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Buying a Vacant Lot to Build a Home – What to Watch Out For

In pursuit of owning their own home in getting their peace of the American dream, many people decide to purchase a vacant lot on which to build. The thought of having an acre or two (or even several acres) outside of the city limits and building a home that can be customized to your specifications is very appealing to many. But before moving forward with the purchase of a vacant lot, there are several things to watch out for:

Location

The old adage “location, location, location” applies to all real estate purchases, and especially vacant land. You may love the location from the standpoint of being outside of the city, breathing in fresh air, having a beautiful view to wake up to every morning, and having lots of space to build your dream home and perhaps add some additional structures. But there are several other things to think about when it comes to location. For example, if you have children, how are the local school districts? Will your kids have access to a busing? What about shopping and access to medical help? How close are you to grocery stores, malls, restaurants, hospitals, etc.? And what about your commute to work? Will you be able to handle the drive to work every day?

Here’s another issue a lot of people do not consider when it comes to location. If you are buying a lot that is a significant distance from the city, you may have difficulty finding skilled craftsmen that are willing to travel to your location. You will still most likely be able to find a work crew to build your home, but you will probably be choosing from a smaller pool of available professionals, and you can expect to pay more in building costs because of access to materials, travel, and related issues.

Zoning Requirements

A vacant lot is most likely subject to zoning ordinances that regulate how the land can be used and developed. The land may be zoned for residential, commercial, farming, or a combination of these. And if that land is in an established subdivision, there may be additional laws, regulations, and requirements that apply. Check with your local authorities (e.g., city and county) to determine what the zoning ordinances are, and if you will be allowed to do what you want on the land. For example, if you want to build a house and have horses on the land, be sure you are permitted to do both.

Easements and Restrictions

Are there any rights of way or other easements that cross the property? Are the boundaries of the property clearly marked? Are there any natural hazards, environmental restrictions, or historical designations that affect the property? Does another party own mineral rights, water rights, or timber rights to the property? You will need to do a title search to uncover the answers to these questions and find out if any other potential title issues exist. Your lawyer may also advise you to have a land survey performed as well.

Access to Utilities

Living outside of the city has many advantages, but one of the potential issues you need to consider is how you will get access to your utilities. In many cases, this will not be as cut and dry as it would be living in an urban or inner-ring suburban neighborhood. Before you purchase the lot, find out how you are going to get your power (local power company, partially with solar panels, etc.), water (utility company or private well), heating and cooling (utility company, propane tank, geothermal technology, etc.), and phone and internet service. In most areas of the country, residents have access to high-speed internet. However, there are still some places where this may be difficult to obtain; and this could be a deal-breaker, especially for individuals who need a fast internet connection for work.

Do I Need a Real Estate Lawyer to Purchase a Vacant Lot in Alabama?

Purchasing a vacant lot to build a home on may be a great idea, but the process is full of potential pitfalls. If you are not careful, you could end up with zoning and title issues and other problems that can be very costly to resolve. And in some extreme cases, you may find that there is no viable resolution that will allow you to use the land the way you want it. To help ensure that you avoid any of these issues, it is best to hire an experienced real estate attorney to handle the closing for you.

If you are purchasing vacant land in Alabama, you must also keep in mind that Alabama is a Caveat Emptor (i.e., “buyer beware”) state. This means that the seller is not required to disclose anything to the buyer about the property’s condition. The seller’s only obligation is not to lie to the buyer. 

Your attorney will provide skilled guidance throughout the process, performing the necessary due diligence and preparing the documentation needed to complete the purchase. Your attorney can write up the sales agreement, perform all the title work, order the land survey, check with the city and/or county about zoning requirements, check on road access, and all other important legal tasks. By working with an attorney, buyers have the assurance that all their legal bases are covered, and they will end up with a positive outcome.

What Type of Business Structure is the Best for my Business?

When you are forming a new business, there are numerous tasks that need to be completed.  Raising capital, hiring staff, developing a marketing strategy, and putting in countless long days in the beginning to bring the business from zero to profitability, just to name a few. But before you begin operations, one of the most important things you need to figure out is your entity structure.

The legal entity you choose for your business will have a major impact on your liability exposure, how you conduct operations, taxes, and many other areas. Each business structure has its own advantages and disadvantages, and the best type of entity for your business will depend heavily on unique factors such as the industry you are in, the size of your company, how many owners you have, and your long-term objectives. The key is to determine which entity structure contains the attributes necessary to best help your business accomplish its goals.

There are five main business entity structures that are recognized by the IRS. Here is a look at each one of them:

Sole Proprietorships

A sole proprietorship is the simplest and most basic type of business entity. This is a common choice for solo entrepreneurs who are just starting out, have very few or no employees, and have limited interaction with vendors, suppliers, and subcontractors. In many cases, sole proprietorships are operated from a home office, and there is no business that they are renting or leasing. A sole proprietorship is easy to start because there is no separate legal entity to form. Essentially, all you need is a business bank account and the required licensing and you are in business. The major downside is that the profits and losses for the business are included on your personal tax return, and the owner is personally liable for any debts and lawsuits against the business.

Partnerships

A general partnership can also be started without forming a separate legal entity. This type of business structure may be suited for a small business with two or more owners that is just starting out and, like a sole proprietorship, the business has few or no employees and other complex arrangements. With the general partnership, owners are also exposed to personal liability that may result from the business. This can be more problematic than with sole proprietors, because you may be on the hook for the potential negligence or misconduct of one of the other partners. 

Limited Liability Companies (LLCs)

One way to address the concern about liability exposure within a business is to form a limited liability company (LLC). An LLC is a hybrid structure that allows owners, partners, and shareholders to limit their personal liability while enjoying the flexibility and potential tax benefits an LLC has to offer. LLCs have fewer formal requirements than corporations, but members can choose to be taxed as a sole proprietorship or a corporation. This makes them a popular choice for all types of small businesses.

S Corporations

A Subchapter S corporation, commonly known as an “S Corp”, is a corporation that must have been created in, and be based in the United States. Ownership is limited to a maximum of 100 shareholders, and shareholders must be private U.S. citizens, very specific types of trusts and estates, or certain types of exempt organizations, such as a qualified pension plan. The main advantage with an S Corp is that business income and losses “pass through” directly to shareholders without first having to pay corporate tax on the money. This allows an S corporation to enjoy the same limited liability for its shareholders has a C corporation, but without the double taxation. The main drawback to an S Corp, aside from the ownership restrictions, is that it can only issue common stock. The inability to issue preferred stock can make it more difficult to attract investors if the business needs to raise capital.

C Corporations

A C corporation is the most complex type of business structure, with limited liability and very few restrictions on ownership. A C Corp can have an unlimited number of shareholders, and the shareholders may be other individuals, corporations, trusts, foreign citizens or entities, and virtually any other type of individual or legal entity. You are also allowed to issue any type of stock, such as cumulative, convertible, callable, and other forms of preferred stock in order to lure investors and for other purposes. As we touched on in the discussion about S corporations, the main drawback with a C Corp is the fact that corporate profits are taxed twice; once at the corporate tax rate, and again at the dividend tax rate when they are received by shareholders as dividends.

What Type of Business Structure is Best for You?

As you can see, there is a lot to consider when deciding which legal entity to structure your business under. While it is possible to change business structures later on, this can be costly and complicated, depending on your circumstances at the time you decide to change. This is why it is much better to choose the business entity that best fits your needs from the outset.

At the offices of Davis, Bingham, Hudson & Buckner, P.C., we have over four decades of experience assisting clients with business entity formation and all other types of business legal matters in Alabama. We can thoroughly examine the specifics of your business, and your needs and future goals to help you choose the right entity structure from the start. Call our office at 334-821-1908 to schedule a consultation. You may also send us a message through our online contact form.

Commercial Real Estate

Investing in Commercial Real Estate for the First Time

Owning commercial real estate can be an exciting way to build your investment portfolio. The commercial market offers the potential for higher growth and greater rewards down the road. Buying commercial property is also far more complex then purchasing residential real estate, and there are more risks involved.

Those investing in commercial real estate for the first time can find the process complicated and confusing. There are numerous potential pitfalls, and the experience could be very costly if you are not thoroughly prepared. Here are 5 important steps that first time commercial real estate investors should take before entering the market:

Assemble your team of experts to assist you with the purchase

There are many ‘moving parts’ involved in a commercial real estate transaction, and you should plan on the process taking significantly longer than the purchase of a typical residential property. During this process, you will need experts to help you with various steps that must be completed. At a minimum, you will need an experienced commercial real estate lawyer, commercial realtor, accountant, and a mortgage lender. Depending on the complexity of the property you are considering, you may also need to bring in appraisers, engineers, environmental specialists, and other specialists.

Determine the purpose of the investment

The first thing you need to get clear on as a new commercial real estate investor is why you want to get into this business, and which type of commercial property is most appealing to you. For example, is this a short-term play where you plan to fix up and sell the property for a quick profit? If so, you should be aware of the risks going in, and the fact that expenses to repair a commercial property could end up being much higher then you originally projected. On the other hand, you may be looking at an investment that you want to provide long term cash flow. Decide before going in the purpose of your investment, what do you plan to do with the property, and your exit strategy (i.e., how you plan to eventually recoup your investment).

Determine the type of property you want to purchase

There are numerous different types of commercial real estate properties you could invest in. Examples include apartment complexes, office buildings, shopping and retail centers, medical facilities, warehouses, industrial property, hotels, or even farmland. Each type of commercial property has its own unique set of risks and potential rewards. Consider which property you are most passionate about, and which one is most likely to yield a good return on investment. It is also important to look at market factors that may present a risk for various types of property. For example, consumers have been trending toward online purchases in recent years, and this has hurt the retail industry. This is something do you definitely want to take into account if you were looking at purchasing a retail property (such as a strip mall).

Understand your local market

Macroeconomic trends are important when considering which commercial real estate property to invest in, and equally important are the trends within your local area. Look at the demographic trends. Is the population growing or declining? Is it a younger or older population? You should also understand something about how your local municipalities operate. There is a very good chance you will need permits and approvals from the city or town to make certain alterations to the property and bring in certain types of merchants. Find out the time frame and what it takes to secure various types of approvals from your local municipalities. This is one of many areas in which your commercial real estate attorney will be able to provide invaluable assistance.

Figure out your financing

One of the most critical pieces to the commercial real estate investing puzzle is the financing. Most investors do not have the ability to pay cash for their first commercial property, so you will need to find the most favorable financing options. First of all, you should not plan on borrowing too much. A bank or private lender would not finance 100% of the purchase of a commercial property anyway; but even if they did, this would most likely put you in a difficult financial position. There are various factors that lenders will look at depending on the type of property you are purchasing and the purpose of your investment. Assuming you are purchasing a property from which you plan to collect rent to cover the loan payments, a lender will generally want to see a break-even ratio (BER) of 85% or less. The break-even ratio is (operating expenses + debt service payments)/gross operating income. If your BER is less than 85%, this means that operating income (e.g., rents) could drop by as much as 15%, and you would still break even on the property. This allows for vacancies in the event that some of your tenants fall on hard times.

Buying a Business

What Things Need to be Considered before Buying an Existing Business?

If you are an aspiring entrepreneur who has always wanted to own and operate your own business, buying an existing business can be a good option. There are many advantages to purchasing a business that has already been established. One of the most important being that they have already done all the initial startup legwork to make the business operational. Beyond that, an existing business has an established reputation in the marketplace, and a brand that people recognize.

Though purchasing an existing business offers many potential benefits, you need to make sure to pick the right one based on your passion, skills, and budget. This may very well be the largest investment you have ever made, so you don’t want to jump in to any random business that may be for sale. It is important to perform some due diligence to determine whether or not you are likely to be successful with it.

There are many things that need to be looked at before buying an existing business. Here are 7 important questions to ask the current owner/seller or their agent:

Why is the owner selling?

In many cases, a business that is for sale will already have a published reason for why they are selling. However, it is useful to ask the seller this question again. There are certainly many legitimate reasons for selling a business; e.g., retirement, health reasons, moving out of the area, and many others. Mainly, you want to confirm that they are selling for one of these types of reasons, and not because the business is in decline and they are trying to get out.

How did the seller determine the asking price?

It is important to find out how the seller arrived at their asking price. Hopefully, it was not some arbitrary figure based on how much they needed to retire on or something similar. There are three common business valuation methods:

  • Asset Based: The value of all the assets the business owns.
  • Income Based: The net revenue the business generates each year, typically using a multiplier of 2X to 3X.
  • Market Value: What similar businesses are selling for in the area.

The seller may have used one of these or a combination of these with more weight given to one or the other. The right valuation method depends largely on the type of business, and the industry it is in.

What skills are needed to successfully operate this business?

This is one of the most important considerations when buying an existing business. It requires a buyer to take an honest look at their skillset and find out if they really have what it takes to successfully run this existing business. A business may be profitable today, but if it is not run properly, it may not be profitable tomorrow. Speak with the owner about what skills are necessary to get into this business and be sure you possess those skills (or someone close to you possesses them) before you decide to move forward.

What are the greatest challenges the business is facing, and what are its greatest growth opportunities in the marketplace?

There are two parts to this question, a more negative side and a positive side. You need to find out what challenges the business currently faces against their competition, and what will be required to overcome these challenges. You should also ask about opportunities the owner believes are available to grow the business in the future.

Is the seller willing to finance all or part of the purchase?

One of the downsides of purchasing an existing business versus starting a business from scratch is that it will typically cost far more to purchase a business that is already established. This could make it challenging to obtain financing through traditional sources, such as the local bank. Sellers can help with this dilemma by offering to finance part or all of the transaction. If you are searching for financing options, be sure to ask the seller if they are willing to do this for you.

Is the seller willing to stay on as a consultant or employee to help during the transition period?

Along the same lines of the last question, you might need some help (at least in the beginning) as you transition into owning and operating your own business. You might also need some assistance with the current employees and clientele. Keeping the seller in some capacity can help address these issues. Find out if your seller is willing to stay on in some type of role.

What legal contracts does the business have? And are there any unresolved legal issues you should be aware of?

As a buyer, you need to know what legal contracts you will be obligated by. One common example is the lease for your location. There may be other contracts with vendors for certain products and services over certain periods of time. You also want to find out if there is any pending litigation against the business or any other unresolved legal issues.

The Importance of Working with Skilled Legal Counsel

Purchasing a business is a major investment that involves many complications and numerous potential pitfalls. If legal mistakes are made during the purchase process or after you take over operations, you could end up with severe consequences; even the possibility of facing civil and or criminal charges depending on the situation. To ensure that you are legally protected from start to finish, it is best to work with an experienced business attorney. At the law offices of Davis, Bingham, Hudson & Buckner, P.C., we have extensive experience helping business owners in Alabama with all types of legal issues, and we work closely with our clients to help them successfully navigate the legalities of owning and operating a business. For a consultation with one of our attorneys, call our office today at 334-821-1908. You may also send us a message through our online contact form.