Real Estate Articles » Starting Out Investing

Escape Clauses And Getting Out Of Contracts

By: Matt Gerchow
Submitted: 12:00PM on Friday 15 August 2008

GETTING OUT OF CONTRACTS

When it comes time to get out of a contract you will want to have set things up correctly ahead of time.

Let the seller know that you have to meet with your business partner and go over the contract with them. Always project your next meeting with your business partner to 3 (or more) days into the future. This will give you enough time to pitch the property to your list (wholesale) or do your proper due diligence (rehab or rental) before putting yourself at risk.

As far as escape clauses go...you want to use a standard state contract but alter a few words in your favor. When I first got started I would show up with these seminar contracts and the sellers, while motivated, would tell me they cannot in good conscious sign my contract.

In Florida we used the Far-Bar, removed the state info so we were not in violation and then changed specific clauses throughout the contract to protect ourselves, give us the right to make up to $1,000 in repairs and even list the property on the MLS should we choose to do so. In Washington, New York and New Jersey we applied the same principles.

Our contract has been reviewed by at least 30 attorneys (that we know of) and has only made it to court once. It has been on the closing table of at least 250 transactions and I am certain many other investors have copied it after challenging me on it.

Enough about that, here are some very specific 'escape clauses' if you will.

Let's go over each of the items in detail.

1. The ability to back out for whatever reason. The amount of time (20 days) is notated in another section of the contract. The wording here is crucial. Notice it says, "Buyer's Satisfactory Inspection". The standard state clause requires you to have a 'licensed' individual inspect the property and submit in writing the reasons why the property is not acceptable. We have also changed the contract on page three "Inspections, Repair and Maintenance" to reflect the same.

2a. Forty-five days from acceptance. Lets face it, this is a very cut-throat business. I am a very nice person, but I don't like losing money. If you are not able to close within the forty-five days but can close on the 47th, 'Acceptance' is defined as the date of the final signature to the contract. If necessary you may sign the 'Final Corporate Approval' and extend the contract as needed.

2b. This is a what I like to call a 'friend-builder' clause. By signing the contract they are agreeing to get the tenant out before closing. You will help them along the way but essentially they are committing themselves to a closing date sometime in the future after the tenant is out. This keeps them from letting the contract expire because they were unable to evict their tenant.
Important to notate: Your preliminary and final corporate approval will only hold up in court if you remember to sign the 'final' corporate approval on every contract before closing. Not doing so could subject you to liability in a court case. In other words a judge may consider this only a weasel clause if you do not practice it throughout your business. Still, 80% of all court cases never make it in front of a judge and it will cost a seller $1,500 to start a lawsuit for $1,000.

Some of my recommendations may sound harsh. You need to keep in mind that this is business, not a popularity contest. Just like you, I don't like surprises, but when they come, I like to be prepared. Being prepared can mean the difference between handling the situation with a phone call or losing $25,000 in a lawsuit.

Our clauses were developed over time through trial and error. Error meaning they cost us money. For those of you that have fear about putting properties under contract, I fully understand. Hopefully as cowboys we have Pioneered before you and 'caught the arrows' so you are now able to setup camp.

One of the stories I used to relate to new investors is an analogy of Brinks armored car service. Funny, because here in Bogota, when Brinks makes a pickup, they completely triangulate the place, three guards with fingers on triggers. It feels more like a robbery than a courier service.

The analogy says Brinks does not start over in each city and experiment with their policies and security measures. They use the same systems in Pahokee, Kansas as they do in Brooklyn, New York. The toughest cities determine the rules.

Whichever contract you choose to use, make sure it has been tested in tough markets. This will keep you out of court and let you live a more peaceful life.

Hope this helps,

Matt Gerchow
Currently In S. America for 4-Months...Next Stop…Thailand for 6-Months

At 04:51PM on August 15, 2008 - Joseph Sullivan said...

matt, i understand the clauses your talking about, however the section where your talking about "buyers satisfactory inspection", then you talk about another state contract having different wording or language, how am i suppose to know what the contract says? i looked where the links were for copying different agreements but, didn't see a purchase agreement?, please explain?