What's going on everybody?
So in today's video, I'm going to be going through a real estate purchase and sale agreement
and showing you the most common mistakes that real estate investors make when they're filling
out a contract and making an offer to purchase a property.
And full disclosure, I'm not an attorney, you should always run any contract through
an attorney.
These are just my own random thoughts.
I am a real estate investor and real estate broker, but you should always consult with
an attorney when it comes to real estate contracts.
And so that being said, let's jump into the video, and throughout the video, if you have
any questions about contracts, drop them in the comments below.
And I'll also put a link to an example real estate contract that you can download on my
website for free.
So look in the comment section below and I'll have a link there.
But the very first thing you want as a real estate investor with your contract is you
want to have an out-clause.
So if you come across a deal, you lock it up, but then you realize it might need too
much work or maybe you ran your comps wrong.
You need a way to back out without penalty because every now and then that's going to
happen, especially if you're new.
So with this contract, and we'll go through more of it in a second here, but this contract
point number 21, they call it a study period.
You can call it an inspection period, but it basically says within 10 days of going
under contract, the purchaser in their sole and absolute discretion may declare this contract
terminated.
And if they declare it terminated the deposit shall be returned to the purchaser and the
parties shall have no obligations to each other pursuant to this contract.
So if you want, you can use this exact verbiage.
Maybe you can change the words around.
Most people I see call it an inspection period, but either way you want to have a clause like
this in your contract.
So that's point number one.
And that's a mistake a lot of investors make because I've seen some contracts where the
investors, they're not even able to back out without penalty and it can be a pretty serious
issue if that happens.
The second mistake I see a lot of investors make with their purchase and sale agreements
is they might have these ... You see that this is a four-page contract.
Some investors I see have 20 or 30 or even 40-page real estate contracts and that's just
complete overkill.
If you're a real estate agent, the standard purchase and sale agreement, including disclosures
might actually be 20, 30, 40, 50 pages.
But when you're a real estate investor, you're doing off-market deals, you don't need to
have 30 pages of disclosures.
It doesn't need to be a 50-page contract.
A confused mind says no.
When you're showing some exasperated seller a 50-page contract it's going to be confusing
to them.
It's confusing to me as someone that's been in real estate for 10 years.
So that's why I always recommend a contract like this that's simple, it's straightforward,
or the contract in the link below to my website.
You want a simple and straight forward contract.
In fact, the first real estate deal that I ever did, it was a one-page contract.
And I'm not saying I would recommend this but it basically just had the price, the closing
date, the two parties that were the buyer and seller, and maybe one or two other terms.
I'm sure a lawyer would completely tear it up, but everyone was in agreement and we made
the deal work.
So basically just keep your contracts to a few pages.
Definitely no more than 10 pages and I would try to keep your contract around two, three,
four, maybe five pages.
The next mistake I see is with the earnest money deposit.
So this contract, they actually do it, I probably would have done it a little bit differently.
So they say that within two days of going under contract of the ratification date, the
purchaser shall deliver $300 to the title company.
I usually write in the purchaser's title company of choice.
I don't necessarily specify just so it gives me a little bit of options.
However, I would also probably change this to within five days of ratification.
And then, $300 is a very small amount for an earnest money deposit, which is good from
the purchaser standpoint, because I've seen sometimes in multiple offer scenarios with
like million-dollar houses, someone might put like 50 or even a hundred thousand dollars
down as the earnest money deposit.
So as a buyer the less you can put down the better.
You do want to be realistic you don't want to just put down 50 bucks or a hundred bucks.
You want to put something that's somewhat substantial, but you also want to try to limit
your risk there.
I've seen a lot of beginner investors where maybe they don't have the cash to put an earnest
money deposit, or maybe they just forget to do it.
So that's why you want to put as little as possible and you might also want to add into
the earnest money deposit, you might want to say something along the lines of, "If the
earnest money has not been deposited within X amount of days, seller shall notify buyer
in writing and buyer will have five days to deliver the deposit."
So that can give you additional protection because many times the sellers not really
going to notice it or even care too much, but you will have the one or two sellers that
might try to get out of a deal because you didn't properly put the earnest money deposit
with the title company.
So just something to keep in mind.
The next mistake I see with a lot of newer real estate investors is you want to make
sure you initial any change in the contract.
That sounds obvious to someone that's been in real estate for a little bit, but let's
say we agreed on a price.
Let's say the seller said they want to sell it for $200,000 and then you negotiated and
maybe you were able to get the price down or maybe they wanted to get the price up or
any type of change.
You need to have an initial next to it.
So what I typically do, I use DocuSign which is a great service.
I'll put a line through the current price if we're changing the price, and then I'll
write the new price next to it, let's say it's 195 or whatever term you're changing
and then you just put your initial right next to it.
It keeps it a little bit cleaner than handwriting it and doing other things like that.
So always make sure to initial anything.
And if you're not sure about initialing something, just initial it, you can't over initial enough,
so that's another thing where sometimes sellers try to get out of a deal.
It happens very rarely, but just make sure all your I's are dotted, t's are crossed,
initials are done, signatures, dates, everything like that.
Next up, if you're a licensed real estate agent, which a lot of real estate investors
are, in fact, I'd recommend that you do investing as well as agent work or at least get your
license.
You need to disclose that information and you can see it here at the bottom here, licensed
parties.
"One or more members of this LLC are licensed real estate agents in Maryland, DC, and Virginia,"
and then it says their name.
So you just need to disclose.
You can just say if your name is Bob, Bob is a licensed real estate agent in whatever
state you are and just make sure that's in the contract because that can come up, again,
every now and then, but you just want to make sure that's in there.
Next up, you want to clarify the tenant situation.
So if you're buying the property and you want it to be vacant you need to make sure that's
in there.
And this is actually in the physical condition, "Seller shall deliver the property to purchaser
vacant and in the same physical condition that it was on ratification," and this one
is as-is, which most real estate investor contracts are.
So you can use this verbiage or you can also just specify, sometimes I might just specify,
maybe even down here, you could say, "Property to be vacant at closing."
So you can always adjust things in the contract and kind of create your own contract and just
add different things.
You just want to be very clear, try not to use too much technical jargon and different
things.
You don't want the seller to be confused.
You want anybody to be able to understand your contract.
The next mistake I see is that a lot of real estate investors that are new think that they
have to pay a lawyer like $10,000 to look over their real estate contract.
When I was getting started, and again, I'm not an attorney, I'm not giving legal advice
here, but I kind of compiled different contracts together and just use bits and pieces of different
contracts.
If you just look up free real estate contracts online, or you can even ask different real
estate investors if they would mind giving you a sample of their contract or giving you
a copy of their contract, and you can use bits and pieces and modify it and then pay
some formatter on Upwork or Fiverr, or just do it yourself and make the formatting look
really good.
This one looks so-so, but again, you don't need to spend $10,000 on a lawyer.
If you want to spend a few hundred bucks just for a lawyer to look it over, that's fine.
But every lawyer is going to say something different.
So start with just a basic standard contract and add different things, talk to different
real estate investors, see what the top investors have in their contracts, and then put those
same elements, or maybe even just use the exact same contract that they do.
So there you have it.
Those are the most common mistakes I see with real estate investors when they're making
offers on properties.
And if you have any questions about real estate contracts drop them in the comment section
below and also feel free to download a free real estate contract in the link below as
well.
Thanks and I'll see you in the next video.
Bye.