PARTITION ACTIONS: How to Exit a Co-Owned Real Estate Investment

Co-Ownership of California Real Estate

PARTITION ACTIONS: How to Exit a Co-Owned Real Estate Investment Pt. 1

By: Julia M. Wei, Attorney-At-Law

California has the remedy of partition, which allows a co-owner to seek sale of the shared property.  A common situation is real estate that is inherited by siblings or cousins.  Each owner has a fractional interest and over time, the property may require repairs and improvements that not all co-owners are willing to pay for.  The carrying costs of shared property will naturally include property taxes, insurance and any mortgage expense. 

When co-owners can’t agree on management of the property, a co-owner can exit that shared investment by seeking partition of property.

A short FAQ on Partition Law in California (found in Code of Civil Procedure Section 872.210):

Who?

Who can seek partition of their property?  Any co-owner except spouses.  The size of the ownership interest is not a factor.

What?

Partition can be in kind or by sale.  In kind is a division of interests, sometimes a suitable result depending on the nature of the property.  For example, a forty acre parcel may be partitioned in kind such as 20 acres to each co-owner assuming equal accessibility and value.  Usually single family residential real estate is partitioned by sale because it is impossible or impracticable to divide the property. The court must determine which is more equitable if the manner of partition is in dispute.  Also, partition by appraisal is possible by mutual agreement.

When?

At any time so long as the co-owner has not waived the right of partition.

Where?

Civil action in superior court.

Why?

Usually when co-owners cannot agree as to the management or status of the property.  One co-owner may wish to liquidate and "cash out" their interest.

What Is This Arbitration Going to Cost Me?

By: Julia M. Wei, Esq.

Arbitration provisions are in virtually all real estate purchase agreements, listing agreements, construction contracts and even commercial leases. 

When you first enter into a contract, you probably are not thinking about what forum you are agreeing to resolve disputes in if a dispute arises.  However, once the dispute has arisen, your attorney should immediately check your contract to see if the parties have agreed to litigate their dispute in binding arbitration.

[For a brief refresher of what arbitration is, I’ve written about it previously here: http://dirtblawg.com/2007/11/should-i-initia.html] 

Often I have heard real estate professionals comment that arbitration is cheaper and faster than court litigation.  Depending on the nature of the dispute, that can be true, but mostly for the reason that arbitration is often speedier.   

Arbitration is a private proceeding.  Private judging means that the litigants are paying out of pocket for their time in front of the arbitrator (usually a retired judge or seasoned attorney).  If the parties have agreed to use JAMS or AAA for their arbitration, then costs for a single arbitrator can range between $10k-$15k per day (shared between the parties).  A panel of three judges would naturally be commensurately more expensive! 

So arbitration is not inherently cheaper from the onset, but over the duration of a case, state court litigation can have significantly more discovery, more court continuances and many more motions.  That means that legal fees in court can be unpredictable and last for years.

In 2011, San Francisco County laid off 40% of their court’s workforce.  This places a huge caseload on the remaining staff and litigants can expect their cases to take much longer to get to trial. In contrast, arbitration is scheduled in a very streamlined fashion and discovery and pre-trial motions can be greatly limited by the arbitrator.   

Additionally, without a special carve out, most arbitrations do not have the right to appeal the arbitration award, which means the arbitrator’s decision is final upon confirmation. 

Lastly, in a failure to disclose cases involving things like water leaks or other property conditions, or construction defect cases, expert witnesses are critical to proving or defending the case.  That means that the litigant is paying for the attorney time, the expert time and the arbitrator’s time.  This is an expensive proposition so the better the arbitrator is at streamlining the process and limiting the discovery disputes, the less the litigant will have to pay.

3 Costly Mistakes Real Estate Investors Can Avoid

3 Costly Mistakes Real Estate Investors Can Avoid

By: Julia M. Wei, Esq.

Whether you are purchasing your first home or your 100th foreclosure, a real estate purchase in California is a significant investment.  As real estate litigators, we frequently see some recurring themes in real estate transactions that could have been avoided.

1.       Failure To Read the Disclosures

2.       Failure to Assess Property Conditions

3.       Failure to Review the Preliminary Report

4.       BONUS - HOA – Failure to Anticipate Special Assessments

 

1.       READ YOUR DISCLOSURES.

California has a mandatory disclosure requirement in the form of the Transfer Disclosure Statement.  Additionally, many listing agents will often have the sellers also complete the Supplemental disclosure.  The California Association of Realtors offers the Supplemental Statutory and Contractual Disclosures (“SSD”) which gives the seller an opportunity to enumerate on other issues affecting the property, such as insurance claims or matters affecting title, and also the Seller Property Questionnaire (“SPQ”), which is lengthier. The SPQ asks about mold, pets or other animals on the property, boundary issues and many other property related issues. 

Sample Forms provided by CAR –

SSD -  http://www.car.org/media/pdf/legal/ssd-11-09/

SPQ - http://www.car.org/media/pdf/legal/358056/

Very few transfers are exempt from the TDS requirement, however sales of new homes as part of a subdivision, trustee sales, tax sales and foreclosure sales are exempt.

Examples of costly items that can be found in disclosures:

a)      Neighbor issues – misplaced fenceline, noise or other nuisance.

b)      Property conditions – prior repairs, water leaks, mold, rat infestation

c)       Changing neighborhood – high speed rail, nearby construction

d)      Hazards – underground and environmental issues

 

 

2.       UNDERSTAND YOUR PROPERTY AND YOUR NEIGHBORHOOD

Not every seller discloses everything.  However, in today’s market with the fast turnaround times, a prospective buyer often sees the property at an open house over the weekend, receives disclosures on Monday, drafts an offer with their agent on Tuesday and may be in contract by Wednesday.  Often that leaves little time for additional inspections as the seller has often already prepared a disclosure report that includes a property inspection and/or roof inspection. 

The buyer should consider leaving in an inspection contingency to continue his or her investigation and obtain specialty reports for things like foundation inspections and septic inspections. While buyers are often told that their offer looks less competitive, the value that comes from having an additional inspection, such as a foundation inspection, could save the buyer potentially many thousands of dollars in repairs.

A further inspection could reveal issues with unpermitted or nonconforming structures, such as a sun room having an non-compliant foundation. 

Neighbor interviews are also good ways to learn about characteristics of the school that may not have been in the disclosures.  Perhaps there is a school nearby and morning traffic is a gridlock.  Perhaps there is a church nearby and they have a conditional use permit to double park on Sunday mornings.  None of these may be deal killers for the buyer, but having more data gives the buyer more ability to assess one property when compared with another, or whether a further investigation is needed.

 

3.       REVIEW YOUR PRELIMINARY REPORT AND UNDERLYING DOCUMENTS

Though often referred to as a “title report” the title insurance industry is not actually providing you with a title report.  Instead, they are offering to insure your title subject to a long list of exclusions.  That means that if the title company has conducted a public record search and found items affecting your property, they will list those items and not insure any problems that arise from those items.

The preliminary report from the title company is often difficult to understand, especially if the property is a condominium or townhouse, or has a metes and bounds description.  Your real estate professional is not a surveyor and is not usually in a position to assess if the property’s legal description is accurate.  Also, the exclusions often include easements and liens such as judgments and mortgages.  Accordingly, your legal professional also may not be able to identify or talk about the effect of the seller’s PACE (or HERO) lien for their solar panels.

These documents often provide further questions to answer and often, consulting with the title officer, any attorney or surveyor or civil engineer may be the only way to definitely answer or assess the issues raised by the preliminary report and linked documents.

 

 

*** BONUS – HOA Issues

If you are purchasing a unit in a planned development, the Homeowner’s Association will usually provide a large package of documents.  Unfortunately, the buyer often only has a couple of days to review these items.  The documents should include a summary sheet and about whether any special assessments have been approved and the documents should also include the HOA minutes, bylaws and financials.

Those documents tell the buyer about the overall health and management of this community.  Failure to study these documents closely could lead to a rude awakening.  Perhaps the minutes note that the pool will be shut down for repairs for a long while.  Perhaps the minutes note that the driveways are in need of repair and that the Board will soon seek competitive bids.  Review of the financials may show the HOA has failed to reserve sufficient sums for major repairs and maintenance. 

 

CONCLUSION

A real estate purchase here in the San Francisco Bay Area is incredibly expensive.  Similarly, general contractors and other construction trades are in high demand and also costly to engage and difficult to schedule.  A significant repair can derail the investment potential when the investor is already running on narrow profit margins.  Taking the time to engage in the due diligence efforts above can save a buyer time and money and hassle.   A stitch in time saves nine.