasing it for 100k and they wanna make sure it’s worth 100k, they can always get an appraisal if they want. But if that language is not in their contract, then they get the appraisal and the appraisal is low, without that language there they have no escape clause from that contract. They’re stuck buying it for $100,000, regardless of how much the house is worth.

Inspection calls is another important thing, too. Most people think “Yeah, home inspector… We wanna get our home inspected”, but when it comes to the investor buyers, a lot of times – especially now with a seller’s market – there can be an eagerness to go in and waive the inspection clause, which in my opinion is a big mistake.

You have waived that and you suddenly find that your foundation is sinking and it’s gonna cost 50k-60k just for that, to shore it up. Your whole investment strategy could be thrown out the door there, in one little misstep.

Joe Fairless: Within the inspection clause, what are some things that you always include in there?

Paul Sian: Generally, we look at the timeframe, the initial inspection, and then we also will address the post-inspection negotiation, and basically what the terms would be; if you can’t come to agreement on repairs, what are the options for the buyer and the seller…

And then mainly for the timeframes that everybody needs to pay attention to. You can’t just leave it in there and say “Hey, we will inspect within ten days” and then leave it at that. Okay, you inspect, but then what? You found that there’s a big issue with the electrical system – what’s your timeframe for resolving that? The seller and the buyer don’t agree, it becomes the “he said/she said” type of thing, and ultimately to resolve it you have to go to court… But if it’s something that’s already spelled out in there, if it does go to court, it makes your case easier.

Joe Fairless: We’ve got appraisal terms, so making sure that they’re in there… This is when we’re buying a property. We’ve got inspection clauses, the timeframes, and both of the initial inspection, of also the post-inspection… Anything else that you can think of as you think of the contract that would be good to know?

Paul Sian: Yeah, definitely a lot of contracts should have language in there regarding deed terms, the type of deed you’re getting… If it’s a bank deed, you’re generally gonna get a special warranty deed, because the banks don’t wanna guarantee, they’re not able to guarantee the deeds, so they’ll guarantee you to the point that they can.

If you can get general warranty deed – that’s the best kind. That basically steps in there and says “Hey, this deed is good.” If there’s an issue later, you can go back against the seller, or if you have title insurance on the property, then the title insurance will cover you under the general warranty deed. A special warranty deed limits it to what kind of ownership interest they’re transferring.

Joe Fairless: Will you elaborate on the general warranty deed and special warranty deed, and the distinction between the two, and if we have a choice on which one we receive?

Paul Sian: Definitely. The special warranty deed – those are generally gonna be on foreclosed properties. Banks generally are only gonna give you a special warranty deed. It’s rare that they have a general warranty deed. They don’t have all the information, and they’re kind of trying to do a quick sale and get rid of it as easy and as quick as possible.

Generally, if it’s closed through a proper title company who does all the title search, they should be able to come up with the full research on the property and kind of protect you on it.

When it’s a normal deed, when you’re [unintelligible [00:07:45].00] individual, if they’re giving you anything less than a general warranty deed, like if you’re getting a quitclaim deed, which is almost like “You can have whatever ownership interest I have in this property, if I have it.”

So it may be the case, you know, I’m selling you the corporate headquarters downtown Cincinnati; I’ll give you a quitclaim deed. It’s worth the paper that it’s written on. Obviously, I don’t own it… I can give you a quitclaim deed, but it doesn’t give you any right to it either.

The general warranty deed is the best, and your special warranty deed – the bank is only gonna give you that. Then a quitclaim deed – it’s rare to find those in a transaction, but if you do, if somebody wants to offer you a quitclaim deed, I’d be pretty skeptical and I would definitely talk with an attorney and a title company to make sure what’s going on with that.

Joe Fairless: What does the bank and the special warranty deed on the foreclosed property – what is the bank not agreeing to, that they would be agreeing to on a general warranty deed?

Paul Sian: With that, they’re basically — they’re in a sense excluding their ability to guarantee the deed, to give you a general warranty deed that says “Hey, our property is good. We bought it at a good title.” Basically, they got it usually through like a sheriff’s auction or foreclosure process, so they are just getting the deed as is, and that’s their way of selling the deed, as is.

So they’ll guarantee it to you to that point, and you can borrow against that, too. If a lender comes and you’re purchasing the property and you need to borrow off of that, you can generally borrow on it, assuming the property itself meets the appraisal criteria… But it still gives you pretty much a good guarantee, but the bank is just not willing to step out there and say “Yeah, we’ll guarantee you against any and every claim possible.”

Joe Fairless: What’s an example of a challenging contract that you’ve worked on?

Paul Sian: A challenging contract… I guess a lot of it just involves the back and forth negotiation before you even get to the contract… Just getting to the terms, especially when you’re in the investment realm.

I’ve just seen a contract that fell apart because the buyer wanted the seller to leave all the raw materials left in the apartment so he could refinish it, and the seller said no, so the buyer in that case walked for that.

Or they probably use something else, they probably use something in the inspection clause… For something as simple as “I’m not leaving you the drywall, I’m not leaving you the screws [unintelligible [00:09:58].19]” So a lot of it is just the negotiation and getting past egos. Once the language is there, once everybody understands the language and they kind of see the purpose behind it, they’re ready to go for it… It’s more how do you get those emotions at times that get in the way.

Joe Fairless: How long have you been working on real estate contracts with clients?

Paul Sian: I’ve been working on that for at least about ten years.

Joe Fairless: From year one to now year ten, I’m sure you’ve evolved your language to enhance the contracts and the value that you offer to your clients… If that assumption is correct, what are some of the things you do now that you weren’t doing before?

Paul Sian: In the past I would use often times the standard draft contracts you would get from a lot of these companies, primarily service attorneys, and sell you blank legal contracts, and they might be state-specific… [unintelligible [00:11:00].15] Now, especially at my law firm, we kind of start from a base our law firm designed, and we design it more based on the locality, like in my case, Cincinnati and Northern Kentucky… Whereas those form contracts by certain companies are generally state-wide. Sometimes they’re city-provisioned, sometimes there’s something in the city, either the tax or the Building Department requirements that are unique, that those contracts don’t cover, so we have contracts — it’s a multiple-page document, then we kind of go through it and based on the particular situation knock out language that we don’t need and make sure the language that we need is in there and it makes sense when it’s put in there.

Joe Fairless: What are some examples or an example of tax and building requirements that are unique to a city, that wouldn’t be in a state templated contract?

Paul Sian: In Hamilton County – this actually more follows upon the owners of the property, but the requirement to register your property with the auditor. And there’s no fees or costs with that, there’s no requirement at the state level… But then you go to a city like Cleveland, or a few other Northern Ohio states, and they actually have rent taxes as well, or unit taxes basically, and they’re charging that, so then you get prorations with some of that, if the prior seller — it’s almost like your regular taxes, when you’re buying and selling a property you prorate based on how much they’ve already paid when their ownership ends, and then how much does the buyer owe based on that.

So they’ve got similar concepts like that that state-wide doesn’t necessarily apply. Cincinnati doesn’t have any rental unit taxes, but we do have registration requirements… And on the opposite end you have those taxes, so you have to account for those.

Joe Fairless: What’s the most challenging part of your job?

Paul Sian: The challenging part – a lot of it too is just making sure people are on the right page, explaining… Not only am I working with the buyers, as I’m working with a buyer or a seller – if I’m working with the other side too, they don’t have their representative… It’s kind of like, I am representing my client, I’m in a contract with them, so they’re the ones I’m representing, and then kind of explaining to the other side, “Hey, if you don’t have your own counsel, then here’s the extent I can advise you. I can’t go further than that, unless I — if I start revealing my client’s privilege information and whatnot, then I run the risk of facing liability lawsuits or giving away information that I shouldn’t be giving.”

Joe Fairless: Based on your experience as a real estate contract law attorney — what is the best way to phrase that…? Real estate attorney in contract law, is that basically it?

Paul Sian: Yeah, real estate attorney/contract attorney, or acquisitions attorney…

Joe Fairless: Cool. Alright, based on your experience within that capacity, what is your best advice ever for real estate investors?

Paul Sian: If you’re going alone, make sure you have your teams in place. That will include an attorney, or if you’re working with a real estate agent, but have your contractor in place, have your property manager in place… A lot of times, especially in this market, when the deals and the offers are flying left and right, you might find yourself in contract with a building that’s ready to go, if you don’t have a contractor there who needs to service something, or you don’t have a property manager in place, especially if you’re a remote buyer and you’re not within the state, you’re gonna be in a tough situation between managing your tenants remotely… If your tenants figure that out, that you’re not local, then that kind of gives them a run of the place, and who knows what could happen then…?

So definitely have your team fully in place before you even start considering making your offer that within the next 20-30 minutes you could  find accepted, because the deals are going like crazy.

Joe Fairless: What are some of the best ways to find those qualified team members?

Paul Sian: Networking is one of the best, and with my out-of-state clients too – what happens is they’ll connect with me based on reading my blog, or seeing some of my posts on certain websites, and they’ll come back and say… We’ll chat, we’ll do an initial phone conversation, and then usually I recommend to any of my buyers that if you have the ability, by all means, come and visit Cincinnati. I’m happy to drive you around, show you around. You need to get an understanding of where you’re investing and the neighborhoods you’re gonna invest in, because everything varies based on which neighborhood you’re in, and the same type of thing if you’re buying in New York – it’s always good to have your boots on the ground and understand what the lay of the land, where everything is.

Joe Fairless: What’s the most popular blog post that you’ve done?

Paul Sian: Active blog posts that I’ve recently done  — I’ve got one that gets pretty good traction, it’s “Financing your investment properties.” I mention different ways that you can finance investment properties, and I get a lot of feedback.

Another blog post I’ve got for investors is my 1031 exchange blog post. I do get a lot — both on the law side as well too, asking for what they call the QFI, the qualified intermediary, who basically arranges the deals, who holds the money while you’re selling one property; you transfer the cash to them and then you purchase the other property. So the money has to be held in a trust, it can’t be just put into your bank account… So I get a lot of questions on those as well.

Joe Fairless: We’re gonna do a lightning round… Let’s do it. First, a quick word from our Best Ever partners.

Break: [00:16:03].16] to [00:17:07].09]

Joe Fairless: Best ever book you’ve read?

Paul Sian: Best ever book, Think and Grow Rich. It gives you a great mindset. It’s not specific to anything, but it kind of gives you the mindset to pursue anything.

Joe Fairless: Any books come to mind as it relates to real estate law or contracts that you would recommend to the Best Ever listeners?

Paul Sian: Not in terms of law… The ones I read are strictly for attorneys and they’ll put you to sleep. If you’re looking for some good bedtime material, those kind of books are good. But most of mine are strictly from a legal, theoretical perspective, and law books that discuss local laws, local statutes and codes.

Joe Fairless: What’s the best ever deal that you’ve done?

Paul Sian: That was a recent purchase of a four-family. It was a good deal at the time, right before we had the run-ups here in the Cincinnati area. I’ve got a reliable lender, but he had some issues with his own company and I kind of had to work with the seller, because it ended up being rather than a 30-day close, it ended up being almost like a 90-100-day close.

I just kept in touch with the seller, and kept in touch with my lender, and we ultimately got it closed. [unintelligible [00:18:07].13]

Joe Fairless: What’s a mistake you’ve made in business?

Paul Sian: [unintelligible [00:18:12].29] Sometimes it’s not fully screening the tenants, not fully vetting the tenants… I kind of use my own process, do my own research, and I’ve slowly come to learn that hey, there’s a lot more to look at, a lot more to look through before you accept just to get a rent check falling into the door.

Joe Fairless: What’s the best ever way you like to give back?

Paul Sian: Just sharing knowledge. I blog, I’m usually publishing once a week on my blog, on my website. I share my knowledge there, and I’m more than happy to answer questions. Anybody is welcome to call me or e-mail me and I’ll try and do my best to give you an answer.

Joe Fairless: Speaking of that blog, what’s the best ever way the Best Ever listeners can read more about what you’ve got going on?

Paul Sian: Definitely the blog. It’s at cincinkyrealestate.com. My contact information is on the page there, so feel free to e-mail me, call, or text me. I’m happy to chat.

Joe Fairless: Thank you so much for being on the show, educating us on the different types of deeds – quitclaims, special warranty and general warranty. Quitclaim – you’ve really gotta stay away from those. Special warranty deeds, and then the best, the general warranty deed… Why each of those three exist, and also talking about other things from a contract standpoint we should be looking out for.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Paul Sian: Thank you as well, Joe.

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