Paperwork can be fun too!
Posted 02-12-2008 at 01:23 AM by Stevebuyshouses
Ok, I hate paperwork probably more than anyone out there, however, it is a must for success in our business. You have to master the paperwork, because everything starts there. All of this part of the blog got started because of comments regarding contracts, so that is where we will start.
First of all there is a mentality to contracts that you must think about and figure out first. In any contract situation you must decide and think about what side of the transaction you are going to be on. This isn’t rocket science here, but if you are on the buying side you want your contract to be pro buyer, but if you are the seller it should be slanted to the sales side. The natural concept that most investors start out with is that the contract is what it is, and you can’t do anything about it. You must be able to read and comprehend the language in the contract first, and then you must not be afraid to change the wording to match what you are attempting to do.
So now let’s talked about what makes a contract legal. The main ingredient in a contract is not technically “in” the contract at all. The first and most important thing that you need with regards to your contract is a meeting of the minds. This means that both parties have met talked regarding the deal that is going down and discussed the parameters of what will happen during the transaction. Once the deal has been discussed and the details are verbalized the reducing it to writing will happen, and this is where the contract comes in.
After the meeting of the minds you must have a price that will be agreed upon. Terms of the deal come next and this can be the most diverse, but we get to that in a second. You must set a timeline for what is stipulated to happen, and then have consideration, what most people call earnest money. In most states consideration does not necessarily have to be cash, but it is in most cases. However there is not a minimum or maximum, so it can be as low or as high as you would like. Also during this process you want to stipulate to the title of the property, status of the property, or lack thereof (as is where is) along with any inspections that you may want to have completed. You must decide who will take care of closing costs, and in what percentages, along with where the closing will take place.
So here are some easy questions for you to think about;
If you are buying how much do you want the earnest money to be?
If you are selling how much do you want the earnest money to be?
If you are buying when do you want the closing to take place?
If you are selling when do you want the closing to take place? Are there late fees associated?
How about closing costs?
What about inspections? How long before approval of the inspection if you are selling vs buying?
Who do you want to be able to get into the property if you are buying?
So as you can see there really are two sides to every story, and your side will determine how you want the contract to read. So if you have a realtor can you use your contract? Of course, there is not a requirement that says that you have to use a board of realtors contract. Many of them prefer not to “allow” you to use your own contract because they do not understand contracts, especially yours.
One of the most important parts of your contract is in the signature line; under the line that you sign on make sure you add “Buyer and/or assigns”. This makes your contract assignable. These can be 4 very powerful words if used right.
Some other good clauses for your contracts;
A lien clause;
Special liens against the property shall be paid by Seller, if any.
*This makes sure that when you buy a property any additional encumbrances on the property will be taken care of at closing by the sellers, this applies to tax liens, or mechanics liens etc.
A closing clause;
The sale is to be closed within 30-45 days from delivery of copy of proposed deed and certificate of title to Buyer, or as soon thereafter as said insurable title can be effected, as hereinabove provided.
*The additional time attached is from the receipt of the copy of proposed title which can add a week or so to your time to close, this also protects you if the title is not clear.
Inspection clause;
This contract is contingent upon Buyer’s inspection and approval of the property prior to transfer of title. The buyer reserves the right to personally inspect and give written approval of the described property within 15 working days after the acceptance of this contract by the Seller.
*Another way to add time to your contract, by stipulating the time starting AFTER the approval of the condition of the property. BTW I have never given a written approval of the status of a property!
A financing clause;
This contract is also contingent on buyer obtaining acceptable financing for the subject property once said inspection has been completed.
*This gives you an out if you cannot get suitable financing.
A Deposit or Earnest Money Clause;
Buyer will deposit with Doug Dunning P.C. at Advanced Land and Title Company 1659 Government St. Mobile, Al 36604 $500 as earnest money.
Such earnest money shall be applied to the purchase price and shall represent all liquidated damages in the event that the property is not
purchased.
*One key here is the liquidated damages, if you are not able to close this reduces your liability in the deal.
An Acceptance Clause;
This instrument shall become a binding contract when accepted by the Seller and signed by both Buyer and Seller. If it is not accepted and signed by Seller prior to 2 working days from the date mentioned below, this contract shall be void.
*This gives the seller a deadline to perform by when you give them a written offer.
As is Where is Clause;
Seller and Buyer acknowledge that this is an “As Is” offer to purchase and Seller makes no warranties as to the condition of the electrical,
plumbing, heating and air conditioning devices. Refrigerator, air conditioning unit, if any, and stove shall remain and are considered part of the
sale.
*As is where is and you want to stipulate to keep the appliances.
Access Clause;
Buyer shall be permitted access to the premises for, but not limited to, inspection and showing appraisers, contractors and inspectors.
*You have to be able to get investors in to be able to sell something wholesale.
Marketing Clause;
Seller agrees to allow Buyer to Market the subject property in any and all ways including signage in the yard, MLS, flyers, and word of mouth.
*This allows you to market the property and sell it before you have to buy it.
This is what we call our Hurricane Clause;
This contract is further conditioned upon delivery of the improvements in their present condition, and in the event of material damage by fire or
otherwise, before closing. Buyer may declare the contract void and shall be entitled to the return of his earnest money, or Buyer may elect to
complete the sale.
*This is in case there has been damage to the property since you originally contracted it. Does not mean you can’t renegotiate though.
These are some parts of my purchase contract that we use on a daily basis in my office, so it is tried and tested in battle, I am sure you can come up with other
things clauses on your own that would work well. The key here is to not be scared to change things on your own and to try stuff out, I promise there is not any
way you can mess something up that you cannot fix. Just remember to read, it is all English after all.
First of all there is a mentality to contracts that you must think about and figure out first. In any contract situation you must decide and think about what side of the transaction you are going to be on. This isn’t rocket science here, but if you are on the buying side you want your contract to be pro buyer, but if you are the seller it should be slanted to the sales side. The natural concept that most investors start out with is that the contract is what it is, and you can’t do anything about it. You must be able to read and comprehend the language in the contract first, and then you must not be afraid to change the wording to match what you are attempting to do.
So now let’s talked about what makes a contract legal. The main ingredient in a contract is not technically “in” the contract at all. The first and most important thing that you need with regards to your contract is a meeting of the minds. This means that both parties have met talked regarding the deal that is going down and discussed the parameters of what will happen during the transaction. Once the deal has been discussed and the details are verbalized the reducing it to writing will happen, and this is where the contract comes in.
After the meeting of the minds you must have a price that will be agreed upon. Terms of the deal come next and this can be the most diverse, but we get to that in a second. You must set a timeline for what is stipulated to happen, and then have consideration, what most people call earnest money. In most states consideration does not necessarily have to be cash, but it is in most cases. However there is not a minimum or maximum, so it can be as low or as high as you would like. Also during this process you want to stipulate to the title of the property, status of the property, or lack thereof (as is where is) along with any inspections that you may want to have completed. You must decide who will take care of closing costs, and in what percentages, along with where the closing will take place.
So here are some easy questions for you to think about;
If you are buying how much do you want the earnest money to be?
If you are selling how much do you want the earnest money to be?
If you are buying when do you want the closing to take place?
If you are selling when do you want the closing to take place? Are there late fees associated?
How about closing costs?
What about inspections? How long before approval of the inspection if you are selling vs buying?
Who do you want to be able to get into the property if you are buying?
So as you can see there really are two sides to every story, and your side will determine how you want the contract to read. So if you have a realtor can you use your contract? Of course, there is not a requirement that says that you have to use a board of realtors contract. Many of them prefer not to “allow” you to use your own contract because they do not understand contracts, especially yours.
One of the most important parts of your contract is in the signature line; under the line that you sign on make sure you add “Buyer and/or assigns”. This makes your contract assignable. These can be 4 very powerful words if used right.
Some other good clauses for your contracts;
A lien clause;
Special liens against the property shall be paid by Seller, if any.
*This makes sure that when you buy a property any additional encumbrances on the property will be taken care of at closing by the sellers, this applies to tax liens, or mechanics liens etc.
A closing clause;
The sale is to be closed within 30-45 days from delivery of copy of proposed deed and certificate of title to Buyer, or as soon thereafter as said insurable title can be effected, as hereinabove provided.
*The additional time attached is from the receipt of the copy of proposed title which can add a week or so to your time to close, this also protects you if the title is not clear.
Inspection clause;
This contract is contingent upon Buyer’s inspection and approval of the property prior to transfer of title. The buyer reserves the right to personally inspect and give written approval of the described property within 15 working days after the acceptance of this contract by the Seller.
*Another way to add time to your contract, by stipulating the time starting AFTER the approval of the condition of the property. BTW I have never given a written approval of the status of a property!
A financing clause;
This contract is also contingent on buyer obtaining acceptable financing for the subject property once said inspection has been completed.
*This gives you an out if you cannot get suitable financing.
A Deposit or Earnest Money Clause;
Buyer will deposit with Doug Dunning P.C. at Advanced Land and Title Company 1659 Government St. Mobile, Al 36604 $500 as earnest money.
Such earnest money shall be applied to the purchase price and shall represent all liquidated damages in the event that the property is not
purchased.
*One key here is the liquidated damages, if you are not able to close this reduces your liability in the deal.
An Acceptance Clause;
This instrument shall become a binding contract when accepted by the Seller and signed by both Buyer and Seller. If it is not accepted and signed by Seller prior to 2 working days from the date mentioned below, this contract shall be void.
*This gives the seller a deadline to perform by when you give them a written offer.
As is Where is Clause;
Seller and Buyer acknowledge that this is an “As Is” offer to purchase and Seller makes no warranties as to the condition of the electrical,
plumbing, heating and air conditioning devices. Refrigerator, air conditioning unit, if any, and stove shall remain and are considered part of the
sale.
*As is where is and you want to stipulate to keep the appliances.
Access Clause;
Buyer shall be permitted access to the premises for, but not limited to, inspection and showing appraisers, contractors and inspectors.
*You have to be able to get investors in to be able to sell something wholesale.
Marketing Clause;
Seller agrees to allow Buyer to Market the subject property in any and all ways including signage in the yard, MLS, flyers, and word of mouth.
*This allows you to market the property and sell it before you have to buy it.
This is what we call our Hurricane Clause;
This contract is further conditioned upon delivery of the improvements in their present condition, and in the event of material damage by fire or
otherwise, before closing. Buyer may declare the contract void and shall be entitled to the return of his earnest money, or Buyer may elect to
complete the sale.
*This is in case there has been damage to the property since you originally contracted it. Does not mean you can’t renegotiate though.
These are some parts of my purchase contract that we use on a daily basis in my office, so it is tried and tested in battle, I am sure you can come up with other
things clauses on your own that would work well. The key here is to not be scared to change things on your own and to try stuff out, I promise there is not any
way you can mess something up that you cannot fix. Just remember to read, it is all English after all.
Total Comments 6
Comments
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Re-post on the deeds, another important piece in the paperwork puzzle.
On to the deeds. The first thing that I advise all investors to do when wanting to get into this business is don’t worry about the sexy stuff and learn the basics. There is nothing more basic for a real estate investor than the deed. This how interest in a property is conveyed. So I will cover most of the deeds that are out there, some may not be in your particular state, but bear with me. The Warranty Deed, the bread and butter of our business(may also be called a General Warranty Deed). This is the way that you want to receive a property when you buy one. This is also the type of deed that most lenders want to see at a closing that they are funding. The basis of a Warranty Deed is that you are warranting the title of the property to the person that you are selling the house to. This is where title insurance comes in. The big boys in the title insurance game such as Chicago Title, and Fidelity write insurance policies much like what you are used to with property insurance. They insure the title of the property against encumbrances or liens that may arise against the property once they have issued the title policy. Of course for this to happen they have some requirements, which include a title opinion which normally will have to be signed off on by a title attorney. A title opinion is just what it sounds like the opinion of a attorney regarding the state of the title on the property. So you as the owner purchase a policy that insures the title on the property against any thing that may come up with the title of the property. All of that being said it is the language of the deed that actually carries the warranty, the title insurance policy just makes you capable of actually doing it. All of your warranty deeds will contain “TO HAVE AND TO HOLD the above described property unto the said Grantees, as tenants in common during their lives and upon the death of either of them, then to the survivor, in fee simple, FOREVER” this is the general warranty language that goes into the deeds. A Special Warranty Deed is when you convey title and only warrant the time that you had the property. This is how you should always convey property if at all possible. There is nothing good that can happen when you WARRANT the title to a property even though you only owned it for a short time, which in our business is anything under 5 years or so. The only barrier to being able to do this is the underwriter for the title insurance company that will be insuring the title. If they will allow it you should do it every time that way, especially if you are fixing and flipping properties. The Quit Claim Deed is just what it sounds like, someone is “quitting” their claim to the property. Basically, this means whatever I have I am giving to you, bad or good. In most states this is how title is conveyed between siblings in probate issues, and between spouses upon divorce. There are other ways as well, but this is the main way that they are used. So what does that mean to us as investors? In most states you can do a search by Quit Claim Deed and see who has recently went through or is going through divorce or probate, which should mean a possible deal. You will also, from time to time see Tax Deeds as well. This means that a property is delinquent on taxes. In some states this is a absolute sale and in others you must have three years of taxes bought in order to get a full deed. In other states there is also a confirmation or quiet title action that then needs to go on in order to receive marketable title. Understand that anyone can convey anything to anyone, but the status of the title subject to that conveyance is where the possession of the property comes in at. So I can give you a deed to the Golden Gate Bridge if I want to and you will pay me for it, but it wouldn’t be worth the paper it was written on. In fact the deed stamp or transfer tax or whatever you have to put on a deed in that area to file it would cost much more than the deed was worth. Tax deeds are tricky, so please get educated on the tax deed situation in your particular state before you buy them. My state has a Vendor’s Lien Deed, which is a deed where a “vendor” or seller finances a property to the buyer and the terms of the financing are in the body of the deed. This avoids a mortgage and note type of situation. This is not better or worse, just different, and you may have some state specific deeds to learn about as well. You will also need to learn about Trust Deeds and Fiduciary Deeds for your investing career. Trust deeds are given to secure an obligation to a property such as a promissory note or mortgage. In many states they use a Trust Deed when a mortgage is created instead of a mortgage. This doesn’t mean that you can’t get a mortgage in that state, that just means that even though they say you get a mortgage it is not recorded that way technically. One point that I like to make is that deeds and mortgages are separate from each other, oftentimes new investors do not understand or grasp the fact that even though title changes hands the mortgage can stay just like it is from a vesting stand point. This happen in a “subject to” meaning that you take title to the property subject to an existing mortgage. A Fiduciary deed is given when the grantor is a trustee, guardian, conservator, or executor. This will take place when you do land trusts, which are great for asset protection purposes, mainly for anonymity. These are the basics of our business, there a few other things, but you cannot be prepared to be in our business without educating yourself on the basics. Doctors need biology, and we need paperwork, so get to learning the basics to get into gear in this business. |
Posted 02-12-2008 at 01:30 AM by Stevebuyshouses
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Thanks Steve!
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Posted 02-12-2008 at 09:36 AM by Aaron85
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So we should sell with Special Warranty deeds and buy with warranty deeds if possible?
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Posted 02-12-2008 at 10:16 AM by Aaron85
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yes thta is what you want to do if at all possible
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Posted 02-12-2008 at 05:12 PM by Stevebuyshouses
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Steve
I'm not sure about Alabama but I know most of my banks that I do REO's for give title via Special Warranty Deeds. Do you think you will have less buyers if you will only offer swd's? Would you let it be a deal breaker? |
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Posted 02-16-2008 at 04:10 PM by TheCloser
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Nope never let it be a deal breaker, just your preference. Mostly, this is anchored on your closing attorney or title company. Some of them are particular about how they convey title to you or other people, but by using an investor friendly one they will understand what you are trying to do.
There is not a lot of difference here, but you are just not warranting it yourself for the prior time. As long as the closer will do it and the bank doing the financing for the sale you are completing does not care, then you are cool. Think about it this way, if you bought it with title insurance and got a warranty deed, and then you convey it via special warranty deed, who is unprotected here? Really nobody, it is just the point that you should not give a warranty deed unless you have to. Again not a deal breaker, but not just not something you want to do unless you have to do it. The only deal breaker is losing money!!! And if the property is a pain even that is ok sometimes. |
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Posted 02-16-2008 at 04:42 PM by Stevebuyshouses
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Recent Blog Entries by Stevebuyshouses
- A Day in the Life/Office (03-16-2008)
- Negotiating Tips (03-12-2008)
- Negotiating The Deal Part 1 (03-10-2008)
- Busy Day (03-07-2008)
- FHA Financing (03-02-2008)
