Contract Tips To Consider When Buying or Selling Investment Properties

Real Estate Investing Audio CD

Have you ever signed an offer to purchase a property and wondered if there were any other clauses that could be beneficial to include?

Don’t worry, you’re not alone. Most investors have been through this at one point in time.

On the flip side, some people become so comfortable with the acquisition process that they don’t put many additional clauses in the agreement at all.

This can be helpful in a multiple offer situation, to make your offer look clean and simple. But you could be putting yourself at a bit of risk depending on the property.

Here are a few things you’ll want to consider when shopping for your next property...

1 Associate Value To Work

Often, there will be work for the Seller to complete as part of the deal.

Usually, it is small, but even the smallest of jobs can sometimes lead to surprises.

It is common to put a clause in the agreement to outline this.

For example, The seller agrees to have the roof re-shingled prior to the completion of this transaction. Both parties agree that the work will be completed by a licensed contractor and a copy of the final invoice shall be provided to the buyer prior to closing.”

The wording of the clause can change, but it is clear that the seller must re-shingle the roof.

What happens if they don’t?

Typically, the lawyers for both parties will speak to one another and disagree over what should happen. As the buyer, you may be able to withhold some money to cover the expense to do it yourself, or to ensure the seller does end up doing the work. But when it comes to money people can have a hard time agreeing on an amount.

A good habit to get into is to put it in the contract. In this case, we could add on to the end of the roofing clause.

“Should the work not be completed prior to closing both parties agree the Buyer will withhold $_____________ until the work has been completed at which time…”

This way, if something isn’t done, as agreed, then it is very easy for your lawyer to protect your interest with the value you associated.

2 Having A Final Inspection

Most often when purchasing properties there will be 30 - 60 days between the time an agreement is in place, and when you actually take possession.

During this time, how do you know if the seller has done the things they promised? Has something happened to the home that you should know about?

This is where the final inspection or walkthrough comes in.

It’s a great habit to have the seller agree to provide access to the property for you to take one last look prior to the closing date. It could be something as simple as:

“The Buyer has the right to inspect the property prior to the completion for ______________ to a maximum of ____ (ex. 2,3,4) times, at a mutually agreed upon time. The seller agrees to provide access to the property for this purpose.”

Now you are able to book a time to see what state the property is in a day or two before closing.

If issues arise (uncompleted work, hidden damage, etc.) you can let your lawyer know and they can take it from there.

3 Picking the Right Closing Date

When buying a rental property, the day of the month you take possession can have a big impact on what your bank account will look like. Here’s how this works:

Most rental properties would have collected some sort of last month’s deposit. This money will be transferred to you on closing. However, you’re also entitled to prorated rent for the month you take possession of the property.

To maximize what you have left after monthly expenses, it can be a good idea to close a few days into the month. This way, you get the large majority of rent for that month while minimizing your expenses.

Closing a few days into the month normally causes the first mortgage payment to be early in the following month, and often it is an interest only payment. By the time that payment comes along you will have another month’s rent in hand as well.

So to recap...

By doing this, you can potentially have last month’s rent, the majority of first’s month rent, and second month’s rent in hand before your first mortgage payment.

It’s a nice way to build a little reserve fund without having to dip into your own pockets.

It’s amazing the difference a few days can make!

4 Protecting Your Profit When Selling An RTO

Selling a Rent to Own property to a tenant buyer can be a simple process.

The lawyers contact each other, come up with some paperwork, and complete the transaction.

But how that paperwork is completed could have a big impact on you if something happens before closing.

Often lawyers put the initial deposit from the tenant buyer and any rent credits in the agreement as a deposit on the property.

However, most agreements are worded that the deposit is refundable should the buyer walk away from the deal.

But that isn’t the case here, and you want to make sure that is clear. One of our lawyers uses this clause.

“The Buyer agrees in the event this Agreement of Purchase and Sale is not completed as a result of the Buyer’s inability to do so, for whatever reason, the Buyer shall forfeit the deposit to the Seller.”

This way the nonrefundable down payment and monthly credits you have collected remain that way. If something happens with financing or anything else, you are protected.

 

5 Honouring the Original Agreement

As you’ve seen from the last point, there are a few extra things to consider when selling an RTO property.

Another one is the integrity of the option agreement.

Because you are putting an Agreement of Purchase and Sale in place when the tenant wants to buy, it could change some of the rights involved on the property, should everything not go according to plan.

To ensure that is not the case and everyone (landlord and tenant) is protected you can use this.

“The Agreement of Purchase and Sale shall not alter the rights either party may have under the said Option in the event the aforesaid Agreement in not completed.”

This way if the sale doesn’t end up happening, things revert back to the option agreement, should it still be in place, and it is clear there was never any type of other rights around the property that changed hands or came into effect.

As with any legal information, it is wise to run it past your lawyer to ensure that you are protected for your exact situation.

These are some of the most common things we see investors overlook, but depending on the exact property or circumstances there are other things that may need to be addressed. Both your coach and lawyer are there to help you through this process, answer any questions, and give you guidance from their experience.

Most closings go very smoothly and no issues arise, but in the event that something did, it is important to have yourself protected.

It’s amazing how easily a few sentences can save you money, time, and unwarranted stress. Sit back, relax, and let the contract do the work ;-)

                  

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