How Deed Restrictions May Impact Your Real Estate Investment | Think Realty | A Real Estate of Mind
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How Deed Restrictions May Impact Your Real Estate Investment

Investors must be familiar with any deed restrictions before embarking on a new venture.

There are typically two types of restrictions that impact an investor’s plans to develop a property: zoning restrictions and deed restrictions.

Investors are generally familiar with zoning restrictions, and they can be easily found when an investor researches a property. Zoning restrictions are developed to better regulate the expansion of the community and with community interests in mind. For example, restrictions might prevent a scenario in which an industrial property is developed adjacent to an elementary school.

Conversely, deed restrictions can be harder to identify, sometimes contain vague language, and are often adopted to protect the interests of specific parties rather than the community in general. Deed restrictions “run with the land,” meaning that changes in ownership do not remove previous restrictions, and any new owner of a parcel is legally obligated to follow the restrictions set in place.

Because deed restrictions can significantly impact a developer’s vision for a new project, it is imperative that investors educate themselves on any potential restrictions before embarking on a new venture.

What Is a Deed Restriction?

Deed restrictions are also commonly referred to as “restrictive covenants.” A covenant is a legal mechanism inherited from English Common Law and represents a solemn promise, in the legal sense, to engage in or refrain from a certain action.

Restrictive covenants on land have a long history in the United States. They have been used for items as mundane as regulating fencing heights to strict policies to keep municipalities and neighborhoods racially segregated. Racial segregation through deed restrictions was made fully illegal through the Fair Housing Act of 1968, but other potentially onerous restrictions can still be legally viable, provided they do not violate any civil liberties.

This long history of use means that some properties with restrictions agreed upon decades previously are still legally binding, regardless of relevance to the current property and community conditions. It can be challenging to track down the entire history of deed restrictions on a particular property, but not doing so can open investors up to significant legal liability.

Common Types of Residential Deed Restrictions

The most common types of deed restrictions are found in residential developments and are often governed by a Homeowners Association (HOA). These are the restrictions investors are most familiar with. They generally are adopted to keep certain standards in place so property values in the development are not decreased through actions of individual owners.

Because these restrictions are tied to the land itself, demolishing an existing structure with the intent of rebuilding will not release the developer from any previous restrictions. HOAs often have broad powers to regulate actions within a development, and investors may find it challenging to obtain approval to start a development that does not fall exactly in line with established restrictions.

Common restrictions include limits on exterior building materials, regulations against additional structures or exterior improvements, limits on parked vehicles or exterior storage, and even restrictions on what types of pets are allowed in the development. Unlike zoning restrictions, which are created by a public commission and can be changed if the intended use benefits the community, HOAs are not required to consider the benefits of changing restrictions to allow a project to continue. This means an investor who attempts a project prohibited by an existing restrictive covenant can expect protracted legal action.

Commercial Deed Restrictions

Although HOAs and their often-strict restrictions are well known to developers, many investors are unaware that commercial property can also carry significant restrictions.

These restrictions are generally instituted to protect a seller’s interests and can limit what commercial ventures are acceptable on a parcel. A seller may, for instance, include a restriction on the sale of the land that disallows the buyer from operating a business that competes with businesses on the seller’s adjacent properties. These restrictions are often vaguely written, and any investor purchasing a deed-restricted commercial property needs to be aware that a broad interpretation of murky restrictions may preclude them from a wide range of business operations at that location.

Commercial deed restrictions are not always written to benefit only a single party, however. Some properties may include restrictions stemming from environmental concerns. These restrictions ensure, for instance, that a medical center cannot be constructed on a site that previously experienced severe environmental contamination.

Commercial land deed restrictions can be harder to track than residential restrictions, but the savvy investor will do a thorough search of a parcel’s history before planning a potentially prohibited development.

How to Find Deed Restrictions

Deed restrictions often span decades and are perpetually attached to the land, so discovering the entire list of potential restrictions can be a challenge for any investor. Realtors are generally able to provide information on deed restrictions but may not always have the entire history available.

Because deed restrictions are recorded with the deed of sale, or property title, title companies are the strongest resource for determining any potential restrictions for a specific parcel. A title search is generally available for a fee, and the title company will perform it.

Investors should note, however, that not all title searches go back far enough in a property’s history and that additional, older restrictions may exist for a parcel as well.

For investors performing their own searches, individual counties maintain a record of deeds or make the information available at the county clerk’s office. Although many counties offer this information in a searchable format online, not all deed information is digitized. You may need to seek out older records in person at a county records office.

Searching for deed restrictions can be time-consuming and challenging, but the risks an investor assumes by not performing a proper search far outweigh any costs associated with the search.

Managing Deed Restriction Risk

Most investors are aware they must perform extensive due diligence before purchasing a new property, renovating an existing structure, or revitalizing a failing business. But, deed restrictions are often overlooked as an investor creates a business plan, performs appraisals, and seeks approval from local regulatory committees.

Each of those items is undoubtedly an essential part of the investing process, but it is also necessary to spend sufficient time researching the title history of a property to ensure a smooth road to implementation of the investor’s vision. The last thing any investor wants is to contend with a convoluted and costly legal process to amend or remove a deed restriction that was undiscovered at the time of purchase. Full research on the deed history of the investor’s target property helps to ensure a successful venture and allows the investor to focus energy on achieving their vision.

David Jacobs is a senior project specialist with Owner Builder Advisors. His experience includes construction labor, construction risk management, and sales. Jacobs leverages his background of both on-site and in-office construction work to better assist OBA clients.

Tags: Deeds