Writing contracts is a paralyzing fear in real estate investing for investors who buy or sell real estate. The common belief is that if the investor overlooks something very important, the deal will be lost, they may be liable for huge sums of money if the contract does not work out, or they will do something illegal and not know it.
These concerns are easy to overcome but must be worked on 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. Here are ways to help overcome these pesky fears of real estate investors.
1. Fear of omitting something very important in the contract.
Real estate contracting is as old as writing and each state has set some standards or the landlords in that state have developed the contract standards they use to write purchase and sale agreements.
An investor can get a contract online, at a local office store, or even from a real estate investment expert. It is highly recommended that you only use contracts approved by your state’s BAR (bar association) or local BOR (board of realtors). In general, using store-bought or expert contracts won’t expose you to much liability, but they can run into major issues that aren’t obvious until you lose a significant amount.
In particular, expert 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, he could lose your deal because they are too stressful. It is best to control the standard contract in your state by using clauses or appendices that favor your position.
2. Fear of serious liability if the contract is done incorrectly.
Unless the contract states otherwise, when you are a buyer, your liability is limited to your deposit amount. If you haven’t made a deposit yet, your contract may not have been valid in the first place, so always give the minimum deposit that the seller will accept. While it is impressive for other investors to donate $1 or $10, if you are in competition with another investor 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 the longest inspection period possible – with homeowners ask and get it 20 to 30 days. The longer inspection period allows me more time to sell the property. You may not be able to use the buyers money for the closing if he is taking out a conventional loan to buy the property – that’s illegal flipping if the closing is not done properly. There are different ways to close the deal using the cash buyer’s money.
If you sell property, your liability is more extensive because you can face a claim called “breach of contract.” This claim claims that the buyer had a valid contract with you for whatever reason; I decided not to sell it to him. The simplest way around this potential problem is to have a lawyer review your contract and have clauses protecting the closing date, such as, “The buyer will have to close on or before a specified date.” If the buyer doesn’t, you have a breach of contract by the buyer but your remedy is the maximum deposit unless you incur an additional financial loss in the transaction that didn’t close.
3. Fear of doing something illegal and not knowing it.
This can be a justified 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 be positioning him or her as the closing agent. He or she will likely write the contract for you, but this can be stressful if you are meeting with a buyer or seller and want to close the deal. Always use a real estate closing attorney as their main course of business, not a general practitioner. You will discover that while each deal is slightly different, the actual amount of contract clauses that vary from contract to contract is very small.
In short, your ability to write sales and purchase agreements is very strong and must be mastered. This requires first reading and understanding the standard contract of your municipalities and local municipalities if they are required as well. You do not need a realtor to write a contract and it is not illegal for you to write one despite what many realtors may tell you. Always ask the attorney to review what you’re doing and pay them by making them the closing agent in the transaction if possible. If the opposing party in the contract chooses the closing agent, have them proceed with the deal and explain that you will use them in the next contract as you control the choice of closing agent.