My good friends down at the Broward Real Estate Investors Association sent me an article that questioned whether a real estate contract is even relevant anymore. If you’re a real estate investor in the Fort Lauderdale real estate market or for that matter and market in the Country, you have to wonder if this isn’t a valid question.

In the “good-old-days” (which were never really were that good), parties entered into verbal contracts and the term “man of his word” was equated to integrity. Soon after men stopped writing on cave walls they realized that one person’s understanding of an agreement could be completely different from someone else’s. When the written word became common, agreements were written down by scribes and later made into laws. In those days, the attorneys/lawyers charged by the word, not the document – amazing how things change!

Anyway, we are going to examine some of the more important parts of a Purchase and Sale Agreement and why not understanding what you are doing can cause you some real headaches.

First, let’s level the playing field by saying that we only use an “AS IS” FAR/BAR as a Purchase and Sale Agreement (“P & S”). This contract is the gold standard in the Florida real estate industry as it has been approved by the Florida Association of Realtors (“FAR”) and the Florida Bar (“BAR”). We will not use a FAR contract because we are not realtors and we see that FAR contracts can vary greatly between brokerage firms.

The other option for a P & S Agreement is one supplied by a real estate guru. In many cases the guru has sold the investor on the idea that his “bullet-proof” contact will work in any state in the United States and will protect the investor because it is so one-sided. But it doesn’t end there; some gurus have contracts that are for just buying and others just for selling a property. Wow, sounds pretty good, right?

The reality is that these contracts will most likely not be upheld in the court system. The only time you need the contract to be iron-clad is when you have a problem. It’s cheap insurance to have the “real-thing” instead of a second rate substitute. I am sure that some readers will feel offended because they paid so much for the guru’s course, but what I am telling you is the reality of the situation. We use AltaStar.com as our source of the FAR/BAR contracts that we use.

In addition, when we are making a presentation to a seller, we emphasize that we use the FAR/BAR instead of some “mystical” contract designed to protect an investor (our competition for the deal) and not the homeowner. We are happy to have the seller show our contract to his attorney for review because his attorney knows what to expect and only has to look at our added clauses or addendums.

The first important aspect of the contract is “Who is the Buyer?” You should determine who the Buyer is going to be as soon as you are ready to put the contract together. If you let the Seller draft the P & S Agreement you are starting on the wrong foot because a homeowner will go to his attorney and an investor will make the P & S Agreement so onerous you MAY NOT want to sign. If you are uncomfortable writing your own P & S Agreement, get over it ASAP and start practicing using the clauses that will keep you out of trouble.

In general, the Buyer should be either a corporation, an LLC or a Land Trust. There are other possibilities like a couple or a single person, but I’m not taking the time here to discuss the liability of buying a property in your own name, nor am I going into controlling the property with other types of contracts in this short article.

If the buyer is a land trust the Trustee will have to be an individual. If you use yourself, you have somewhat defeated the purpose of having your ownership of the property to be invisible. We use either the Seller’s name on the trust or the street address for simplicity purposes and potential seasoning issues. The most important part of the trust name is actually the date of the trust.

>From here on out and for the rest of this article I am going to tell you exactly how not listening can kill a deal or come so close to killing it that even I get frustrated:

I tell the wannabe mentoring student how to do the contracting and how to use the land trust to purchase the property. The land trust gives us options to transfer the property and save closing costs and time to another investor and the beneficial owners are anonymous. He chose a name that has no relationship to anything except something he is thinking about. No real problem here but I should have known he wasn’t listening to me.

Next we discuss the REO asking price and I tell him what to offer. He does as instructed but comes back to tell me he has a Buyer in hand and the listing agent (his personal friend) says he can get the property for his bid plus $5,000. I tell him it is a stunt but he persists that it is still a good deal and he wants to raise the bid. I explain that if his Buyer is good to go ahead and raise his bid to be sure he gets the deal.

I don’t like to say “I told you so” but the next day the agent comes back with “Multiple offers came in and you must give me your highest and best offer”. He raises his offer again and not surprisingly he gets the property. I ask to make sure he can write the contract and he says “Of course. I’m a realtor”. He does write the contract but I don’t see it until the deal starts to implode!

I had carefully explained that we do not give deposits for more than $100 to individual sellers and $500 to $1,000 for REO deals because of the risk of losing the deposit if we couldn’t close. When I finally see the contract, he put $100 as the escrow deposit which was crossed out by the listing agent and replaced with 10% – over $10,000 in this case! Naturally, I breathe deeply and ask if he is going to put up the $10,000+ and he says “I have No money!”

When I ask where he expected to get the deposit he says “use the buyer’s deposit.” I have an issue with that because if the deposit is held by the listing agent – even if we are within our inspection period, we still have a liability to return the deposit even if we don’t get it back from the listing agent.

Next, he wants to market the property before we get the signed contract back which we won’t do either. We do not market properties we do not have an equitable interest in – and that is that. Other investors do market properties with the intent of putting them under contract later or collecting a deposit they may or may not return.

When I finally see the signed contract come back from the lender, I notice a few more irregularities – the escrow agent and the closing agent are different, allowing us no control of the closing. And we will have to do two closing in separate locations to make the deal work – meaning closing with our money (or hard money) and them going elsewhere to close again with the end-Buyer.

I had been told that the listing agent (his friend) would reduce the deposit but it was not done. He got virtually zero days inspection and his Buyer got 5+ days. This means that we have to put up the deposit and wait for the Buyer to do inspections. The only problem with inspections is that the Buyer wants the water and electric turned on and we are not the Owner of Record. So he goes back to the listing agent and gets him to get the utilities turned on.

In the interim, we get another Buyer who can instantly close for cash, and he loves the property! The “Almost Student’s” Buyer is finicky and has almost unreasonable requests for information and inspections. Our cash Buyer doesn’t want to give a backup contract and the original contract with the “Almost Student” is still live and his Buyer gives a $5,000 deposit as the first half of his $10,000 deposit.

When I finally see the P & S Agreement between the “Almost Student” and his Buyer I notice the closing agent is the Buyer’s choice. This is really nifty, because now we have to close at two different agents’ office, who are both adversarial and on different days. But as they say “It just keeps getting better and better” – the second deposit check comes into our office and it clearly has written on its face “Refundable Escrow Deposit”. This would not be an issue normally except the “Almost Student” did not use our “No Refund of Escrow Under Any Circumstances” clause.

If there wasn’t a descent profit in the deal we would have let it go. Actually it is a sweet deal even if we have to get another buyer so we will complete it.

What’s to be learned here?

1.) Understand your exit strategy BEFORE you decide to try and buy a property or put it under contract. Otherwise, you could lose a great deal of money because of no money to close and having to carry the property to avoid seasoning issues.

2.) Do not believe your Buyer is truly a Buyer until you have a signed contract and a deposit. He is only a “Suspect” until he commits MONEY!
Remember – The age-old wisdom “Buyers are liars and Sellers are liars – whenever you are on the opposite side of the table”.

3.) Don’t get suckered into “We have had multiple offers, give us your highest and best offer”.

4.) Control the Escrow Agent and more importantly, choose the closing agent – even if you have to pay for the title policy.

5.) Get a reasonable inspection period, at least 5 days, and preferably 10 days for REO’s. With homeowners get 15 – 30+ days for an inspection period.

6.) Have your escape clauses to get out of the contract and not lose your deposit. More importantly, get ABSOLUTE forfeiture of the escrow deposit if the Buyer fails to close.

7.) Don’t be intimidated by anyone telling you that there are other buyers just waiting to get the property. If it’s true there will be other opportunities. Just last week we had a listing agent come back to us after he called our offer ridiculous. He called us back to plead with us to re-submit it, which we did for $4,000 less, and we got the deal.

There are a couple more lessons above and when we close both sides of the transaction I’ll let you know what else you should have gotten from this exercise.

We are beginning to see more and more properties selling with option agreements in place with the transactions taking place directly between the Buyer and Seller with the “Option Lien” being shown as a “Satisfaction of Lien” on the closing statement. These are upper-end properties in the $500K to $1.3 million dollar range which should help the median priced home in the near future.

We couldn’t have said it better ourselves!