Overcoming the 3 Worst Fears of Writing Real Estate Investment Contracts
Writing a contract is a paralyzing fear in real estate investing for investors buying or selling real estate. The common thinking is that if the investor misses something very important, the deal will be lost, he may be liable for huge sums of money if the contract does not work, or he will be doing something illegal without even knowing it.
Overcoming these fears is easily achievable, but must be worked through in 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. Below are ways to overcome these nagging fears for real estate investors.
1. The fear of missing something very important in the contract.
Real estate contracting is as old as writing, and each state has set some standards, or realtors in that state have set contract standards that they use to draft purchase and sale agreements.
An investor can contract online, at a local office store, or even from a real estate investment guru. It is strongly recommended that you only use contracts approved by your state’s BAR (Bar Association) or local BOR (Board of Realtors). Generally, using store-bought or guru contracts won’t cause you too much liability, but they can have big problems that aren’t obvious until you lose a big deal.
In particular, guru contracts are sold as investor protection and often have separate buy and sell contracts. If these contracts are sent to the seller’s attorney for review, they may lose your deal because they are so onerous. It is better to control the contract that is standard in your state by using clauses or additions that favor your position.
2. The fear of huge liability if the contract is concluded incorrectly.
Unless otherwise stated in the contract, when you are the buyer, your liability is limited to the amount of your deposit. If you haven’t given 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 is impressive for other investors to give $1 or $10, if you are competing with another investor who is offering $100, you may lose the deal.
Always stipulate that your escrow deposit is not due until your inspection period is up and ask for as long an inspection period as possible – with homeowners I ask for and get 20 to 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 are getting a conventional loan to purchase the property – this is an illegal flip if the closing is not done properly. There are different ways to complete the transaction using the buyer’s funds in cash.
If you are selling a property, your liability is wider because you can face a lawsuit called “Breach of Contract”. This claim alleges that the buyer had a valid contract with you and for whatever reason; decide not to sell it to him. The simplest way to overcome this potential problem is to have an attorney review your contract and have clauses that protect the closing date, such as the buyer will have to close on or before a certain date”. If the buyer doesn’t, you you have a breach of contract by the buyer, but your remedy is up to the limit of 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 $2000 minimum.
3. The fear of doing something illegal and not knowing it.
This can be a legitimate fear for beginners. It’s best resolved by having a lawyer, not another investor, review what you’re doing. The benefit to the attorney is that you will appoint them as the closing agent. He will likely write the contract for you, but this can be burdensome if you are meeting with a buyer or seller and want to close the deal. Always use a real estate closing attorney, not a general practitioner. You will find that while each deal varies slightly, the actual amount of contract clauses that vary from contract to contract is very small.
In summary, your ability to write purchase and sale contracts is very powerful and should be mastered. This first requires that you read and understand a standard contract for your state and local municipalities, if they are also required. You don’t need a realtor to write a contract, and it’s not illegal to do one, despite what many realtors may tell you. Always have an attorney review what you are doing and pay them by making them your closing agent if possible. If the other party to the contract chooses the closing agent, have him oversee the deal and explain that you will use him on the next contract where you control the selection of the closing agent.
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