Education is Protection- Don't Leave These 3 Things Out of a Contract

If you are interested in getting into the building of a rental property portfolio I think it is so very important that you understand or at least start to educate yourself on all aspects of the field.  Even if you don't plan on doing everything yourself, knowing the ins and outs of your business is imperative.  I mean think about it, it is your money that is going into this investment, don't you want the transparency of what is happening or could happen to your money and your investment?

One of the areas that I feel you must educate yourself as an investor is when it comes to the contract that a realtor may put together for a property.  If you're not working with a realtor then you need to be even more aware of the different components that make up a traditional housing agreement so that you don't miss something that could be a detriment to your investment.  Even if you're just buying a primary residence understanding the contract is crucial....Why? Check out the story below. 

QUICK PROOF....we have friends that recently bought a home.  They were novice home buyers, so they knew very little about the process and what should and should not be included with a contract.  Because of this, they relied heavily on their real estate agent to do things right.  While most real estate agents do a great job, and we work with many real estate agents whom we love, at the same time they are human and can make mistakes.  In the midst of their deal, the appraisal happened and came back $15,000 under the negotiated sale price.  The problem....their realtor did not include, or forgot, an appraisal contingency in the contract.  Therefore, for the deal to go through they had to pay the difference between the appraisal and the negotiated sale price; otherwise if they had walked away they would have lost their earnest money deposit of $20,000.  An appraisal contingency is a pretty standard contingency that is included in a real estate contract.  

Moral.....had they educated themselves a little more about the process then they could have potentially caught the missed contingency and saved themselves an extra chunk of cash out of their pocket at closing.

Now do you see why it is important to know what to look for?  I hope so.

So what do you need to look for in a real estate contract?  Check out these 3 contingencies so you can make sure to not lose cash in the future.

1.  Home Inspection

Typically this is a 7-10 day window where an inspector, a contractor, or yourself spends time thoroughly viewing the property for major issues that could potentially be worked into the contract for the sellers to fix. In addition, during this time if any major issues arise that are beyond your scope you are able to pull out of the contract without losing your deposit. If there are some major issues, i.e. roof issues, heating systems, etc.  you can talk with your realtor and renegotiate with the sellers to fix certain things in order for the deal to continue. Some of the things that are checked out in a home inspection are, but not limited to:

-roof

-furnace

-HVAC system

-electrical

-plumbing

-structural elements

-foundation

-pests

-and more...

2. Appraisal 

If you are purchasing a property using financing you will need to get at least one appraisal completed. An appraisal will give you a basis for value to ensure that you are making a wise financial decision. This will be conducted by a third party that neither your realtor nor your lender have any control over. If the appraisal comes back higher then the negotiated price then you can sleep at night knowing you got a good deal.  BUT, if it comes back less than the negotiated price, as our story above illustrated, you have to pay the difference out of pocket at closing or renegotiate the sale price.   As an investor, there are some loan programs that do not require an appraisal, which saves you with overhead costs.  Check with your lender! 

3. Financing

This is typically the last contingency to complete in this process. At this point, you’ve inspected the house and you are clear. The appraisal has been completed so you know the value is there. Now you have to be able to qualify for the loan. Before you were able to have a contract drawn up you would have had to provide a pre-qualification letter to your realtor that states what you are potentially able to qualify for.  The pre-qual letter gives quick insight into what you may qualify for.  The letter is drawn up by your lender based solely off of verbal information.  Once you get under contract, the lender then begins to gather documents to prove that you can actually qualify for the financing. If you experience any major changes that would jeopardize your ability to qualify for the loan you could get out of the contract. Moreover, if the loan program undergoes any changes that would affect your ability to qualify you could also pull out of the contract. In both of these instances you would not lose your deposit.

These are three aspects that you should definitely talk to your realtor about including in your contract when you are going to buy a home, whether it be a rental or a primary.  I truly believe education is power and education is protection.  So protect yourself from future issues by educating yourself on the ins and outs of buying property!

Happy Investing!