Everything You Need To Know About Real Estate Contracts For Investors

Consideration

In most real estate contracts, there has to be some sort of consideration that needs to be given in order to bind the contract. In real estate, typically earnest money is used as consideration. Other things could be used as consideration as well but the standard practice is using earnest money. When it comes to making an offer on a property; you have got to put down some earnest money.

To protect yourself a little bit; I would like you to say that the earnest money would be delivered within the three days of acceptance. The reason for that is it could become really difficult and expensive for you to make an earnest money check every time you are looking at a property. Let’s say; you are making five offers a day and you do a $1000 of earnest money, you have to put out like $5,000 a day.

I think the smartest thing to do is to say, “Hey, we’ll do a $1,000 or $5,000 of earnest. However, we will deposit the earnest money three business days after the time, you will accept the offer.” You can show them a copy of the bank statement in order to ensure that you’ve got the money and say, “We are willing to pay but we don’t want to pay until we know that you are going to accept the offer or not.

If you will accept the offer, we will just need a couple of days to get the money deposited. It’s not a big deal.”

I find that work extremely well when setting up your real estate contracts. It does a couple of things:

1.    It gives you the ability to make multiple offers without having to cover the earnest money on those.

2.    It also gives you a little bit of time to get the money put into the account.
So, once the bank comes back and says, “Yes, we are going to accept your offer.” You have got a couple of days to re-look your numbers, drive by the property again and make sure that you really feel good about it and then write your earnest money check.

Now, if you have written your real estate contract properly, which I would recommend that you write for an inspection’s due diligence deadline and I also recommend that you write for a loan denial deadline. We have talked about this before but I want to harp on it again.

You shouldn’t be making cash offers unless you have cash in your physical bank account. In worst case scenario, you could lose the contract or you could be sued by the bank or you lose your earnest money and/or you could get super liquidated damages. Lots of this stuff is pretty rare and I don’t think that’s a big deal but the loss of your earnest money is a big deal.

The best case scenario if you write a cash offer and you are planning on getting hard money lender is that they make you change your contract and say that you are actually getting financing.

The problem is that for some reasons someone just came up with this bright idea that banks or credit unions prefer cash offers over financing offers. I would say that they may about a small percentage; however, they care about price more than they care about what type of financing you are getting. Price is the most important thing that they are looking at.

I really recommend being upfront with the banks and the sellers and say, “I’m getting financing but I’m getting an unconventional. It’s a hard money lender and I have already got pre-approved. Here’s the copy of my proof of funds letter, which shows that they have got the money in reserve and it’s ready to go.   He has got my earnest money and its rock and roll on this thing.”

I really think that’s helpful because a lot of people write their real estate contracts as cash and then, we do the loan docs and send them over and then the banks say, “No, we are not going to close on this because it was supposed to be a cash offer.” Now, some banks might not care and some gurus out there may tell you that the banks don’t care and they don’t even look at it at the last minute.

But I am here to tell you that they do because we have multiple situations where that happened. Let me also tell you that the banks care about the price a lot more than they type of lending that you are getting.

Obviously, if the bank has a choice between $100,000 cash and $100,000 financing offer; they will probably going to choose that $100,000 cash offer. However, if it is a difference of $100,000 cash offer and $150,000 financing offer; the bank is going to take financing offer any day of the week.

No questions on that because it’s more money. If you think of the cost of money that the banks have and the bail out from the money that they get from the government or the Federal Reserve, that type of money is pretty cheap for them. So, the holding cost is not something of major concern for them.

How much Earnest Money should I put in?

It really depends upon your area and it depends upon the price of the property. I typically make a $1,000 earnest money on the offers between $70 – 100,000.

If I am dealing with a property worth of $ 250,000 – 300,000, which is very rare; I can make a $5,000 earnest money. I know a lot of our people in California are making $5,000 – 10,000 earnest money just because the pricing is higher. I think the best way to know is to just talk around and see what people are doing with their earnest money and get an idea.

I think the answer to that question is going to be area by area but I would recommend talking to some agents or some other investors. I don’t like to be cheated on earnest money. I am not going to lose my earnest money. I want to protect my earnest money by different ways through my real estate contract:

1.    I am going to make sure that I get three days before earnest money is due and I am going to re-look at the numbers and re-look at everything during that time.

2.    Through the due diligence deadline. I am going to go out there, inspect the property and give myself a week or 10 days to do that. During that time, that’s going to give us (lenders) time to go look at the property and give you a final estimation of how much we can do and make sure those numbers are reliable.

If we can’t do as much as you want; you can come up with a difference. If we can’t get you an alternative funding source or gap financier, we will let you know that we can’t make it work. That gives you an opportunity to pull up right then before your inspection deadline. You want to make sure that you have inspected the property and make sure you know what’s there.

Make sure your contractor’s bid is 100% solid. That’s an important thing to ensure that you have 2-3 bids on everything you are doing on a property before your inspection deadline. If you will do that; it’s going to save you thousands of dollars. Make sure you have all that done before you go past your due diligence deadline. If you go pass that, we can get you out of the loan denial deadline because we will deny the loan as we don’t have the ability to make up the difference.

One thing with us is that we are always able to fund on a property but the question is, how much we can fund. What’s the dollar amount we can fund for you and does that dollar amount work for you? Hopefully it does and if it doesn’t, then you can come up with a cash difference.

We have some alternative ways such as gap financing or unsecured business line of credit, which takes some time to get. It doesn’t work on your immediate transaction. If those things don’t work for you, then we will give you an opportunity where you can just get out of your contract.

How long should I give myself to closing?

It depends upon how experienced you are. The more experienced you are; the shorter the time period you can go. The less experienced you are; the more the time frame you are going to go. If you are experienced; I would say 3-7 days inspection period is perfect but if you aren’t that experienced, I would say 10-15 days of inspection period is good.

I would recommend an additional 10-15 days on loan denial deadline and then closing 30 days later.

If you are not experienced, you should sign a 30-day contract, which means 30 days from the time you make an offer till the day you end up closing. Let’s say, the first 10 days are for your inspection period, the next 10 or 15 days are for your loan denial and then you have 5 more days to end up closing, which is a total of Day 30. I think it’s the best way to do that.

If you are really experienced, I would say a week for due diligence, a week or probably 10 days for loan denial and then you can close after a few days of loan denial deadline. This means that you can give yourself a 20-day real estate contract.

A lot of people get caught up on the time frames as the banks are really trying to unload stuff and the time frames are important. I think they are as important as the price is and I think an extra 5 days or something is not a big deal. But I’ll tell you what a big deal to the bank is.

If you tell them you are going to close in 30 days and you don’t; they hate that and lots of times, they will give you an extension or sometimes, the contract will say, “If you will go over, we will going to charge you $50 or $100 a day.” You just want to make sure that whatever you have made an initial offer, you have got to fall through on that because that’s a big deal with banks. They hate extensions.

Don’t solely trust a real estate agent when it comes to pricing a property!
I think real estate agents are wonderful, helpful. And they can serve a lot of purpose for you. One pitfall we see quite frequently is that people taking so much advice from the person who is selling them a home.

There is somewhat a conflict of interest. An agent is giving you an advice as they are going to receive some money or commission on that. For example, an agent is going to make a commission and he is telling you what the value of the property is, he really doesn’t has any risk in it because he is going to get paid and would be gone whereas a lender has a lot of risk if he gives you a loan because he is on a hook for it.

Anytime you are getting advice from an agent, you have got to take it with a grain of salt. I think it is a great place to start but I think you need to do your own research as well. You cannot take what an agent is giving you as it is. In lots of cases, an agent isn’t involved in a transaction.

So, if an agent isn’t getting paid for brokering the property or anything and the only thing they are getting paid for is may be the amount that you pay them such as $50 – 100 to look at the value and come up with something. They have no alternative motive and there is no way that they can benefit. All they are trying to do is to give you a good number at your request.

What those agents typically do is that they find the highest priced properties that they can possibly find. They will find 2 or 3 of those and give them to you, so you can get excited about the high number.  What you really need to do is sit down with them or sit down with another agent to look at it and do some of the research on your own.

First of all, you need to sit by yourself before you talk to your agent to get the values and you look at the three lowest actives and three lowest solds that has happened in the area, which are in move-in ready condition.

After that, if you will subjectively compare those against the subject property and think that whether you want to have this or that and make some modifications based upon that. Again, the key to this is starting with the least expensive properties and working your way up.

Most people are going to start with the most expensive properties and work their way down. That’s not the way to do it. You want to start with the least expensive and work your way up. When you find three homes that are in move-in ready condition, those are going to be your comparables.

One thing that lots of people miss is they think that they have to compare a fixed-up property to a fixed-up property. In this market place, you are not going to get a whole lot of money with a whole bunch of repairs on a property then you are for the property that is in move-in or ready condition. There are three different classes of properties:

i.    Properties that are in need of work
ii.    Properties that are move-in ready
iii.    Properties that have been updated or upgraded

Now, a property that is in need of work is never going to be compared to a property that is in move-in ready condition or the properties that have been upgraded.

But a property that is move-in ready condition is a good comparable for the property that has been upgraded. The reason for this is that the buyers are looking for value and least expensive things that they can do.

We recommend that you fix up the property and sell it on the higher end of the move-in ready properties, so you can sell them faster and you won’t have that much hold time and you save a ton of money. That’s kind of a trick to this where you buy low and sell low and you sell a product that’s in good shape.

Lot of people says, “If I am going to sell low, then I am cutting myself out of the potential profits.” But the fact of the matter is that the market is going to dictate what the property is worth and if you would list the property too low, I guarantee you that you are going to have multiple offers.

If you don’t have multiple offers or you don’t have the property sold fast, you didn’t list it too low. If you would list it too low, you’ll get multiple offers and if that’s the case, you can sell it more than the asking price. It happens lots of time.

There are many people who think that the asking price is like a gospel or bible, which cannot be changed. The fact of the matter is listing price is just the starting price.

If the listing price can go down; it can also go up. We sold lots of properties more than the asking price because we receive multiple offers because there is a competitive bidding situation. That’s an ideal situation for you as a real estate investor to be in. The reasons for that are:

i.    You are going to sell it faster. You are going to have it out of your head faster.
ii.    You are going to save a whole bunch of interest that you have to pay a hard money lender like us. I want you to save interest. I want you to turn and burn, make some money and go get another one. That’s a huge benefit.
iii.    You won’t have sleepless nights and you don’t have to worry about that you have to sell that house. You are just going to put that up and within few days, you get another real estate contracts.

Did you undersell the house? Maybe, by a thousand or two but if you get in an auction situation, that’s really good because in auction situations, people get excited and they overbid. Any time there is a competitive situation, it usually ends up in the favor of the seller and not in the favor of the buyer.

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