I see it all the time. New investors writing offers all the time that pretty much guarantee they will lose their earnest money or, sometimes, their entire deal.
In particular, there are three mistakes that investors most commonly make when writing their real estate purchase agreements.
Making any one of these mistakes will put you at risk to lose your earnest money (at the very least).
Let’s go over each mistake and how to easily avoid them.
#1 Real Estate Purchase Agreement Mistake
-Writing Your Offers as “Cash”
DO NOT write your offer to purchase as a “cash” offer unless you can prove that you have all of that money in your own personal bank account.
I don’t know why, but a lot of investors are getting this advice from somewhere to submit all their offers as cash offers. Not only is this extremely dishonest (unless you actually have the money in the bank), but it is killing their deals flat, too.
Once the bank finds out that you’re pulling a real estate loan for the deal, they almost always will deny your offer on the grounds that you misrepresented your position.
The Solution: Write your offers as “financing”, “private financing” or “hard money” offers. This way you don’t risk having your deal summarily rejected over one tiny issue.
#2 Real Estate Purchase Agreement Mistake
-Making Your Deadlines Too Close
There are two dates on every deal that you should know better than your own wedding anniversary:
- The Inspection Deadline
- The Loan Denial Deadline
Like with mistake #1, missing either of these deadlines could cost an investor a deal and their earnest money.
Here’s what drives me nuts about this one: INVESTORS WRITE THEIR OWN DEADLINES INTO THE OFFER!
OK . . . I’m sorry for All-Caps-ing you like that. I feel better now. It’s just frustrating for me to watch investors lose money on deals over an issue that they have so much control over.
The Solution: Give yourself plenty of time on deadlines.
Especially on your first deal, I recommend that you give yourself two weeks on the inspection deadline and one week after that for the loan denial deadline. It’s better to miss a deal completely than to enter a deal and lose money on it.
#3 Real Estate Purchase Agreement Mistake
-Making Your Earnest Money Non-Refundable
There are a number of reasons why you could lose earnest money on a deal. Missing one of the deadlines mentioned above is a good example of how that might happen.
When investors lose earnest money, they’re that much less capable of moving forward on their next deal and making a profit—which is the whole point of REI.
Granted, sometimes deals just go bad, and earnest money is usually the first casualty. But you can avoid this from happening in most cases.
The Solution: Write your real estate purchase offer so that your earnest money is refundable.
Most investors that I talk to don’t even know that they can do this, but it’s true. Usually, you want the refund language in your offer to center around the common reasons why you might choose to exit the deal, such as an inspection coming back with unsatisfactory results.
You’ll no doubt make many mistakes starting out; we all do! However, if you can avoid these three top mistakes you’ll be so much further ahead than your competitors!