Overcoming the 3 Worst Fears of Writing Contracts in Real Estate Investing4 min read
Contract writing is a paralyzing fear in real estate investing for investors who are 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 doesn’t work, or he will be doing something illegal and not even know it.
Overcoming these fears is easy to achieve but must be worked on 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. The following are ways to help overcome these nagging fears for real estate investors.
1. The fear of omitting something very important in the contract.
Real estate contracting is as ancient as writing and each state has set some standards or the realtors in that state have set contract standards which they use to write both purchase and sale agreements.
An investor can get contracting online, at a local office store or even from a real estate investing guru. It is strongly suggested that you use only contracting approved by your state’s BAR (attorneys association) or your local BOR (Board of Realtors). Generally using the store bought or guru contracts won’t open you to too much liability, but they can have major problems that aren’t obvious until you lose a great deal.
Particularly, 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 deal because they are so onerous. You are better off to control the contract that is standard in your state using clauses or addendums that favor your position.
2. The fear of huge liability if the contract is done improperly.
Unless otherwise stated in the contract, when you are a buyer, your liability is limited to your deposit amount. 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 to other investors give to $1 or $10, if you are in competition with another investor who is offering $100, you could lose the deal.
Always put in a clause that your escrow deposit is not due until your inspection period is over and ask for as long an inspection period as possible – with homeowners I ask for and receive 20 to 30 days. This longer inspection period allows me more time to sell the property. You may not be able to use your buyers’ funds to close if he is getting a conventional loan to purchase the property – this is illegal flipping if the closing is not done properly. There are various ways to close the transaction using a cash buyer’s funds.
If you are selling a property, your liability is more extensive because you can face a lawsuit called a “Breach of Contract”. This lawsuit claims that the buyer had a valid contract with you and for whatever reason; you decided 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 specific date”. If the buyer doesn’t, you have a breach of contract by the buyer but your cure is to the limit of his deposit unless you incurred an additional financial loss in the transaction that didn’t close. Always get as large a deposit from a buyer as possible, usually at least 3% to 5% or a minimum of $2,000.
3. The fear of doing something illegal and not knowing it.
This can be a well founded fear for newbies. It is best resolved by having an attorney, not another investor, review what you are doing. The benefit to the attorney is that you will put him in as the closing agent. He likely will write the contract for you but this can be burdensome if you are meeting with a buyer or seller and you want to close the deal. Always use an attorney who does real estate closings as his main course of business, not a general practitioner. You will discover that while every deal varies slightly, the actual amount of contract clauses that vary from contract to contract are very small.
In summary, your ability to write purchase and sale agreements is very powerful and must be mastered. This first requires you read and understand a standard contract for your state and local municipalities if they are also required. You do not need a realtor to write a contract and it is not illegal for you to write a contract despite what many realtors may tell you. Always have an attorney review what you are doing and pay him by making him the closing agent on the transaction if possible. If the opposing party to the contract is choosing the closing agent, have him shadow the deal and explain that you will use him on the next contract where you control choosing the closing agent.