BiggerPockets

I just finished reading this article:

http://www.biggerpockets.com/renewsblog/2006/11/25/wholesaling-real-estate-basics/

"If you end up not being able to sell the property before you are expected to close then you utilize your contingency and walk from the contract."

I pulled this quote above from the article, I am curious to know how a contingency would read, can someone give me an example of a contingency used in a contract?

Thanks

Hi Chris
Thanks for your quick reply
I see your point very clearly, I am very new to REI and don't understand a lot of things, yet...

This article was written by Joshua Dorkin, BiggerPockets founder. I am looking for people on this site to pull knowledge and indirect experiance from such as yourself and Joshua. I am sure Joshua was just using this as an example to help new REI enthusiasts such as myself.

I definitely see your point and agree that this can be and is a reputation killer, like backing out of a handshake.

Even with this new knowledge I am still curious for a contingency example just for my own knowledge gain...

Thanks

Well....(i say rather sheepishly)

I should have read that Josh was the author of the article --- he knows a thing or two about real estate i think!

I still stand by the point that you can probably get a pretty good contract to use that will have out clauses in them to protect you, but you do not want to walk from a property just before closing because you do not have it sold. That can be a killer!

I'm quite sure that is not what Josh meant...

Jon is right Alan. Definitely look for more recent articles or threads on wholesaling and don;t be afraid to ask questions of people on BP who are doing business. IN 2006 things were much more fluid and some things such as financing were much easier to come by and there were a lot more buyers for properties. All the more reason to be really precise on the areas and price points you are looking to wholesale so you will never have to worry about a contingency clause.

You should always look for deals that fit your buyers criteria that way you don't have to worry about contingencies. Also if you don't have buyers and the deal is solid you should have no problem finding them.

Only use the contingency in case one or all of your buyers aren't interested in the property for some reason such as lack of funds or too much on their plate. The best one IMHO is the inspection clause which gives you a certain amount of time to inspect the property and back out if you find something wrong.

Thank you all for your time and input.

I can see that using a contingency clause irresponsibly would give a black eye to ones reputation. I also understand from my experiance that when I bought my main residence, I had an inspection clause. I had the opertunity to not buy the house if the inspection was not to my liking. This is a contingency clause.

From reading the article I had the impression that this was a legal way you gurus protect yourself (which it is) and could use it as needed but I was unaware of the negative light it is shown and you don't use it very much if at all.

My question now from reading some of the posts above is even though the article was written in 2006, was using a contingency clause to back out of a deal more acceptable back then? If the market is in better shape and more banks are willing to loan does this give an inverstor more power to back out of deals? I am not sure how the 2006 market and todays market would differ on reputation?

I like the term Chris used "out clause" and the way it was worded:

"I still stand by the point that you can probably get a pretty good contract to use that will have out clauses in them to protect you, but you do not want to walk from a property just before closing because you do not have it sold. That can be a killer!"

Walking away from a deal because you don't have a buyer is a reputation killer but if the deal has flaws such as a bad foundation that the seller did not disclose turns this deal into a money pit, one has the right to walk away. This should not hurt one reputation because this is just protecting your business and/or your investors. Like looking at cars on a used car lot. If the engine no go, I no buy.

This has opened my eyes to the fact that if I have a deal and a buyer and if I am good at my job I will never ever need to use a contingeny.

Not 100% knowing what Curt means, I will use his words. Using a contingency is a minor league move and shows inexperiance as the major league players know what they are doing, they find the deal and make the money on the buy not the sell.

Knowledge is power, thank you all

Have you had an attorney confirm that? Based on discussions I've had with a couple different attorneys (in my state, at least), I'm not sure that's the case.

Once you have a property under contract, you have equitable interest, and at least in my state, that provides you the legal right to market the property, regardless of whether you have a license or not.

Plus, once you have the property under contract, you're not marketing the property on behalf of the seller (which WOULD require a license); instead you're marketing your interest in the property on behalf of yourself, which I would be surprised to find is illegal.

I'm not an attorney, and perhaps even our attorneys wouldn't agree, but I'm under the impression that a contingency to assign wouldn't be considered illegal.

Once you have a property under contract, you have equitable interest, and at least in my state, that provides you the legal right to market the property, regardless of whether you have a license or not.

Plus, once you have the property under contract, you're not marketing the property on behalf of the seller (which WOULD require a license); instead you're marketing your interest in the property on behalf of yourself, which I would be surprised to find is illegal.

That much is correct. You can market your equitable interest in the property and sell (assign) the contract to a 3rd party, providing the contract does not say otherwise.

All contracts, except personal services contracts, are assignable unless they specifically state otherwise. If you assign a contract, your liability to perform remains with you and your assignee, unless the contract specifically states that you are released from liability upon assignment.

What I'm saying is that the language in the contract about "buyer" and "seller" implies a duty to perform as such. If you include a clause or a contingency that is external to that duty, then it changes the nature of the contract into a listing agreement.

A contingency or provision that relieves the buyer from the duty to perform as a buyer and substitutes a duty to perform as if he were a broker will change the nature of the contract into a listing agreement. If you're not licensed or don't have limited power of attorney, then you're breaking the licensure laws.

Just because the title of the contract says "Purchase and Sale Agreement" doesn't mean that it is a PSA. The nature of the duties specified within the contract determine what kind of contract it is.

It really doesn't matter what a few attorneys may say in advocating their client's position. What matters is that contract law is what it is. If you have no duty to perform as a buyer, then your duty is to perform as a broker. That's why providing earnest money deposit as fully liquidated damages for breaching your duty as a buyer is required. If you use an "inspection clause" to bail out and get back your EM, then you must have found something in the inspection that you don't like. You must have a valid basis for exercising the contingency clause.

That's why I use "sole subjective discretion" in the inspection clause, so they can't argue with me that I don't like the available property insurance quote or I don't like the shape or size of the lot. It's not subject to further negotiation; the deal is dead for a valid inspection reason and I get back my EM.

Your contingency clauses must be based on material issues with the property or your own capacity to perform your duty as a buyer (subject to your subjective opinion). You cannot change your duty to perform as a buyer into a duty to perform as broker, unless you have proper legal credentials.

By the way, as an optionee in an option contract, you do not have an equitable interest in the property. You only purchased the unilateral right and option to buy the property for a set price for a set price. You're not obligated to buy the property, therefore there is no equitable interest conveyed by the option contract. To get that equitable interest, you must exercise the option and sign the attached purchase & sale agreement to create a bilateral obligation.

An assignment provision by itself is not a contingency ("buyer has the right to assign this contract without further approval of seller.").

A provision that changes your duty to perform as a buyer into a duty to perform as a broker requires legal credentials. If you have no duty to perform as a buyer (i.e., you get back your EM if you fail to find a buyer), then you are acting as a broker. A 3rd party assignee is not (yet) a party to your contract with the seller. Therefore, your ability to find a 3rd party is immaterial. It doesn't matter whether the contract identifies you as a "buyer", because you are acting like a broker.

A broker has a duty to perform best efforts to find a 3rd party to buy the property, the broker has no duty to buy the property, and if the broker fails to find a buyer the broker has no financial responsibility to the seller. Your "contingency" to find an assignee to buy the property places you into the exact same duty as a broker, not a buyer.

If it looks like a duck and quacks like a duck, it's a duck.

As an optionee, yes you have a marketable interest (the "right to buy"), but it is not equitable interest in the property. Your "equitable interest" is in the option contract, which is personalty, not realty. Be sure your option contract grants sufficient possessory rights to enter, to inspect, and to show the property to your prospective assignees.

Ryan,

The US Bankruptcy court has concluded that an unexercised option contract has no equitable interest in the property. An option contract is unilateral, not bilateral, and therefore does not require a broker's license for the clear reasons explained earlier. 'Nuff said about options.

As for the other comments, I believe your rebuttal is inaccurate. If you want to use contingencies or provisions in the manner described above to substitute duties, then GO FOR IT! I am not sharing in your profits or losses, and I am not contemplating sharing a defendant's chair with you.

There are certain legal principles regarding contract law that are universal. One of those principles is that the nature of the contract is determined by the behavior of the parties to the contract, not necessarily what is written in the contract. If you substitute your buyer's duty with a broker's duty and then you behave as a broker, then you are a broker.

The contract is only relevant when there is a dispute, then a judge will read the contract to determine what duties were agreed. The judge will see that there is a seller duty and a broker duty, but no buyer duty. Then the judge (or the seller's attorney) will ask to see your broker's license or limited power of attorney. Are you prepared for that situation? I think not.

I didn't want to start a religious war, even though I knew some folks have strongly entrenched beliefs about how they are operating their business and writing their own contracts. I know there are many folks using contracts in way that is highly questionable and they haven't yet been caught. Most of them don't realize they are misusing contracts, and they will be understandably annoyed or angered at my remarks.

If your attorney has approved your contract language, then who am I to argue with your choice of attorney? Just be sure to ask your attorney how he would attack that contract if the parties were reversed.

My remarks are based on many hours of real estate law education and debate with the best real estate attorneys. Their goal is keep me out of the defendant's chair, and they've done a great job so far.

And I forgot to mention my standard disclaimer in my previous remarks, so I'll mention it here: I am NOT an attorney, so ignore everything I just said and do whatever the heck you want.