Disclaimer – This is legal information, not legal advice. For legal advice contact an attorney. You can download the slides to real estate contracts for investors by filling out the form below. Also, this blog/video/presentation is focused on residential real estate contracts.
Introduction to Real Estate Contracts for Investors
Once you understand buyer’s position and the seller’s position, it’s much easier to analyze which clauses in a contract favors the buyer or the seller. An investor that understand’s buyer’s and seller’s position will understand that real estate investors should use different contracts to help them achieve their goals when buying or selling investment properties.
Real Estate Contracts 101 – The Basics
At a minimum a real estate contract should:
- Identify The Parties
- Describe the Property
- Clearly Define Terms of Payment
- Consideration (Usually a deposit)
- Offer & Acceptance – Meeting of the minds
- Mandatory Federal Clauses such as Lead Paint Disclosures
- Mandatory State specific clauses
Of course, if really estate contracts only contained the bare minimum, they would be only one page long. Every other clause can be modified in a way that favors buyer’s or seller’s position.
Understanding Buyer’s Position
When buying investment properties the goal is to buy a property at a discount or on great terms, and to also:
- Put little to no money down;
- Maximize contingencies;
- Save money by pushing costs to the seller;
- Assign the K for profit;
- Maximum warranties.
Understanding Seller’s Position
When selling properties for profit, the goal is to get the highest price from a qualified buyer and you can do this by:
- Lock in a serious buyer with a high downpayment;
- Avoid having non-serious buyers tie up your property;
- Minimum to no contingencies;
- Not assignable, or only assignable with your permission;
- Save money by pushing cost to the buyer;
- Little to no warranties.
Downpayment and Escrow Clause
Real estate contracts generally have a clause for an escrow deposit.
Investor Buyer’s Position – Pay a small deposit held by a neutral party. Even better, use a promissory note payable at a later date. Creative buyer’s with no money can use goods, services, or property as their downpayment. Many seller’s wont go for this, but you can put that the deposit returnable to buyer if you do not perform.
Investor Seller’s position – You want to lock in a serious buyer. You want a large deposit and for the buyer to forfeit the deposit if they do not perform. The bigger the deposit the better.
Assignment Clause
An assignment clause allows the buyer to assign the contract to another buyer.
Investor Buyer’s Position – Investor buyers (particularly wholesalers), need contracts that are fully assignable so they can assign their interest for profit.
Investor Seller’s Position – When trying to lock in a serious buyer you want to use either a contract that is not-assignable only assignable with seller’s consent. You want the contract to be assignable with your consent to make sure its assigned to a qualified buyer.
Assumption vs. Subject To
In an assumption or subject to deal the buyer agrees to take over the mortgage payments. In an assumption the buyer agrees to be legally responsible to make the payments. In a subject to, the buyer can walk away if he defaults.
Investor Buyer’s Position – Minimize risk with Subject To
Investor Seller’s Position – Make sure you get your money with an Assumption
Tie Up The Property Clauses
There are all all sorts of what I call “tie up the property” clauses that let either buyer or seller back out after tying up the property with a contract. When buying, you want to be able to get out of contracts at the last minute if possible. When selling, you don’t want committed buyers are less likely to back out.
Financing Contingencies
A financing contingecy allows a buyer to back out if they cannot get funding.
Investor Seller’s Position – Financing contingencies often can’t be avoided. However, they can be limited. Seller wants to be able to void the contract if the buyer can’t get financing within a limited number of time. This prevents your property from being tied up.
Investor Buyer’s Position – Required if you need money to get funding. No time limit or a longer limit favors the buyer.
Owner Financing
Owner financing is when the seller agrees to hold the note instead of the buyer getting a lender. Owners can often hold the note at a better rate than banks.
Investor Buyer’s position – Long grace period if there is a missed payment. Right to have assign mortgage to another buyer. No prepayment penalty.
Investor Seller’s position – Make sure you get your money. Short grace period if there is a missed payment. Not assumable with protective clauses such as a due on sale clause.
Due Diligence Clauses
Due Diligence Clauses – There are many different kinds of clauses that allow a buyer to examine or hire inspectors to make sure the property is in good condition or to examine records such as existing leases or condominium documents. As a buyer (unless you’re knowingly buying a fixer upper) you want to make sure that you can back out of a contract if defects are found or fix them at the seller’s expense.
Examples of Due Diligence Clauses:
- Termites;
- Title Evidence/Defects;
- Plumbing and Electric;
- Survey;
- Radon;
- Existing Leases;
- Ingress and Egress;
- Restrictions and Easements;
- Condominium Docs;
- Roof;
- Violations;
- Engineering report;
- Zoning.
Investor Buyer’s Position – Try to get seller to pay for the inspections. If defects are found (title issues, plumbing and electric, etc.) then you want to have the option to either have the issue fixed at owner’s expense, reduce the purchase price, or back out of the deal entirely.
Investor Seller’s position – Try to get buyer to pay for the inspections. If you’re not selling the property “As is”, If defects are found you the options to either (a) extend the contract for X number of days to fix the issue (b) back out of the deal if you feel the costs are too expensive.
Expenses Clauses
Some contracts contain Expense clauses that says who pays for termite inspection, cost of surveys, closing costs, etc.
Investor Buyer’s Position – Make seller pay for costs or make sure you understand what you’re responsible for paying.
Investor Seller’s Position – Make buyer pay for it or make sure you understand you’re responsible for paying for.
Neutral – Split the costs
Prorations Clause
Prorations – Whether or not taxes, rents, interest, property owner dues, will be prorated at closing. Generally, helps the buyer.
Third Party Approval Clauses in Real Estate Contracts For Investors
A third party approval allows a buyer to back out of a contract if it is not approved by a third party.
Examples of third party approvals:
Subject to approval of my:
- Partner;
- Spouse;
- Real Estate Coach;
- Attorney.
Investor Seller’s Position – Seller want to eliminate third party approvals or to make sure that any third party approval they allow is for legitimate business reasons. For example, “subject to the approval of my partner” can mean either A. You’re really dealing with a business that can only buy property with approval its partners or B. A fake partner that the buyer uses to back out of deals. Some people are afraid of legal documents unless they have been approved by their attorney.
Seller’s can (and should limit) the amount of time a buyer can get a third party approval to prevent buyer’s from backing out at the last minute.
Investor Buyer’s Position – Use third party approval clauses as liberally as possible.
Warranty Clauses in General
Warranties can be used to compensate the buyer if title to the property is imperfect or if something at the house is broken. Generally, buyers want as many warranties as possible. Sellers on the other hand do not benefit from warranties.
Conveyance Clause
A conveyance clause determines how a property will be deeded. Can be done by quitclaim deed, general warranty deed, or special warranty deed.
Quitclaim Deed – I may own this land that I’m selling to you. Very risky for investor buyer’s to buy quit claim deeds. Investor seller’s will find it hard to sell quitclaim deeds. Quitclaims are used in special situations.
Special Warranty Deed (The Standard) – I own this land and I myself did nothing to mess up Title. If there is an issue with title to this property that I caused, I will fix it. This is what most investor sellers should use.
General Warranty Deed – I and no one who owned this land before me did nothing to mess up the title. There’s really no way to warrant what people before you have done. Investor buyer’s should try to get a general warranty deeds.
Editors Note – Some jurisdictions swap the meaning of general and special warranty deeds.
Survival of Contract Clause in Real Estate Contracts For Investors
Survival of contract allows the buyer and seller to hold each other to representations after the agreement has been executed. Generally favorable to buyer (seller already got his money).
Investor Buyer’s Position – This clause straightens your position if you want to sue buyer if things are not what were represented in the contract.
Investor Seller’s Position – Avoid it. This won’t stop a buyer from suing you if he wants to though.
Personal Property Warranties
If personal property is sold with the real estate such as appliances, like a microwave. This can be warranted to be in working order as well.
Investor Seller’s position – Sell included personal property “as is.”
Investor Buyer’s position – Can get a warranty on personal property.
Maintenance Clauses in Real Estate Contracts for Investors
A maintenance clause is an agreement for the seller to keep property clean, lawn cut, pool clean, walls washed, no holes in the walls, etc.
Investor Seller’s Position – This clause has no benefit to the seller. Can limit time buyer has to approve of the condition of the property. Can sell ugly houses “As is” instead of agreeing to a maintenance clause.
Investor Buyer’s Position – When buying ugly houses, may want to buy the house as is. When buying pretty houses, you definitely want a maintenance clause.
Risk of Loss in Real Estate Contracts For Investors
A risk of loss clause determines what happens if the property under K is destroyed before the closing date
Investor Seller’s Position – A seller wants to either (a) extend the contract and fix the issue, or (b) back out of the deal if it costs are too expensive.
Investor Buyer’s Position – Buyer wants to either (a) back out of the deal. Or (b) take property “as is” and take the insurance proceeds to restore the property.
Default Clauses in Real Estate Contracts for Investors – Buyer Default
A buyer default clause explains what happens if the buyer does not perform (buy the property).
Super Investor buyer friendly clause – Buyer gets his earnest money deposit back and the contract is voided. No other remedies.
Somewhat buyer-friendly – Buyer loses earnest money as liquidated damages. No other remedies.
Investor Seller Position – Buyer loses earnest money as liquidated damages and seller has right to sue for to force the sale of the property.
Default Clause – Seller Default
A seller default clause explains what happens if the seller does not perform.
Investor Buyer Position – Get earnest money deposit back. Maintain right to sue for specific performance.
Investor Seller Position – Return buyer’s security deposit. No other remedies.
Possession Clauses in Real Estate Contracts for Investors
A possession clause can be used to determine a buyer’s remedy if seller cannot deliver possession by the time of closing.
Investor Buyer’s Position – Wants property at closing or compensation for any delays caused by seller. $X amount per day.
Investor Seller’s position – Existing leases may interfere with possession. Wants buyer to take property subject to existing leases.
Lien Affidavit
A lien affidavit is a sworn statement that there are no liens on the property. This is generally required by the closing agent.
Investor Buyer position – You want an affidavit from the seller that there are no liens on the property.
Investor Seller position – Doesn’t gain anything from lien affidavit clause.
Attorneys Fees and Arbitration Clauses in Real Estate Contracts for Investors
An Attorneys fees clause can be used to determine if one side will be responsible for the other sides attorneys fees. An arbitration clause can be used if the parties want mandatory arbitration instead of going to court. Generally, legal fees for arbitration is cheaper than Court battles.
It’s hard to say whether or not an attorney’s fees clause is more beneficial to investor buyer’s or investor seller’s They generally come in two flavors:
The prevailing party gets attorneys fees paid for by the other side.
Or each side is responsible for its own attorneys fees regardless of the outcome.
If you have an awesome real estate attorney, an attorney’s fees clause can benefit you greatly no matter which side you’re on. Which brings me to my next point.
Conclusion To Real Estate Contracts For Investors – Understanding Buyer’s and Seller’s Position
If I did my job right you may think you need different contracts when buying or selling investment properties to best protect your interest. Or perhaps you want an attorney to review and approve your contracts. If these fit you, then do not hesitate to contact me! Thanks for reading the post and watching the video, and don’t forget to download the slides to real estate contracts for investors. 🙂
Don’t forget to check out my facebook group for real estate investors.
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