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In this series I am outlining clauses commonly used in real estate contracts.  Use this information as a reference but do not repeat any examples word for word in a contract.  Consult an attorney in your local area for more details.  You can read Real Estate Contract Clauses Part 1 for the first five clauses or click on the contracts category to follow along with this series.

6. The Default Clause

This clause is of significant importance because it outlines the rights of the parties in case either defaults.  The buyer should protect herself with as many contingencies as possible but will want to limit her liability in case of default.  In short, the buyer wants to make sure that the deposit will be returned in full.   The seller should at a minimum withhold any out of pocket expenses plus any damages. 

7. Existing Mortgages or Deeds of Trust

This clause provides information about the existing loan on the property.   It is vital to investors that seek “subject to” deals, “wrap around” deals, assumable mortgages, etc.  Any deal in which the original mortgage will remain intact requires a clause or contract outlining the terms of the loan.  This clause commonly contains any fees associated with the transaction and who is responsible for paying them. 

8.  The Expenses Clause

This is one my least favorite clauses when it comes to negotiating.  Even when I outline “who pays what” in the contract, it seems to always become an issue at settlement.   Expenses normally refer to the costs associated with closing the deal such as closing costs, documentary stamps, transfer fees, surveys, etc. 

As a rehabber and house flipper I am often times borrowing more at the table, which increases the total amount of the loan.  This in turn increases items such as transfer taxes.  In my state it is customary for both parties to split the transfer costs, which is normally the largest of the fees.  In this case the seller is not normally willing to split the percentage of the amount over and above the selling price.  Check with a title company in your area for more information on these costs and customs. 

9. Financing Contingency Clause

Never leave A home without it.  That is unless you already know that you have the financing in place or that you are paying with cash.  This clause simply makes the deal contingent upon the buyer obtaining a loan for the property.  Make sure that your entire earnest money deposit is refunded just in case.  The seller may want to add a time period in which the buyer must apply for a loan.

10. The Inspection Contingency Clause

As the title suggests, the buyer want to make the deal contingent upon an approved inspection.  Often the buyer will delay the inspection until right before closing.  I prefer to give the seller time to fix any items that I find unreasonable prior to the closing date.   You can find more information about property inspections here.  House flippers may want to skip the inspection process since he already knows what the scope of work will be.