Contracts are the cornerstone of your investing operations & growth. But understanding and optimizing them is a missed opportunity for most real estate investors.
In this episode we’ll cover:
- The contract drafting mistake putting your off-market deals at risk
- My 6-step contract review process
- Key terms all contracts to purchase real estate need.
My Six Step Real Estate Contract Review Process
- First, I (or really my paralegal in this case) Confirms all details are correct to this transaction. You’d be surprised how often carry over language get’s left in deals or just mistakes happen. Check names – and importantly everyone that needs to sign is included- we talked a bit about that in last week’s episode, spelling – yes sounds stupid but it can cause title search issues, property addresss, county, lot and block number.
- Next, I go through the contract with a lens of what type of property is this. If it’s a stand alone property, do I have language around surveys, and boundary lines, and questions about waste disposal type like septic vs. sewer. Or if its multifamily – do I have questions about zoning status, existing tenancies, or utility split set up. If its a condo do I have questions about the bylaws & budgets, common utilities, and so on. Because each of these types of properties have different due diligence concerns
- After that I review the contingencies. These are usually financing and appraisal, property condition, and title. If there’s tenants in the property I like contingencies around them too. These need to be tightly drafted and appropriate to the situation and of course representative of the negotiation that took place. I’ve noticed that this is an area that isn’t usually fleshed out well in initial negotiations and it can be frustrating as a buyer to have to go back to the seller to talk about all the different ways you can kill the deal. Because that’s really what these are. I definitely suggest telling the seller that these will be in the contract. I personally do this in a conversation as to how the sale is going to go. Like I’m going to get a mortgage and that’s going to require an appraisal….. and I’m also going to inspect the property to make sure there’s no deal breaker type of issues. And then say you’ll have this language included in the contract as well.
- Then I review for representations, warranties and disclaimers. This is true whether you are the buyer or seller. From the sellers perspective are you promising things about the condition of the property that you can’t really promise? From the buyer’s side are you promising things financially that aren’t really in the bag? On the flip side, are there things, promises, we need to hear from the other side. For example, a really simple one is that the seller has authority to sell. Sounds obvious. IT’s not. I can tell you this term has blown up in seller’s faces when an estranged spouse turned up on title or a child was added to the LLC business and isn’t onboard or aware of the sale. Or gosh this one – where some guy put his kid like literal 8 year old on title as an estate planning tactic (this is a horrific strategy never do it btw) but he had to go to court and get a 3rd party guardian appointed for the kid to facilitate this sale which took MONTHS.
- Next, I review and usually add deal specific language. Like are you including any personal effects in the sale like furniture which is common in short term rental sales. Are any credits included? Are there any zoning or ancillary matters than need to be cleared up prior to closing.
- Then finally, I review for just key contract terms to make this thing complete. What is the choice of jurisdiction if we need to sue each other. Can we get attorneys fees? Is this the entire contract? Are there any third party rights – like to realtors?
READ THE TRANSCRIPT OF EPISODE EP. 73
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DISCLAIMER: Although Bonnie is an attorney she doesn’t give legal advice without a dually signed engagement agreement. All episodes of Good Bones Real Estate Investing are educational and informational only. The information discussed here isn’t legal advice and isn’t intended to be. The information you listen to here isn’t a substitute for seeking legal advice from your own attorney
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