What You DON’T Want in a Real Estate Contract
This is a compliment to the previous 7 Components of a Legitimate Contract. We point our sellers to these two articles so they can help make an informed and intelligent decision. And it makes it harder on those shady, wannabe investors!
Have you heard the old saying, "Sometimes knowing what NOT to do is as important as knowing what to do."? I have used this line of thinking to help me make minor decisions like "where to eat?", to huge decisions like "what is our overall company strategy?" So, I thought I would compliment the last post 7 Components of a Legitimate Contract with a post about what you do NOT want in your contract. After reading these two posts, you'll be able to spot 99% of scammers and cons a mile away!
- One or two page contract: If the contract is NOT the TREC contract, or it’s only one or two pages, then it is most likely a one sided contract; meaning it’s only protecting the buyer, not you the seller! If the contract doesn’t have the TREC heading (above) then do NOT sign the contract!
- Deceiving clauses in the special provisions: In one page contracts, and even in the TREC contracts, you want to look for a clause that will let the buyer cancel at any time. These clauses might look something like this:
- “Offer contingent on partner’s review or inspection”
- “Offer contingent on third party inspection”
- “Offer contingent on the Sunday weather!”
- If you find wording like this in your contract demand that it be removed!
- Furnish sellers disclosure: Section 7B SELLERS DISCLOSURE NOTICE states whether you as the seller have to furnish a seller’s disclosure to the buyer. Number three of this section should be checked stating: "The seller is not required to furnish the notice under Texas Property Code." This is a sneaky trick investors/buyers use as the ace up their sleeve in case they don't want to purchase the property after the option period. Ensure to provide the buyer a seller’s disclosure if it is stated in the contract, otherwise the buyer could get away without closing and not have to pay you a penny! If nothing else, be clear if you must furnish one to the buyer or not (a real estate agent will make you fill out out).
- Low or no earnest money! These are the funds the buyer gives you as the seller if he/she fails to purchase the property AFTER the option period has expired. To ensure the buyer is serious, require at least 1% of the purchase price, this is standard among the real estate community. Example: if you are selling your property for $100k then require at least $1,000 earnest money. If you are selling your property for $150k then require at least $1,500 in earnest money. Do NOT let the buyer talk you out of putting down earnest money. The earnest money is applied to the purchase price at closing so it shouldn't make a difference to the buyer if he/she is going to close, and not wholesale the property to another investor. Tip: You can also use this as a negotiation tactic by giving the buyer something he/she wants while requiring more earnest money. If the buyer is serious more earnest money will not matter!
- Long option period: The option period is the time allotted for the buyer to perform his/her due diligence (inspections, estimates, etc.), and back out with only forfeiting the option fee (usually 10% of the earnest money). As long as the buyer backs out within this option period he/she is only required to give you (the seller) the option fee and the buyer keeps the earnest money. Therefore, it is important to keep this period short, 10-15 days at most! If you extend the option period any longer then the buyer could try to shop your property out to investors with no intention of actually buying the property.
There you have it! Five things to avoid in a Texas real estate contract. If you’re selling a property these few pointers could be worth thousands, or even tens of thousands, of dollars. I hope this helps you, the property seller, demystify the components of a contract, and prevent you from being taken advantage of by scammers and crooks.