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If you think Real Estate Contracts are one size fits all, then you're dead wrongOnce you’ve mastered real estate contracts, and they’re not hard, you’ll give yourself a big confidence boost and put yourself streets ahead of the competition. Make sure you get good legal advice before entering into any agreement. Once you’ve done the first one it’s very straight forward though. Bottom line with contracts is that while there are standard ones in place, there are a number of special conditions that you can add. The more difficult you make it for the seller the less likely you are to get the deal OR the more you’ll have to pay. So the trick is to structure the special clauses in such a way as to appear to the seller as no big deal but give adequate risk protection for you. By far the biggest reason that real estate contracts fall over is due to the inability of the purchaser to get finance. This is where you’re pre-approval come in. If you put in a contract that doesn’t have a finance clause you are much more likely to get the deal and much more likely to get it at the price you ask. So if you decide to go without a finance clause in your real estate contracts, and you need to judge that for yourself on each deal, then you need to think about other, seemingly innocuous clauses to give yourself protection. When you speak to your Strategic Accountant about real estate investing talk to him/her about these real estate contract clauses; 1. Contract name: "You and/or nominee" (let’s you change the name you buy the property in if you have to) 2. Subject to partner’s approval: Vendors don’t generally see this as a problem because it’s to be expected that you’d want your partner to view the property before you bought it. But did you notice that it didn’t say “spouse” it said “partner”. So this could be a business partner, a consultant, a financial partner or whoever you like. Try to make the timeframe for this in your real estate contracts as long as you can without it becoming a problem. 3. Subject to building inspection: This is a standard clause in real estate contracts and you should follow through with a thorough building and pest inspection. Remember though that legally you cannot use this clause as a reason not to proceed unless there is a genuine issue that you were unaware of at the time of offer. Bottom line is don’t rely on this clause. 4. Finance clause: If you choose to use one you should state the financial institution that you intend to use and the loan amount. If you don't then there may be cause for the vendor to seek you to get finance from the pawnbroker down the road (as an extreme). Bottom line is don’t leave the finance clause “open ended”. 5. Due diligence: This one is sometime difficult because it’s a bit less common and the vendor might be confused by it. You need to state what the due diligence is for and for investment properties it usually to check the market rent, existing leases, rental records, fire and safety report and so on. If it’s a multi-unit dwelling you might include this one. 6. Fire and safety: In some states you could also seek that any fire and safety issues to be corrected at the vendors expense. Again vendors don’t like this because it’s open ended and generally not a good one to include if you’re trying to close a good deal. It depends on the situation but it’s probably best to use the due diligence clause to view the fire and safety report and then re-negotiate if there’s a problem. There are many more contract issues that your Strategic
Accountant should cover with you. If you'd like to learn more about real
estate contracts then click here. This strategy works perfectly with our “Buy, Value Add and Hold” strategy that we’ve discussed thus far. The difference is that instead of buying the property, you lease the property with an option to buy. This gives you control of the property but without the need to get a loan until you decide to buy the property sometime in the future; at the pre-agreed price. Real estate contracts should allow you to value add to the property, just the same as before, and sub let the property i.e. rent it to someone else. So you lease the property from the vendor, value add to it cosmetically, and then sub let it to someone else. You increase the value of the property, you increase the income from the property and you delay paying for the property to some future point in time BUT at a price fixed today. It’s a terrific strategy particularly for people short of cash. In fact this type of investing has some particular benefits to everyone, like delayed payment of taxes until you buy the property. So I’d encourage you to learn more about it and decide if this suits you better than the normal form of purchasing property. Take a look at lease/buy real estate contacts and learn how they work. Here is a site dedicated to the lease/buy strategy. It
really is beginning to take off as a viable property investment vehicle
so check it out and see if you like it.
Lease Purchase Contract
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