One of the most complicated tasks when starting out is knowing the legal ramifications of what needs to be in a wholesale contract. This article will be a great foundation to start with. However, laws are different in each state, so the best advice in this article is to consult an attorney.
Starting out can be expensive with legal fees. In my experience, I paid over $1,800 in legal fees to generate contracts I use for lease options. Of course, most newbies starting out do not have that kind of money. I will go through the most important content that need to be added in your purchase contract.
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Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Buyer & Seller’s Name
I know what you’re thinking: Of course this need to added. But there are times when someone claiming to be the owner will try and sell a property they do not own. This can happen both intentionally and unintentionally.
There are some people who are uninformed and believe because they are family, they can sell the property if a love one passes. This is how someone may try and sell a house they have no legal rights to. In cases such as this, the property will have to go through the probate process. This is done if the deceased died intestate (without a will). The family member of the deceased may try and sell the house.
It is important that you have the rightful owner agree to sell the property. Before writing the contract, it is essential to check the tax records to ensure the individual agreeing to sell the house is actually the owner.
Again, this may seem elementary to some, but it is important. Everyone need to agree upon the property that is being sold. We like to take things a step further and add the legal description of the property. This is done because there are many new developments where we live, and some properties have the same address.
This does not happen often, but there is a possibility. The municipality use the legal description when addressing the property on the deed. This is done because there may be errors, so to minimize those errors, it’s good to use the legal description as well as the physical address.
Terms & Conditions
Make sure everything is spelled out. It is better to have everything in the contract and not need it than to need it and not have it. The terms and conditions will outline everything you and the seller are agreeing to. You’ll want to include the following:
- Purchase price
- Close of escrow date
- Title company/closing attorney
- As-is verbiage
- What conveys with the purchase
This information is vital; sellers tend to forget what was agreed upon and will try to cancel the contract. Verbiage that I add in every contract: “All personal property left in/on the real property is deemed the responsibility of the buyer.” We add this verbiage because when agreeing to buy the property as-is, this limits the seller from trying to return to the property after closing. This is why what you convey with the sale of the property is important. Many times when buying a property as-is, the seller may leave a lot of personal property behind. Adding this clause in the contract will give the buyer the authority to dispose of everything that is left behind.
It is very important to spell out as much as possible. Sellers will tend to ask questions, and if something is not added in the contract, then it wasn’t agreed upon. For instance, the seller may state, “I want to leave all appliances,” then in the contract you will add all appliances are to convey with the sale of the property. Not only will the seller get amnesia, but the family members may try and step in to present problems as well.
This is the key ingredient because especially for a newbie, the fear is “what if?” What if I can’t find a buyer? What if the seller finds out? What if my offer price is too high? What if, what if, what if.
The inspection period is your answer to all those questions and many more. The inspection period gives you the opportunity to find a buyer. It is good to have the inspection period a minimum of 10 days, but again, everything is negotiable, so try and push it out as far as you can within reason.
The inspection period also gives you the time to send the property to cash buyers and see what they are willing to pay for the house. This will give you the chance to renegotiate if your agreed upon price is too high. So for example, if you agreed to buy a house for $80k and you sent it to a few buyers at $85k and they are willing to pay only $75k for it, then you know you need to renegotiate with the seller to get the property below $73k at minimum to make some money. This will not always work, but it’s a 50/50 chance it will. If you’ve built great rapport with the seller, then 9 out of 10 times, they will decrease their amount.
Use the inspection period to your advantage. Leveraging the inspection period is critical in any wholesale transaction.
Earnest Money Deposit (EMD)
In most states, there must be some consideration or transfer of value for it to be a binding contract. So the buyer has to give up something and the seller have to give up something. This consideration does not always have to be money. Your consideration could be “we agree to dispose of all trash left in the property.” There is a transfer of value because you can monetize the cost of the personal property removal.
Related: What Exactly is Real Estate Wholesaling (& What Does a Wholesaler Do Every Day)?
When you are dealing directly with the seller, the earnest money deposit can be as low as $10. Yes, $10. The earnest money is good faith collateral stating you are going to exercise your right to purchase the property. In the event I do not purchase the property and I am outside the parameters of the inspection period, I forfeit the earnest money.
Why should you keep the earnest money as low as possible? This is important because in the event you are unable to find a buyer within the inspection period time, you can continue to market the property up to the close of escrow to find a buyer. Hopefully you will find the buyer, but if you do not, the earnest money is then forfeited.
Signatures & Date
Someone recently asked me whether the agreement should be notarized. That was a great question, and my answer to them was no. The purchase contract does not need to be notarized; however, I’ve seen contracts where the buyer and the seller did not sign. If this occurs, obviously you are not under contract, and you do not have a binding agreement. Lastly, please make sure you have signatures and a date on the contract.
These are a few things that must be incorporated into a contract. Again, it is important to have an attorney review and approve the documents before using them. The contract can be very detailed or it can be very basic depending upon your preference. As long as you have a strong foundation, your contract can be an effective tool.
In a few weeks, we will discuss what is needed in the assignment contract. If you have any questions, feel free to comment. I enjoy the comments — it gives me a chance to see what I may have overlooked.
Investors: Anything you’d add to this list?
Be sure to leave a comment below!