8 Ways to Protect Yourself in Real Estate

Kristin Luna
Written by Kristin Luna
Updated January 12, 2022
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Know what to expect when you dip your toe in the real estate market

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The real estate industry can be a slippery slope to navigate if you’re a newbie. Protecting yourself before any purchase can be a natural salve to both your mental and financial health. From hiring an attorney to doing your due diligence with home inspections, these eight tips will help keep you protected in real estate, whether it’s your first house purchase or your 10th.

1. Hire a Lawyer

Whether you’re the seller or the buyer, finding a good real estate lawyer can make all the difference in a seamless property transfer. And whether you’re hiring a friend as your real estate agent or listing your home on your own, you’ll still want an experienced attorney to review any paperwork before you sign on the dotted lines. Having legal counsel will ensure you're clear about your rights and responsibilities and may prevent problems down the road. A seasoned attorney will also hunt out potential issues like second liens or unpaid property taxes.

2. Choose a Lender

You can’t buy a house if you don’t have the financial means to do so, so financing should be at the top of your mind when considering a new real estate investment. It’s common to borrow money from your long-standing banker since there’s already an established relationship, but other lending options exist across the board. Both sides of a financial lending deal require a level of trust, so make sure you feel confident about your choice before engaging in any contractual agreement.

It’s also imperative you know what your lender has to do for you. For example, your lender may be required to provide written notice if you aren’t using a local general contractor to conduct your appraisal. Licensed or certified appraisers must follow federal and state appraisal standards. If your lender doesn’t require an independent appraisal, you may want to order your own through a certified or licensed home appraiser near you.

3. Don’t Buy a Home You Can’t Afford

Just because you may be pre-approved for a certain loan amount doesn't mean you must max out your lending cap. It's easy to get out ahead in a speculative market, but it's wise to remember that an economic downturn has the potential to evaporate the value of your investment overnight.

Getting into a bidding war with investors is commonplace in a competitive real estate market. Just because the home seems attractive to other buyers doesn't necessarily mean it's a good decision to offer well over the listing price. For example, if the appraisal comes in lower than what you've offered to the seller, your lender won't always approve the additional funds, meaning you'll be forced to pony up the cash for the remainder of the house price.

Carefully measure financial risks and calculate your ability to afford a real estate purchase (regardless of its value on the open market) to protect yourself and your investment.

4. Think of Resale Value

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Unless you're in your senior years and plan on aging in place, it's likely that this isn't the last house you'll live in. To protect any real estate investment, one crucial thing to keep in mind is to know the resale value. You wouldn't, for example, want to buy a home in a hot area at the top of a real estate bubble just before it bursts, potentially ruining any gain you'd have on your investment.

Conversely, buying a home in a growing market makes the investment much more attractive since you're banking on the house increasing value over time. A measured approach to evaluating the potential resale value—and how long you think you'll be living there before upgrading or moving out of the area entirely—will help protect you in real estate.

5. Use Contingency Periods to Your Advantage

There are three major timelines in any real estate purchase: inspection, appraisal, and loan. If either party doesn’t hold up their end of the bargain at any point in this process, either side often can break the contract and walk away. Using these periods to negotiate or get out of a situation where you feel like you're overpaying is baked into the real estate system and can be used effectively.

For example, if you (as the buyer) are willing to waive contingencies, you’ll likely be able to make a far more attractive offer than someone who needs the assurances of their bank to complete the transaction. On the seller’s side, if you’re willing to accelerate the closing process or quickly complete any necessary repairs found during an inspection, you’ll likely be in a stronger position to protect your asking price.

6. Get a Home Inspection

Never buy a home without getting a thorough home inspection first. Hiring a top-rated home inspector near you can save you a lot of headaches down the road. These pros know what potential issues to look for, like termite damage or common electrical threats, which are problems that may not be visible to the naked eye. Most banks require an independent appraisal to mitigate their risk, and in any case, it's wise to protect yourself.

7. Do Your Due Diligence

Before you close on any piece of real estate, have a title company investigate the property's history for you, determining whether there are problems that could interfere with obtaining free and clear ownership of the property. It’s on you, the buyer, to ensure this box is checked, and it’s a requirement for bank-funded transactions.

It’s also a good idea to check local reviews of schools in the neighborhood, how access to health care facilities would potentially influence the value of your home, and whether there are any environmental issues related to pollution or flooding in your area that could taint you selling your home down the road. Public transit options, whether the property is on city services like sewer and garbage, and the availability of local markets to shop for groceries and clothing all have the power to impact the value of a real estate transaction.

8. Have a Backup Plan

One of the most important things to protect your real estate investment is not to put all of your eggs in one basket. If you bought a house intending to rent it out long-term, only to find there's not a market for long-term rentals in your area, you could find yourself underwater if you expected to pay the mortgage from the rental income. Have a backup plan, such as flipping the house and selling it for a profit or turning it into a vacation rental if your local codes allow it, before you make any purchase.

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