The cheap money that is available today is keeping the market active, so to get into some of the good properties that are available, we need to act quickly. But sometimes acting quickly we can overlook important details. We also want to make sure we give ourselves options while doing some due diligence on the real estate we are purchasing with contract clauses for real estate. Recently, we were asked, “what are the most common conditions that agents use in offers, or better yet, what are they, why and what are the benefits or drawbacks of each?”
Contract Clauses for Real Estate
We’ll focus on how to structure the most widely used contract clauses for real estate to protect yourself properly.
It will prove more valuable, as these will likely be the ones you come across the most.
By far, the two most common contract clauses for real estate in an offer to purchase a property are making the deal conditional on some sort of inspection, and obtaining financing.
Other more common ones that we see for residential deals are:
- Conditional on lawyer’s review
- Conditional on obtaining insurance for the property (due to the wide variety of investments available)
- Request a survey from the seller
- Requesting times to access the property before closing
- Other documentation requests from the seller (ex. Electrical Safety Authority Certificate, work permits)
- Requests to have the seller repair or upgrade certain aspects of the property
- Requests for the leases of any current tenants and past payment history
- Requests for confirmation of operating expenses for the property (typically with multi family properties)
There are other contract clauses for real estate that you may see some brokerages insert for their protection, often removing any liability for any square footage discrepancies, property tax adjustments, etc.
But to us, the contract clauses for real estate above are the most common, although their use is sporadic compared to the home inspection and financing clauses.
Here’s the deal with contract clauses for real estate:
From an investor standpoint–or any buyer for that matter–we want to include at least one clause that gives us the opportunity to back out of the deal if we decide, after further investigation, it is not to our liking.
Used correctly, the financing and inspection clauses give us that ability. Some investors want to make the deal conditional on “a partner’s approval”, but that sends up all sorts of red flags to any realtor or seller with a bit of experience, because there are too many variables that it covers.
The logic behind using “a partner’s approval” condition is that it acts as an escape clause under any circumstance whatsoever, because your partner could not like the colour of the paint in the bedrooms. That is reason enough to back out of the purchase.
This is even more of a challenge in an active market like ours, where buyers are not that hard to come by. So when submitting offers you need to be a bit strategic, while protecting yourself at the same time.
We are always going into every potential purchase with good faith, so that is why we don’t use contract clauses for real estate like this since it impacts our negotiating power. The fewer red flags that come with our offers, the better and we word our inspection and financing clauses in such a way that we are protected.
For example, some realtors will insert into agreements a clause making the deal conditional on specific financing guidelines, perhaps a 5 year mortgage at 4% amortized over 30 years.
These details are stated in the agreement.
Now, after due diligence, you may not be able to use the financing clause to get out of the deal because if someone finds financing for you with those terms, that condition has been fulfilled.
When we put in an offer, we make the financing conditional satisfactory to us as the buyer.
What ends up being satisfactory could be 99% of the purchase price at 0.5% interest spread over 35 years. There is no one else to determine that but us.
So in essence, it acts like an escape clause without raising the red flags to the other parties involved.
The home inspection works the same way.
Some people will put in a standard home inspection clause that gives the seller the chance to fix any issues that come up, at which time you are locked into the purchase.
We stay away from wording the clause in such a way, because in that scenario we are transferring control of the process to someone else. If the need for a major repair came up during an inspection, we may not want to proceed to buy the property no matter who fixes it, and we want to be the ones to make that decision.
We always prefer to keep as much control of the process as possible.
The other point to remember when dealing with contract clauses for real estate is the more you put in, the less attractive the deal becomes to the other party. A couple small requests are one thing, but we have seen people requesting mountains to be moved in only a couple days.
So when presenting an offer to the other party, we prioritize and go for what we feel is necessary to make the deal work for us. For instance, if the seller doesn’t have the survey we requested, it doesn’t matter much to us, unless we had plans that were specific to that, which is rare. It was more a ‘nice to have’, not a requirement, and if we really wanted the property and it was in demand, we may not even ask for that until after we have a conditional deal and are moving forward with our due diligence.
That touches on some powerful negotiating tactics we have learned over the years, which have benefited many investors.
The idea with contract clauses for real estate is to prioritize your needs, protection, repairs, property visits, legal advice, whatever they are, get enough of them that make the deal work, while always protecting yourself from being locked into a deal you don’t like.
Our first priority is always protecting ourselves without scaring the seller by going overboard, you may want to strongly consider making it yours as well.
Visit our other site www.therealestaterenegades.com for more real estate investing articles.