fliprent

One of the biggest obstacles I faced when starting out investing in real estate was writing contracts.  It would be nearly impossible for anyone to write a blog post (at least one that would be read) about everything one needs to know about contracts.  With that in mind, I’ve decided to provide some basic knowledge for a beginner in real estate investing.  Another thing to note is that rules and laws are mostly local.  Writing a book or post that covers the law for the entire nation would also be, well… pretty darn long.  Here are some rules that I still use today.

1. Try to make sure that every clause in the contract is in your best interest.

This rule is much easier said than done, especially since hiring a lawyer is pretty much the only way to do this every time.  Clauses can be written in the favor of the seller or the buyer.  Depending on your position, you will need to write the clauses accordingly.  Some clauses which real estate investors may want to include are Acceptance, Approval, Arbitration, Assignment, Closing Date, Default, Existing Mortgages, Expenses, Financing Contingency, Inspection, Leases, Investment, Personal Property, Title Defects, Severability, Recording, Purchase Money Mortgage, and several more.   Some creative clauses include Wrap Around, Second Mortgage, Deposit, Down Payment, Credits, Unpaid Rent, Explanation, Examination of the Books, Rezoning, and Percolation test.  I will be writing several posts that will go into more detail about many of these clauses, so be sure to subscribe to my feed.

 2. Get the advice of a Real Estate Broker.

Yes I know that the commission may not be worth the actual services rendered but they do know a lot more about real estate contracts than us, especially in beginning.   You may be able to negotiate a fee to have someone show you which clauses in a contract are actually negotiable and how to go about it.  Just be careful when using the brokers form.  They are usually written to protect the broker more than anyone else in the transaction.  Some states allow “transaction brokers”.  These brokers help both of the parties in a deal without representing either side.

3. Create your own contract and incorporate your clauses in the form.

 Most contracts have the parties write the clauses in on the blank lines.  As the buyer you may want to create your own contract which already includes your standard clauses.  Don’t use this method to trick or mislead the other party into signing a horrible deal however.   I am a firm believer in Karma.  What goes around comes around.  Be honest in your negotiations and make sure that the other party is aware of your conditions. 

3. Remember the three main areas to negotiate real estate.  Price, Terms and Property.

Usually the seller is concerned with the price over everything else. There are ways to give the seller the price but get concessions on other points of the contract.   These points are normally in the form of terms.  Terms can more than compensate the buyer even with the higher price being paid. The savvy negotiator actually creates a better deal through the use of friendly terms.  Such terms can include, seller financing, lease options agreements, assuming the existing loan, etc.  In this current buyers market, there are plenty of deals with the possibility of getting good prices plus good terms.  Property is the last part of the negotiation that can be used when all else has failed.  Personal property such as appliances, automobiles, TV’s, boats, furniture and even other real estate property can be thrown in the deal to make it work.  Just be creative. 

4. Buyers - Be sure to include contingencies in the contract.

Contingencies are clauses that should be in the agreement.  They allow the buyer to get out of the deal if she finds things that don’t suit her needs or may incur additional costs.  Such items include, the inability to secure the necessary financing, problems with the property (termites, roof, mold, etc), problems with the title (liens, judgments, etc.) 

5. Sellers - Close the deal as quickly as possible.

Many investors especially wholesalers will want to stall the closing date as long as possible in order to “flip” the property to another investor.  Be careful of the contingencies that they want to place in the contract and put time limits on them.  For example “All the inspections should be complete within 5 days”.  This will minimize the chances that the buyer will lock up your property for a long period of time, just to have it fall through at the end.  Always include a closing date in the contract.  Most residential property with 4 units or less should not need more than 45 days to settle.   Also be sure to get a good faith deposit from the buyer.  This will help to minimize the chances of them walking away from the deal.

6. Have your lawyer review your contract.

This rule may be the most important of all.  Laws vary for each state and it would be worth the money up front, to make sure that you don’t loose more money later.  Once you are more experienced with writing contracts and the local laws in your state, you can skip this step.  Also you may only need to have this done once, if you follow rule number 3 and create your own contract. Try to find a lawyer that invests in real estate too.  Most law schools teach theory.  After a few contracts you may know more about them than most lawyers do.  Find the experienced real estate lawyer instead of the guy fresh out of law school.