In the complex maze of the real estate industry, the most valuable advice is also the most simple. Do not make promises you cannot keep – do not enter into obligations you may be unable to meet. This should be obvious but many people make deals that fall apart with little or no recourse on their part.
In fact, this avoidable problem is not unusual in a variety of businesses. The November 4th issue of The New Yorker has an article (“The New Futurism” by James Surowiecki), which illustrates some of the problems, which may result in entering into risky agreements.
For example: Jordan Elpern-Waxman left his job to become an entrepreneur and market a niche product. The challenge that Jordan created for himself is that he entered into his new venture without planning what he would and could do to sustain, grow and, if necessary, close his operations.
Even before he left his prior employment, Jordan should have known how much he could spend each month, how much debt he was willing and able to take on and what the deadline was for him to make the business work before he would have to close it down, so as to avoid the assumption of crushing debt which would affect the rest of his life.
The obstacle people like Jordan create for themselves is that, despite reforms made by the Credit CARD Act of 2009, individuals enter into an agreement (to borrow money) they most likely cannot keep. Or, as Jordan says: “I had gone through my savings and put everything on my credit card, and I woke up one morning and looked at the balance and said, ‘Holy [expletive deleted], how am I ever going to pay this thing off?”
Thus, time spent with an experienced attorney who can anticipate these pitfalls and challenges, and help you plan for and around them is an important component of due diligence. Since real estate debt, including mortgages, leases and long-term financial obligations, is so widespread, it is important to consider the potential problems that may ensue if a company dissolves or two individuals legally terminate their union – whether personal or professional. Being unaware of and unprepared for a series of liabilities that attach at the end of any endeavor can be economically ruinous and emotionally exhausting.
Jason Smolen, co-founding Principal of SmolenPlevy, a Northern Virginia law firm with a diverse array of individual, family and business clients, has spent more than 30 years advising real estate clients on complex contracts, sophisticated business transactions and other important matters, to avoid entering into the types of arrangements which could result in onerous, and potentially fatal, financial burdens.
Regardless of the industry, the size of the deal, or the resources of the client, his advice remains unchanged – do not assume obligations you cannot meet.
Key factors that Smolen urges clients to consider include:
He adds that every individual who enters into an agreement should know, before he or she signs anything, about the potential pitfalls. For example: Will they have to assume responsibility for a multi-year lease in a shopping center if they become estranged from their business partner? Or are they accepting a pledge from a broker who, in an attempt to finalize a deal, has no ability to ever fulfill his promise?
Further, where debt is a factor, Smolen suggests that clients always think very carefully about how they want to proceed. Because debt is an inescapable part of doing business, it is advisable to ask an attorney to map for you the manner in which the debt will pass and to whom, if the deal doesn’t result in profit. This counsel “levels the playing field and gives clarity to the question of whether or not someone should proceed with a deal,” says Smolen.
Finally, Smolen reminds his clients that egos have no place at the table and can lead to unreasonable or unfulfillable promises. Smolen cautions that even if you have financial protection in place, you should not risk putting yourself in a position to waste money or resources because of a promise your unchecked ego made.
It’s obvious from surveying the landscape of an industry scarred by unfulfilled promises – of half-finished housing tracts, foreclosed properties, never-to-be-completed buildings, empty offices and abandoned neighborhoods – that real estate transactions, no matter the size, should always start with a conversation with a experienced attorney. As Smolen suggests, “There’s much to be said for an appreciation of the gravity of making a promise and knowing whether you can honor it, combined with the knowledge that ambiguity is not necessarily your ally.”
I hope you’re having a great day – let me know if you need anything.