100 Percent Financed
Risks are just a part of doing real estate. The larger the purchase, buying a property for example, the greater the risk. Get used to it, things happen. And, unfortunately, many of those things are out of your control. So as an investor you need to protect yourself at all times. Remember, everyone involved in the process typically has their own best interest at heart. The realtor, wants their commission, the lender wants their fees, and the seller wants the biggest check they can get at closing, so who's job is it to protect YOU? Simply put, it's your job.
With your earnest money deposit and what could be a growing list of other costs on the line, you must protect yourself with a business savvy Purchase & Sale Agreement.
Here are the 6 must-have contingencies you need in every real estate contract:
Financing is easily one of the most important contingencies that should be addressed in any real estate contract. Without money, the rest of the contract is useless. There are quite a few mortgage products on the market so it's wise for you to carefully search for the best interest rate and terms. But regardless of your efforts and at no fault of anyone involved, there are still several things that can happen during the application and approval process which could ruin your deal. What if the mortgage, for whatever reason, isn't granted by the lender? Not really your fault, but again, things happen.
A brief clause in the contract that addresses financing can be a shield for you. It would allow the buyer, you, to be released from the contract in the event that financing is not secured. In other words, the buyer will be released from all obligations if the mortgage is not obtained. Think about that... you'd receive your earnest money back without penalty.
A property title search in real estate involves a thorough process of searching and finding any documentation evidencing the history of a piece of property. This is Real Estate 101, and you should certainly include title search in any real estate transaction. So soak this in: always verify the seller's absolute right to convey title to the property free of encumbrances, errors, liens, or any restrictions.
You can do this by employing a knowledgeable title attorney. They'll do a thorough search on the history of the title while you focus on covering your assets with shrewd legal language. This contingency in the real estate contract states that if, during the title search, any liens or clouds on the title appear, the potential buyer is allowed to rescind the contract with no penalty.
An appraisal determines the market value of a property. The amount is usually considered to be the amount of money that the property would sell for if placed on the market. This is different from a property inspection; an appraisal determines the home's selling value while an inspection is a careful look at all of the major structures and systems in a home to ensure that they work and are up to code.
Most mortgages are contingent upon financing, as stated earlier. The mortgage company will generally depend on an appraisal to guide the amount of money that is granted to be mortgaged. If the appraisal comes in below the price of the property, most lenders will require the buyer to either make up the difference or ask the seller to lower the price. Show off your business acumen here, but discreetly. Simply add a contingency in your contract that makes it clear to both you and seller that if the property does not appraise at the asking price, you, the buyer will be allowed to cancel the contract, receive the deposit money back and not be penalized.
4. Seller Documents
A wise and what should be standard practice for investors is to carefully analyze all financial documentation from the property in question.
We recommend gathering the following documents BEFORE submitting your earnest money deposit. Request ALL of the following docs within 5 days of executing your real estate contract:
- All Leases
- Past 2 Tax Returns
- Rent Roll
- Profit and Loss Statements
- Trailing 12 of Utilities
- Utility Bills
Real estate is not an exact science. And we're not saying don't move forward with the deal should you not get 100% of the documents listed above. We are saying, however, that these documents reduce your risk and provide detailed insight on a property's financial performance. So if you do move forward without gathering 100% of the documents, know the risk that you are taking and have an exit strategy if you choose not to move forward. Your exit strategy will come with the addition of this contingency which requires the seller to produce all of the documents listed above.
5. Property Inspection
Do this: secure a reputable and thorough property inspector. They should be educated and extremely knowledgeable as it relates to examining properties. A good inspector will see evidence of things like damage to the foundation, moisture in the walls, and other significant issues that may not be readily visible to the average person.
A contingency addressing the results stemming from a property inspection is important because it allows the you to clearly stipulate the dollar amount and extent of work that you are willing to invest in a potential investment. MAJOR KEY: cosmetic repairs aren't a huge deal, as long as the costs aren't overwhelming and the management of the repairs won't become a day job. But major health and safety repairs should be avoided.
6. 100% Occupied
Investment properties should be purchased for the sole purpose of returning cash flow. Because an investment contract in real estate is unique, it is entirely reasonable to ask that the property is 100% occupied at the time of closing. Ask by adding this money-making contingency in your contract. If, for any reason, this contingency is not agreed upon or the property is not occupied, the you as the buyer have the right to back out of the deal. Vacant properties don't make money!
If these 6 contingencies are addressed in your real estate contract, you will be well protected from the major, deal-changing problems that could occur in buying process. And don't forget, attorneys draft contracts. Use a trained professional, a real estate attorney, to assist you in drafting contracts specific to your state.
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