Like a physical renovation, a legal renovation can transform the market value of a property.
A physical renovation removes surface level flaws that have scared away the ordinary consumer, thereby increasing the market value of the property. Rather than seeing flaws, investors see solutions, which allows them to identify hidden value and capitalize on market inefficiencies. Physical renovation is the primary way investors remove surface-level flaws to unlock hidden market value. This concept usually applies to physical flaws (such as ugly carpet), but it can also apply to legal flaws (such as title defects). However, legal flaws are more complex than physical flaws, so many investors are unable to look past legal flaws in the way they look past physical flaws.
Just as the ordinary consumer shies away upon discovering an ugly carpet, many investors shy away upon discovering legal flaws. This creates an opportunity for investors who are able to imagine solutions to legal flaws.
What type of “legal flaws” can be cured to increase the market value of a property? Here are a few examples (among many others):
- Title defects are a problem in the chain of title. Many times, it is clear who owns the property from a practical perspective, but from a legal perspective, some or all of the property is titled in the name of a third party. In these situations, the market value of the property suffers until the title defect has been cured. Title defects can often be cured through a quiet title action, which is an extremely versatile and effective legal tool. If you are not familiar with the basics of a quiet title, read my article, “What is a Quiet Title Action?“
- Ownership Disputes. If a property is held in co-ownership or joint tenancy, the owners may not agree on how to make use of the property. If the owners have reached an impasse in their decision making process, the market value of the property can suffer. If an investor or real estate attorney can step in and resolve the ownership dispute with a creative solution, the market value of the property can be restored.
- Removing Nightmare Tenants. Imagine a multi-family property full of tenants who have constantly defaulted on rental payments, damaged the premises, and refused to vacate. Removing nightmare tenants is a legal problem with a legal solution. Replacing nightmare tenants with quality tenants is a very powerful way to perform a “legal renovation” and re-stabilize the property's income stream.
- Changing Form of Title. Suppose a multi-family property is currently classified as a condominium from a title perspective. Condominiums are subject to specialized rules and regulations that may decrease the value of the property. There is a specific legal procedure by which a condominium can be converted into a townhome community or a free-standing residential community. In the right circumstances, this can add significant value to the property as a whole.
- Subdivision. Subdivision is a classic example of how to add value through legal services. When a developer subdivides a piece of raw land, the physical properties of the land itself may not change at all. However, by doing the legal work necessary to convey the property in separate parcels (i.e., subdivision), the developer can increase the value of the property and make a significant profit.
These are only a few examples of how legal services can add value to a property. When evaluating investment opportunities, do not limit your thinking to physical renovations performed by a construction contractor. Expand your thinking to legal renovations performed by a competent real estate attorney, and feel free to contact me with questions.