Contract Questions - Posted by Latoria (MD)

Posted by Joe (NoVA) on February 01, 2002 at 09:00:24:

I like the idea of the contract limiting remedies for the seller.

J.

Contract Questions - Posted by Latoria (MD)

Posted by Latoria (MD) on February 01, 2002 at 08:09:27:

Hello all,

What does it mean to “tie up a property w/purchase contract?” Does this mean the seller can not accept any other offers? When a contract stipulates “subject to partner’s approval or getting financing”, can you get out of the contract? My concern is that if I submit a contract on a property and I plans fall through, I won’t get stuck. Can a seller force you to go through w/the deal? What are your options? I’m a newbie and I haven’t done any deals yet but I’m ready to submit offers. Any help is appreciated.

Re: Contract Questions - Posted by JoeS

Posted by JoeS on February 02, 2002 at 07:25:09:

Boy did this subject pick up interest. I have to add that even though I have this clause in my contract, I havr never used it in 7 years. I do however on occasion have a property inspected by a contractor, but I have never not closed. All the posters who gave answers are correct, you should never tie up a property without knowing your backup plan. Having such a plan is part of having an overall roadmap of success. The more steps you leave out, the greater your chances are of failure, problems and disaster! I really dislike the term weasal clause. If you are a new investor, tell the realtor you are getting started in the business. They will assist you, as they want to sell you houses.

Re: Contract Questions - Posted by David Garcia

Posted by David Garcia on February 01, 2002 at 16:40:55:

I have a contract called "offer to purchase"
this does not tie the property, its just reserving the right to buy the home at a certian price & time. This can be cancelled anytime & I tell seller that they can keep offering the property.

Once I’m ready to buy, I then sign the “Standard Real Estate Sales Contract” This does tie the property. I do this when I have a buyer approved & ready.

I really appreciate Steves comments about being honest & straight forward with the sellers.

Re: Contract Questions - Posted by Latoria

Posted by Latoria on February 01, 2002 at 09:57:16:

Thanks for all the responses everyone! I do believe I have a better understanding. I am also studying to be a Realtor so I did have a little knowledge already. I do believe that I can get financing if I needed to. I like Steve’s point about honesty and ethical issues.
Thanks.

Dissenting Opinion!!! - Posted by SCook85

Posted by SCook85 on February 01, 2002 at 09:48:59:

Latonia,

I make a ton of offers and I must tell you that I am totally against the so called “weasal” clauses. Just the word “weasal” should tell you a little bit about them.

There are legitimate clauses that you can put into a contract to protect you, and depending upon the type of deal you are doing you should have those clauses in there. But to have a “contingent upon approval by my partner” clause that will only be excercised in the event you can’t flip a home is down right unethical.

As Joe(NoVa) stated about conditions coming together. Well if you want to get out of a contract because you can’t flip it, that is your reason, not because your partner didn’t approve it. In most cases when the “partner” clause is used, a partner doesn’t even exist.

I just do not believe in tying someones home up regardless of who it is for our benefit and not caring about the outcome to them. Quick cash sales are usually what entices motivated sellers to deal with investors like us. If we don’t produce quickly like we say we will, then at times it can be very costly to them.

Ethics and Morals are something that I feel that should be incorporated into everyones business. If you want to get out of a deal because you can’t flip it, then you should tell your seller that you are in the business of whoesaling homes and that you will only purchase their home when you find a buyer. Then you can put a clause in the contract that says “the buyer has the right to terminate this contract if they can not find a substitute buyer within XX days.” Motivated sellers will appreciate your honesty, and understand that you need to be compensated for your expertise.

Forgive me for my post, my intent is not to insinuate that anyone is investing unethically. I’m just against the “weasal” clause and I feel that investors should hear the other side of the story as well. When we sign a contract we should sign it with honor and the intent to produce. If we can not produce we should not be signing contracts to purchase homes. There are other ways to accomplish our goals without having to “weasal” our way there.

Happy Investing,

Steve

Re: Contract Questions - Posted by Brent_IL

Posted by Brent_IL on February 01, 2002 at 09:21:23:

Joe’s advice was excellent.

Your goal is not to make offers, but to get profitable offers accepted. The partner contingency is all right for FSBO’s and must-sellers, but most Realtors will advise their clients to strike it out, or limit the time you have to get this partner’s approval. Like to 48 hours. You’re not set up to be able to know for sure if the deal is a good one within a short time.

There are an unlimited number of clauses that will protect you if you bail on the deal, but you only need one. The final inspection contingency mentioned by Joe is a good one that is widely used because it appears benign. It’s of equal concern that you are perceived as one who gets to the closing table.

Many real estate contracts do have a clause that allows for specific performance. Even if you settle out of court, the damage could damper your budding real estate career.

IMHO, you’re not quite at the point of making offers. I’d wait a while. There’s an enormous amount of mostly good information in the archives. Pick a topic in which you have an interest and plug it in. That’s a very fast way to get up to speed, and you can’t beat the price.

Re: Contract Questions - Posted by JoeS

Posted by JoeS on February 01, 2002 at 08:55:09:

Good answers by Joe in VA. I always put 2 things in my contract (I type up my own). One is a clause that allows me to back out, a “weasal” clause. It reads:
Subject to an inspection by a contractor. When I sell a home, people want to have this done, so it is a logical clause. The other and important condition I have already printed in the contract to buy: “In case of default by buyer, seller will retain the earnest money deposit as the only and sole legal remedy for said default. In case of default by seller, buyer shall use all legal remedies as a cure.” I have never yet had a lawyer or seller object. HTH.

Re: Contract Questions - Posted by Joe (NoVA)

Posted by Joe (NoVA) on February 01, 2002 at 08:44:23:

“Tying up a property w/purchase contract” means that you have made an offer with consideration that has been accepted by seller. It is a legally binding contract. If the seller accepts other offers after that point he will put himself in a bad situation, as he has promised the same piece of property to multiple people. So for all intents and purposes, no he cannot accept other offers after you have a valid contract.

If you do not yet have a valid contract–either because he has not accepted or because a “condition precedent” has not occurred (see below), then he is free to accept another offer even if your offer is on his desk at the same time.

A “condition precedent” is a contingency that must occur before a contract is formed and therefore made binding. “Contingent on partner approval”, “contingent on financing”, and “contingent on satisfactory inspection” are three examples of conditions precedent. After you make the offer with one of these contingency clauses, the offer is not considered a binding contract until AFTER the seller accepts AND the condition occurs. In other words, if he accepts AND IF (and only if) your partner approves/your financing goes through/the inspection is satisfactory, THEN you have a binding contract.

These clauses therefore offer you a way of validly “weaseling” out of an accepted offer. The best one is probably “subject to partner approval”, since you can conveniently get your partner’s DISapproval when the deal is not to your liking and there’s nothing the seller can do (some would argue the partner should at least act in good faith). Likewise if your funding falls through or if your inspection turns up unexpected defects you can cancel your offer and be done with it.

Once a valid contract has been formed (seller has accepted and conditions precedent have occurred), the seller CAN enforce the contract against the buyer in a variety of ways. I’m a little rusty on remedies, but at the very least you will lose your deposit if any…and if the seller stood to make a profit from the deal above and beyond fair market value (which he could receive from selling to someone else) he could recover the difference from you. In a few states, the seller could make you buy the property through the remedy of specific performance, though I think this is rare. As a practical matter, to avoid the hassle of litigation a seller would probably rescind the contract and keep your deposit, and just sell the property to someone else. But you never know…

My opinion, which you should not take as legal advice, is:

a)Get your financing in order before you make offers, so that you have the backing and confidence you need when making offers;

b) DO put an inspection contingency in your contract, to protect you from any hidden surprises.

c) Purely from reading, as I have done no flips myself, “subject to partner approval” helps flippers in case they do not find a buyer to flip to (but you should really ask someone who flips properties).

Good luck,

Joe Barrios
Alexandria, VA

Backup contracts - Posted by Bud Branstetter

Posted by Bud Branstetter on February 01, 2002 at 10:15:27:

Since you are studying to be a realtor you may have already learned that a seller can accept a backup contract. In Texas it is one additional form that acknowledges that there is another contract pending.

I may be even more stringent that what Steve suggests. I do not write a contract that I can’t perform on. I do not accept contracts with weasel clauses. I use a reserve deposit receipt to accept money from multiple parties. Even when they have to get approved for the loan there is a specified time(short) in which they have to have that approval.

I agree fully - Posted by Joe (NoVA)

Posted by Joe (NoVA) on February 01, 2002 at 11:14:43:

No disagreement from me here…I personally would not fabricate a partner for the reasons you state. But…it’s nevertheless true that some people DO use the “partner” clause for this purpose.