Legal Insights to Consider When Purchasing a Home or Investment Property in California
Purchasing a home or investment property might be one of the most exciting and nerve-racking purchases of your life. You will likely have a real estate agent in your corner to facilitate a smooth transaction. Will you need an attorney as well?
Easements, HOAs, zoning and use, and other restrictive covenants are common reasons to consult an attorney. But many people overlook the minutiae involved in how to title a property or how a property should be owned, which could mean placing it in a trust, an LLC, or owning it personally.
In the case of investment properties, it’s critical to consider if there are partners or family members purchasing a property together.
In joint purchases, an attorney can help assure a smooth purchase, create a thorough and detailed lease agreement, and guide partners or family members on how to avoid conflict and lay out rules and terms in case such conflict arises.
“A property is a tangible asset you will likely own for years to come. Savvy home buyers engage both a local realtor to find and secure a property and a dedicated local attorney to deal with appropriately titling and owning their property. A qualified attorney will help you determine whether to place your property in a trust or LLC and set up a structure to minimize future liability and keep your asset intact.” - Tyler or Jim
Titling a Home in California
The title is used to document the ownership of a property and the legal rights the owner has over a property. Titling on a property is generally filed as either sole ownership or co-ownership.
Under sole ownership, a property can be titled as a single or unmarried person, a married person having a separate property, or a domestic partner having a separate property.
Under co-ownership, a property can be titled in several different ways. The type of co-ownership most common for a married couple in California is a community property. Other types include community property with right of survivorship, joint tenancy, tenancy in common, or trustees of a trust.
Owning a Home in California
A typical but fundamentally important question we are often asked is how one should retain ownership of their property in California.
The three most common ways to own a property are to put it in a trust, an LLC, or to own it personally.
Trusts
Trusts are an excellent option for keeping a property within a family if someone passes away or becomes unable to make decisions about a property. Similarly, if a property is owned by two unrelated people, a trust can be created to precisely define each owner’s vested interests and rights to a property.
LLCs
Limited Liability Companies, or LLCs, are a useful entity for both business and real estate ventures alike. Placing a property into an LLC limits a property owner’s personal liability in matters revolving around that property. In California, annual filings must be submitted for LLCs along with a fee that is paid to the state.
Personal Ownership
If you purchase a property on your own or with a partner and you don’t actively place the property into a trust or LLC, you will simply take personal ownership, responsibility, and liability of the property. In the absence of an entity like a trust or LLC, personal ownership is the default form of ownership.
Investment Properties
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In recent years, many investors have gravitated toward buying investment properties instead of placing money into the stock market. Owning an investment property can result in steady and significant returns for an investor in the form of passive income and asset appreciation.
Because investment properties aren’t someone’s primary residence, there are other laws and regulations to follow. Buying an investment property alone or with partners or family members will create extra steps, namely in how a property is purchased and how a structure is set up to avoid conflict between multiple buyers.
If you purchase an investment property that is already occupied with tenants, you will also need to determine how to keep or make a new lease agreement with those tenants.
Investment properties have differing rules and regulations depending on the city a property is located in. For example, in Santa Barbara County, there are strict rules around short-term rentals and how property owners are allowed to rent properties via rental sites like AirBnB and VRBO.
In Santa Barbara County, short-term rental rules are hyper-specific to location, changing from one neighborhood to the next.
It is important to work with a local law firm that can advise you on the rules of short-term rentals in your area. In Santa Barbara, breaking short-term rental rules can result in penalties or charges.
Buy Safely, Everyone!
Whether you’re purchasing your dream home or an investment property, it’s a massive decision and a major asset to protect.
Along with your realtor, consider working with a local attorney who can advise you on how to properly title and own your property to minimize liability and keep your asset intact.
In California, the standard real estate contract requires mediation before you can file suit and has an arbitration provision. This is something to be aware of when purchasing a property.
Want a clearer explanation on the property purchasing process in California? We’re here to provide thorough, affordable legal counsel to all of Santa Barbara County’s residents, so give us a call and ask us anything, we’ve got answers for you.
