Blogger’s Note – The son of a good friend of mine is looking to get started in real estate investing. He would like to become a landlord and find properties that offer positive cashflow to replace his current income. His goal is to ultimately become a full time real estate investor. I have been giving him some advice as he tries to liftoff his real estate investing and I thought it would be interesting to share some of his questions and my answers on this blog as I’m sure there are others out there who have the same questions. I hope to publish more questions and answers in the future. Click here to see the previous question and answer: How Do You Know You Picked The Right Tenant?
Question: When writing a purchase contract do I need a lawyer? Is there a template I can use to keep me safe?
Answer: You do not necessarily need a lawyer every time you make an offer, but you should at a minimum have a you contract reviewed by a local attorney who specializes in real estate law before you first use it. After that first time, you have your template ready to go.
Real estate purchase contracts can come in all shapes and sizes. They can run for dozens of pages and contain so many fancy words and legalese that they are basically incomprehensible to the average person. Is such a complicated contract needed for the average real estate sale and purchase?
No, it is not at all.
The purchase contract that I use runs about a page, two at the most. In my opinion, all of that other stuff found in most contracts just mucks up the works.
To begin explaining my answer, I first need to describe what exactly a contract is. A contract is a document outlining something that two or more people agree to do, in this case sell and purchase real estate. A contract does not have to be very formal and can even be drawn up on the back of a cocktail napkin if an agreement is reached while sitting at a bar. Once signed by each party, a cocktail napkin contract could be legally enforceable and similar documents have been enforced by the courts in the past. But I think you might want something a bit more formalized.
For any contract to be valid, including real estate contracts, they need to contain only two things. The first is terms that all parties to the contract agree to. The second is what is called consideration, or something of value that is exchanged. That is it. The complexity in contracts come come into play with the terms that all parties agree to. Those can be as simple or as complicated as you want them to be.
What Should Be In Your Purchase Contract?
I like to keep things simple, and I think you should as well. This is because it is much easier to get to yes during negotiations if things are simple and easy to understand. Legalese and complicated clauses confuse, and a confused mind often says no. That said, there are several clauses that need to be in your purchase contract. To get started, here are some items I would consider placing in your real estate purchase contract.
- The date of the contract.
- The names of buyer and seller.
- The address and/or legal description of the property.
- The purchase price
- A clause requiring the seller to satisfy any liens (loans or otherwise) they may have on the property.
- Wording on how you want the property to be transferred (usually by warranty deed).
- A clause requiring the property title to be free of defects and able to be transferred to you.
- Wording that allows you to inspect all areas of the property, even if there are tenants living in the property, within a reasonable time frame.
- A clause dealing with the transfer of appliances and fixtures. Sometimes people will take all of the plumbing and light fixtures unless you say they stay. The legal term to use is appurtenances.
- A clause requiring you to obtain “adequate” financing.
- A clause giving you an out if you need it. You do not want to be 100% tied to anything. Give yourself a way out if you need it. This is often referred to as a weasel clause for obvious reasons. Never use this clause except for very good reasons.
- A time frame for the completion of the contract.
- A form of consideration which is usually some form of an earnest money down payment.
That is it.
There may of course be special conditions or clauses with each purchase. Each property and each seller offers unique circumstances that may necessitate further agreement. For example, a seller may want to keep a certain light fixture or you may need to get prorated rents and deposits from existing tenants. You may (and should) also want get the written leases for existing tenants. You might also want to discuss who will pay closing costs and transfer taxes just to name a few.
But all in all the above clauses, along with a place for you and the seller to sign and date, should make for a pretty sturdy contract.
Developing Your Purchase Contract
There is no standard purchase contract that will work in all areas of the country, so a general template is not a good idea. A good place to start formulating a template purchase contract for you to use is by doing a Google search for real estate purchase contracts in your state. Look at a few and then cobble them together. Or, ask around at your local real estate investor’s club. Many people will be happy to share or at least share a source. You might actually want to have several different types of contracts on hand as the terms needed for a property with and without tenants can be quite different.
Whatever you do, remember that I am not an attorney and I cannot give legal advice. I am just a real estate investor who will tell you that it is wise to have whatever you are doing reviewed by a competent professional. Clauses and traditions will vary from state to state and even from county to county. Find out what people are familiar with in your area by talking with a local real estate attorney. This may cost you a few hundred bucks on the front end, but it will be well worth it. Plus you need to build up a relationship with a good real estate attorney anyway and a review of a purchase contract is a good place to start.
What does your purchase contract look like? Are there any particular clauses you like to use? Please share with your comments.
