Contract Tips To Consider When Buying or Selling Investment Properties
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…” 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 ;-) Some Cool Free Stuff... Step 1: Grab a free digital copy of our real estate investing book, Income For Life For Canadians, right here. This book has been downloaded over 22,597 times and has helped hundreds of investors kick-start their investing with simple and straight forward strategies that you can implement right here in Canada. You'll also receive our weekly [Your Life. Your Terms.] email newsletter with the latest investing updates and videos. Step 2: Free Weekly Investing Videos & Articles: Get the latest updates and join the over 10,000 other Canadians enjoying the weekly [Your Life. Your Terms.] email newsletter. The email is sent out each Thursday. And as a little bonus we'll give a FREE digital copy of the book, Income For Life For Canadians, too! Your Life. Your Terms. Step 3: Free LIVE Investing Class: Do you live in the Greater Toronto or Golden Horseshoe Area? Come out to our next introductory "Investing in Nice Homes in Nice Areas" Real Estate Class. It's 90-minutes and you'll learn a ton - promise!Thousands of investors have now joined us for this class and the feedback has always been amazing.
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.
