Settle Dispute Quickly to Avoid More Expense

QUESTION: We recently sold some rural land which we had been told on an appraisal report was 24.2 acres. We clearly advertised the property as 24.2 acres “more or less.” But shortly after the sale closed, the buyer had the property surveyed and learned only 22.1 acres were included. Since she plans to subdivide the property into one-acre home sites, she claims we cheated her out of two lots worth at least $10,000 each. But the problem is she only paid us about $5,000 per acre. What should we do?

ANSWER: Consult a local real estate attorney. The faster you settle this dispute, the less it will cost you. Going to court could be very expensive compared to making a reasonable settlement now.

While your mistake was innocent, it may be a material misrepresentation. After verifying the buyer’s survey to be certain it is correct, it might be cheaper to pay the buyer $5,000 per missing acre than to incur the court costs and the delays.

IRS Return Used for Verification

Q: I would like to invest in apartment buildings. But I am uncertain how to best verify the expenses. I realize the sellers and their realty agents may be lying, but how can I determine what the real costs of operating the property are?

A: When making an income property purchase offer, include a contingency that your purchase offer is contingent upon your approval of the seller’s IRS Schedule E for the last three years for the property. Owners never over-report rental income nor under-report their operating expenses on their income tax returns.

Incidentally, a quick way to estimate operating expenses for apartment buildings is to figure at least 40% of rental income is spent on operating expenses, not including mortgage interest or depreciation.