While many property sellers, buyers, and real estate professionals act professionally and keep the law for the most part, illegal real estate practices still occur every day. As a real estate investor, you need to educate yourself about these illegal practices in the industry to protect yourself from situations that can jeopardize your success. Everyone in business is usually trying to strike the best deal. However, some people opt to use unethical and illegal practices to earn more money. If you aren’t cautious, you may get duped.
Here are some common illegal real estate practices that you are likely to encounter as a real estate investor and that you should watch out for.
1. Discrimination
Discrimination is illegal under the Fair Housing Act
Not all real estate agents behave ethically. One of the most common failures to comply with ethics in real estate that you may encounter when buying or selling property is discrimination based on your race, skin color, religion, nationality, family status, disability, or sex. For instance, if a realtor refuses to work with you because you belong to any of these protected groups, they will be violating the Federal Fair Housing Act. When looking for an investment property to purchase, you should also beware of listings that violate anti-discrimination laws.
2. Misrepresentation
Another of the common illegal real estate practices you are likely to encounter as an investor is misrepresentation. This is when an agent misstates crucial information about a property. While most of the time it’s unintentional, some agents may intentionally give false information about a property to push the sale forward. Misrepresentation is illegal, and real estate investors can pursue legal action if they buy a property they wouldn’t have bought if they had the right information.
3. Real Estate Agents Practicing Without a Valid License
Another illegal real estate practice you may encounter is agents practicing without a valid license. When selling or buying property, make sure you verify that a real estate agent is licensed before you hire him/her. Also, check the agent’s background information to see if there are any disciplinary actions against him/her.
Related: How Real Estate Investors Can Protect Themselves from Coronavirus Scams
Why Is It Important for Real Estate Investors to Be Ethical?
It’s not just the real estate agents you work with that are required to comply with ethics in real estate. As a real estate investor, engaging in illegal real estate practices can negatively affect your business. Some real estate investors think that in order to get ahead, they have to engage in unethical and illegal practices. However, this hardly works in the long run. It may come back to haunt you later. Ethical real estate investing is the way to go.
As a real estate investor, you should be concerned with the impact your actions and investments have on society. You should not take advantage of other people just to make a buck. It’s still possible to make a lot of money in real estate without engaging in unethical and illegal practices. While profits are important, investors who support sustainable, life-improving causes and avoid engaging in illegal practices in the real estate industry tend to have more success in the long run.
Being an ethical real estate investor comes with great benefits. First, you’ll be able to establish trust and build good relationships with your clients. This leads to continued loyalty to your business and referrals. For instance, if you own a rental property, satisfied and happy tenants will often pay their rent on time, take good care of the property, and recommend it to other people. When buying an investment property, sellers also need to be confident that they are dealing with an honest person who isn’t trying to take advantage of them in any illegal way. Therefore, being ethical will help you build better relationships and help you grow your business. Essentially, being ethical in your practices is a win-win for property investors and their clients.
Maintaining high ethical standards will also help you avoid lawsuits. Handling legal issues can very costly and stressful, and will tarnish your reputation irreversibly. If you end up in jail, your dreams may not come to pass. There’s no reason why you should risk it all when you can still make money in real estate while being ethical.
How to Comply with Ethics in Real Estate as an Investor
As a real estate investor, you need to take proactive steps to avoid ruining your reputation or being sued because of engaging in illegal real estate practices. To do so, you need to see yourself as a problem-solver and not just a real estate investor. While you should make sure you are making a profit, you should also cater to the needs of your clients and those you work with. You’ll not only build a good reputation but also steer clear of legal trouble. Here are some ways real estate investors can remain ethical and protect their businesses:
1. Ensure Good Employee Working Conditions and Fair Payment
As a real estate investor, you will often need to hire different people to help you with various aspects of your business. This may include property managers, cleaners, security, and contractors. Ensure good working conditions and safety for your workers and pay them fairly in accordance with the Fair Labor Standards Act.
2. Set a Fair Rental Price
You should set your rent price based on what other similar rental properties in the areas are charging for rent. Make sure you also check the local rent control laws before you increase rent.
3. Follow the Legal Tenant Eviction Process
Landlords have to follow the legal procedure when evicting delinquent tenants as specified in their state’s termination statute. This usually starts with giving the tenant a written notice. Landlords also have to take into account existing eviction moratoriums before initiating an eviction process.
4. Disclose Property Defects When Selling
When selling a property, you are usually required to provide details about the condition of the property upfront, even when selling “As-Is”. It is illegal to wilfully conceal information about material defects in the property you are trying to sell that may negatively affect its value. You risk being sued. However, state disclosure laws usually vary. Therefore, be sure to check into the disclosure requirements for your location.
5. Comply with Fair Housing Laws
Under the Fair Housing Act, it is illegal to discriminate against potential tenants or buyers based on race, disability, nationality, sex, religion, or skin color. Make sure you familiarize yourself with fair housing laws to avoid discrimination claims.
Related: 5 Legal Real Estate Investing Tips to Know Before Buying a Property
The Bottom Line
You may make a little less money than you would want to now, but in the long run, it’s your reputation and referrals that will get you ahead of the competition. If you are just getting into real estate investing, you should educate yourself about real estate laws and regulations. In this way, you will be able to protect yourself from fraud, unfair treatment, and lawsuits. It’s also important that you have an experienced real estate attorney on your team. They will offer you legal advice and ensure your transactions are smooth whenever you buy, sell, or rent out a property. If you believe that you are being unlawfully discriminated against or have suffered financial loss because of illegal real estate practices, you should consider reporting the matter to local law enforcement.
Now that you know what activities to avoid as an investor in order to stay on the legal side of things, you can start searching for your next investment property. Sign up for Mashvisor to find profitable traditional and Airbnb rental properties quickly and efficiently.