Drafting contracts is a crippling fear in real estate investing for investors buying or selling properties. The usual thought is that if the investor omits something very important, the deal will be lost, may be liable for huge sums of money if the contract does not work out, or he will do something illegal without even the know.
Overcoming these fears is easy to achieve but must be worked through in their order of importance to the investor, which can be done in minutes or hours. The result will be a rewarding and long career in real estate investing. Here are ways to help overcome these nagging fears for real estate investors.
1. Fear of leaving out something very important in the contract.
Real estate contracts are as old as writing and each state has established standards or the realtors in that state have established contract standards that they use to draft purchase and sale contracts.
An investor can get deals online, at a local store, or even from a real estate investment guru. It is strongly suggested that you only use contracts approved by your state’s BAR (bar association) or local BOR (Board of Realtors). Generally, using store-bought contracts or guru contracts won’t expose you to too much liability, but they can have some major issues that aren’t obvious until you lose a lot.
In particular, guru contracts are sold as protecting the investor and often have separate buy and sell contracts. If these contracts are sent to the seller’s attorney for review, they could lose your contract as they are very expensive. You better control the contract that is standard in your state by using clauses or addenda that favor your position.
2. The fear of huge liability if the contract is badly done.
Unless otherwise stipulated in the contract, when you are a buyer, your liability is limited to the amount of your deposit. If you haven’t paid a deposit yet, your contract may not be valid in the first place, so always give the minimum deposit the seller will accept. While it’s impressive for other investors to give $1 or $10, if you’re competing against another investor who is offering $100, you could lose the deal.
Always put a clause that your security deposit is not due until your inspection period is over and ask for as long an inspection period as possible – with landlords I ask and get 20-30 days. This longer inspection period gives me more time to sell the property. You may not be able to use your buyers funds to close if they get a conventional loan to buy the property – this is illegal reversal if the closing is not done properly. There are different ways to complete the transaction using a cash buyer’s funds.
If you sell a property, your liability is more extensive as you may face a lawsuit called “Breach of Contract”. This lawsuit claims that the buyer had a valid contract with you and for whatever reason; you have decided not to sell it to him. The easiest way to overcome this potential problem is to have your contract reviewed by a lawyer and have clauses that protect the closing date, for example, the buyer will have to close on or before a specific date. If the buyer fails to do so, you have a breach of contract by the buyer but your remedy is up to their deposit unless you suffered additional financial loss in the transaction that did not close. Always get as large a deposit as possible from a buyer, usually at least 3% to 5% or a minimum of $2,000.
3. The fear of doing something illegal without knowing it.
This can be a well-founded fear for beginners. It’s best to resolve the issue by having a lawyer, not another investor, look into what you’re doing. The advantage for the lawyer is that you will place him as the closing agent. They’ll likely draft the contract for you, but that can be cumbersome if you’re meeting a buyer or seller and want to close the deal. Always hire a solicitor who does property closings as a core business, not a GP. You will find that although each agreement varies slightly, the actual number of contract terms that vary from contract to contract is very small.
In summary, your ability to draft purchase and sales contracts is very powerful and must be mastered. This first requires you to read and understand a standard contract for your state and local municipalities if they are also required. You don’t need a real estate agent to write a contract and it is not illegal for you to write a contract despite what many real estate agents may tell you. Always have a lawyer review what you are doing and pay them by making them the closing agent for the deal if possible. If the opposing party to the contract chooses the closing agent, ask them to follow the agreement and explain that you will use it on the next contract where you control the choice of closing agent.