QUESTION: About five years ago we invested in 24 acres of land with another couple, our best friends. We agreed this parcel had future potential as a commercial site as it is at the crossroads of two rural highways. But for the last year our co-owners have been pestering us to sell.
A local builder made us a standing offer to buy our acreage at a decent, but not huge profit. We think if we wait five more years we can quadruple our investment. However, last month our co-owners informed us that they sold their half interest to the builder. He then contacted us and offered to buy us out for the price he paid our former best friends. If we don't sell, he says he will bring a partition lawsuit, whatever that is.
ANSWER: I presume you were tenant in common co-owners. There is no law that prevents such co-owners from selling their share without the permission of the other co-owners. However, if you had a well-drafted partnership agreement, then such a sale could have been prevented with mutual buy-out or right-of-first-refusal provisions.
Now your new co-owner might be successful in his partition lawsuit if the court agrees to order the property sold. A partition lawsuit is one of the weaknesses of owning real estate as tenants in common or joint tenants. Please consult a real estate attorney for more details.
Unexpected Risk in a Limited Partnership
Q: About five years ago, I invested $20,000 as a limited partner in a motel built by a well-known developer. The limited partnership was sold to me by a stockbroker. Everything went well until March and April, when I didn't receive my usual dividend check and K-1 partnership income tax return.
When I called the stockbroker, she said the limited partnership is bankrupt and the lenders are foreclosing. Just last December we were told the motel was doing very well. How can this happen and what can the limited partners do?
A: You raise an unexpected risk of limited partnership real estate investments. The developer you named, but which I deleted, has more than 11,000 limited partners who were similarly defrauded by what appears to be looting of the partnership cash accounts. Other than suing the developer and alerting the government authorities, there isn't much you can do to get your investment back after the lender forecloses on the partnership assets.
Should Landlord Give Tenants 1-Year Lease?
Q: I own an apartment building. My policy has been to give tenants month-to-month leases. But at a recent apartment owner's association meeting a speaker said owners should give their tenants one-year leases to cut down on tenant turnover. Do you agree?
A: Leases protect tenants more than they protect landlords. When a tenant has a lease, the rent cannot be raised nor can other lease terms be changed until the lease expires.
However, it has been my experience that when tenants decide to move out, a lease won't stop them. Of course, the lease gives the landlord a legal right to go after the tenant for the remaining unpaid rent until the end of the lease, minus rent collected from a new tenant. But obtaining a judgment against such a tenant usually isn't worth the trouble. Also, in most states the building owner has a duty to try to re-rent the premises to reduce damages.
Don't Invest Only for Tax Reasons
Q: My wife and I earn over $135,000 annually and are paying a small fortune to Uncle Sam in income taxes. We desperately need to buy some real estate for the tax shelter. What kind of property do you recommend?
A: Please don't buy investment real estate just for the tax gimmicks. Income property should be acquired for its long-term investment potential, and the tax benefits are only incidental.
Personally, I like to buy run-down "fixer houses," which can be purchased at below-market prices and upgraded either to hold for long-term investment or for resale profits. After the 1986 Tax Reform Act, the tax shelter benefits are definitely not a major reason for investing in real estate.
Rental House Managed by Agent Unprofitable
Q: I am undecided if I should sell or rent my home as I will be moving away from this area. After consulting several local realtors who will manage the rent collection, I find they want a fee of 10% of the gross rent plus a lease fee if a new tenant must be obtained. As this will result in a loss after making my mortgage and property tax payments, do you think this is too high?
A: Hiring a professional property manager for a single-family rental home at an affordable fee is not easy. The customary fee is 10% of the gross rent. You are not being overcharged. From the manager's viewpoint, that fee barely covers the expenses of rent collection and supervising the house, especially if it needs repairs.
Since you will be moving away from the area, I suggest you sell your home now.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to the Real Estate Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.