Over the years, I’ve helped more than 200,000 entrepreneurs and investors develop the "financial fluency" they need to create, maintain, enjoy, and share great wealth. When it comes to real estate, a big part of that fluency is mastering the art of contract negotiation.

Just as math is the language of physics and money is the language of accounting, contracts are the language of real estate. The more fluently you speak that language, the more successful and profitable you’ll be. And the keys to becoming a native speaker can be summed up in seven contract essentials.

But before I reveal these fundamentals, I want to make something absolutely clear. I am not looking for you to act like your own attorney. Nor am I asking you to become a real estate law expert. In fact, you will need to have a sharp attorney look over and write up many of your real estate contracts. But it’s critical for you to understand the basics for two reasons:

• Many times, you’ll be ready to strike a deal and you won’t have your attorney with you. If you wait until your attorney can draw up the agreement, you might as well kiss the deal goodbye.

Imagine you’re meeting with the owner of a six-plex that you’d like to buy. Because he is highly motivated, he’s verbally agreed to sell you a $1.2 million property for $700,000. And you say, "Gee Mr. Seller, I’m glad we could come to an agreement on price and terms for a cash sale. I’ll go meet with my attorney to get the paperwork written up. It should take three or four days for me to get it back…"

What do you think would happen to your great deal in those three or four days? Hint: Look for another investor walking out the seller’s door with a silly grin on her face and a signed contract in her pocket.

You’ve got to know how to lock up the property on the spot. Then, later, you can have your attorney draft the more involved documents for the actual closing.

• Sometimes you’ll need an important written agreement immediately, and it will make sense for you to get it done on your own.

One goal of building your successful investing business is to have a file of "attorney-approved" documents. This will include lease agreements, purchase contracts, rent-to-own paperwork, and standard releases from contractors. And once your attorney has gone over these documents, you need to know how to use them in the day-to-day management of your properties.

Now you know why you need to know the basics. So here they are:

Contract Essential #1: Relax. A contract is just an agreement between two or more parties. One party makes an offer, the other party accepts the offer, and something of value changes hands.

Many contracts don’t need to be in writing to be enforceable. But a real estate contract typically does. Even if this isn’t the case, take my advice and always put your agreements in writing.

Contract Essential #2: Clearly and accurately identify all the parties to the agreement.

Now this may seem obvious, but you’d be surprised at the number of people I’ve seen write up a deal and use vague language as to who, exactly, is involved.

If you are the buyer, make sure you list the seller’s full name on the purchase contract exactly as it is on the deed. Did they use a middle initial? Or did they spell out their middle name? Do they hold title as the trustee on behalf of a revocable living trust? Make sure you get it right.

If you are leasing a property to a family, make sure you list all adults who are party to the lease as "tenants."

Are you requiring a co-signer for a loan agreement? If so, make sure you identify the co-signer and get his signature.

Are you selling a four-unit property to a corporation? If so, make sure you identify the legal name of the corporation and the state in which it is incorporated. And remember to get the title of the person doing the signing.

You can’t be too careful.

Contract Essential #3: If the contract uses an acronym or another shortcut to reference a proper noun, make sure the shortcut is clearly defined and consistently used.

This is just a fancy way of saying that if you use a label like "Closing Agent" in your agreement, make sure there’s a statement somewhere in the agreement that says, "The ‘Closing Agent’ shall be XYZ Title Company located at 2211 Main Street, Anytown, CA, 91960."

Contract Essential #4: Accurately describe the property.

You’re getting the idea. Half the battle is being crystal clear about who or what you are discussing in the agreement. When it comes to identifying the property, a street address can be enough for something like a lease agreement or a repair contract with a roofer. But for any document that will be legally recorded, make sure you use the "legal description" of the property.

Here’s an example of a legal property description:

"Lot 3, Block 24 of the High Hopes Subdivision as recorded on Map No. 322 recorded in the County Recorder’s Office on May 1st, 2006 in the County of Glorified, State of…"

You can find the legal description of a property in public records at the county courthouse. But you don’t have to make a special trip to get it. It will be on the Preliminary Title Report that you’ll get from the title company as part of your due diligence work. (If it’s a really long legal description, I just photocopy that section of the report and attach it to my document.)

You can also find the legal description on the loan docs the property owner has in her files… on an old copy of her title insurance policy… or on a copy of her deed, if she has any of that handy.

You probably won’t have the legal description when you meet with the motivated seller and make the deal. So use the property’s street address to fill out your purchase contract. And in the space where it asks for the "legal description," simply write, "To be provided later."

Contract Essential #5: Lay out, in plain language, what both parties are agreeing to.

In the event that there is a disagreement down the road, this will help a judge or other neutral third party interpret your agreement the way you intended it.

Contract Essential #6: Always be the one who drafts (or pays the attorney to draft) the agreement.

For every point you discuss and agree to orally, there will be two more that never come up during negotiations. And there is a subtle yet strong pressure to accept any written contract pretty much the way it is written. That’s why you want to be the one in control of the paperwork.

Let’s say you agreed to buy a house for $600,000 with a down payment of 10 percent ($60,000). You also agreed that the seller would carry back the balance at five percent interest.

This is a real deal I did on a house in San Diego a few years back. Because I volunteered to write up the paperwork, I was able to specify that the loan was for "interest only," which lowered my monthly payments considerably… that I had a "first right of refusal" to buy the note if the seller ever tried to sell it to a third party… and that I got the washer/dryer, drapes, yard furniture, refrigerator, and a few other items. Though I ended up paying the seller a few hundred dollars for the refrigerator, I got the rest because I had included them in the agreement.

What do you do if the other party insists on writing up the paperwork? Okay, let them do it. But don’t be lazy. Make the effort to draw up the agreement yourself too… the way you want it done. That way, you’ll have a contract that favors you to compare, side by side, to the other party’s document.

Contract Essential #7: If you use a fancy formula or hard-to-describe condition in your contract, give an example or two of how you want it interpreted.

Here’s an illustration of what I mean. I once bought a two-bedroom condo from a motivated seller who was in the military and had been transferred. To sweeten the deal for him, I agreed to an "equity split." In other words, a portion of the profits I earned when I resold the property would be paid back to him. To clarify how this split would work, I included something like this in the agreement: "For example, if the Buyer resells the property for $200,000 then the seller shall get paid the Option Price of $105,000 plus 12 percent of the amount over $130,000. In this case, the Seller would get $105,000 plus 12 percent of $70,000."

Again, the idea is to make it easy for a third party to understand how the deal works.

As I said at the beginning of this article, contracts are the language of real estate. Train your brain to get good at them by following this simple rule: A contract doesn’t need to use fancy words. You don’t have to sprinkle it with "whereases" and "ipso factos." Just clearly lay out who agrees to do what, by when, to what standard, with what consequences, with what warranties, and for what payment.

Mastering these seven basics won’t take much time or effort, but it can make a big difference in your income. You only need to save one deal to be glad you did.

"Business is easy," according to Sam Zell. "If you’ve got a low downside and a big upside, you do it. If you’ve got a big downside and a small upside, you run away."

That philosophy has stood Zell in good stead. He started out buying and renting out small properties to college students while he was an undergrad himself at the University of Michigan in the early ’60s. More recently, he sold one of his flagship Real Estate Investment Trusts to a leading hedge fund for $36 billion.

In real estate, the best way to keep your investment decisions "easy" – with low risk and a high potential for profits – is to act on values others can’t see. Often, that means going against the herd, especially against dominant ideas in the mainstream media.

Zell grew his portfolio rapidly from the ’60s through the ’80s. But he only leapfrogged into the league of billionaires in the early ’90s. He bought aggressively during the real estate recession of those years, while the headlines and public sentiment about real estate were at their worst.

I’ve tried to help you see beyond the mainstream hysteria. Go through the Early to Rise archives, and you’ll see that I’ve been warning you about bubble markets for about four years now.

I advised you not to get caught up in the hype. Instead, I recommended to be sure to buy below market value; buy cash-flow properties only; fix your interest rates; have a margin of safety in the form of ample cash reserves, cash flow, or both. And always have a Plan B. (If, for instance, you were planning to flip, to be prepared to rent, sell on terms, or do a lease option that would keep you in the black if the flip didn’t work out.)

That advice ran contrary to the headlines. It also cut against the advice of real estate gurus who figured the easiest way for them to make money was to sell you on the idea that real estate is a can’t-miss proposition.

The height of the "can’t-miss" mania was marked by the publication of Are You Missing the Real Estate Boom? It was written by David Lereah, former shill… er, "chief economist" of the National Association of Realtors. It came out in February 2005, just months before some of the hottest markets in the country peaked. For timing, it ranks right up there with James Glassman’s Dow 36,000, published in 1999, shortly before the second-worst stock market crash of the last century.

Different Headlines, Same Story

Today, the real estate headlines are all about doom and gloom. But, once again, there are tremendous opportunities out there. You just have to tune out the herd, focus on the facts, try to understand the true, larger trends, and look for values others can’t see.

For instance, I live in South Florida, one of the worst markets in the country. Prices are down. Volume is down. (The number of transactions is off 50-60 percent in many areas.) Insurance and real estate taxes have soared, and foreclosures are setting new records. Yet, I’ve continued to make good money in real estate.

That’s basically because I’ve followed my own advice. Over the last two years, I’ve been writing about exceptional values outside the bubble markets. And I’ve gone into these markets in search of undervalued properties.

In one western state, the first property I bought was a four-plex in an area where college students live. We bought it for $180,000 on a street where comparable properties were selling for $220,000. It produced just over $25,000 a year in gross revenue. So we bought it under value and it cash-flowed comfortably. We also fixed the interest rate.

Even though this was a market that offered great values and strong growth… and where sales volume remained (and remains) high… we followed the deep-value, low-risk/high-potential-reward formula I’ve always recommended. And it’s continued to work well.

Within six months, we got an unsolicited offer for $60,000 more than we paid. Since then, we’ve received two more offers for as much as $80,000 more than our purchase price. Not long after we bought this property, we bought another four-unit property not too far away. We ended up selling it for $129,000 more than we paid in just under 14 months.

In another market in another state, I closed on a 14-unit apartment building five months ago. The seller was asking $565,000 for this mostly vacant building. We ended up buying it for $397,500. Today, after about $68,000 in rehab, the property is fully leased (with a waiting list) and generates just over $7,000 a month in gross revenue. It also generates about $4,100 in net operating income (NOI – revenue minus expenses).

A conservative eight percent cap rate puts the current value of the building at about $615,000. That’s about $145,000 more than the roughly $470,000 we have into it, including purchase price, closing costs and repairs. (A cap rate is basically the yield you would get on an income-producing property if you bought it for all cash. It is arrived at by dividing the NOI by the purchase price.)

Even an ultra-conservative 8.5 percent cap rate would put the value of this property at about $579,000. That means we’ve been able to create – at a minimum – an additional $109,000 in equity on a cash-flow property in five months. And yet, the prospects going forward are even better.

It Pays to Invest in Value & Growth Cities

Right now, I’m looking at properties in one of the most affordable oceanside cities in America. It’s a major city that not only offers value, but strong growth as well. It’s the fastest growing city in its state. In fact, its population growth has been 75 percent greater than the national average over the last 15 years. Jobs have grown at nearly twice the national rate over the last two years.

The fact is, value cities like these are actually benefiting from the mayhem going on in the bubble cities. There is a huge flow of money moving from the bubble areas to the value areas – from homeowners, individual investors, institutional investors, and operating companies.

This will continue for years to come – even while the national headlines shout "sub-prime crisis" and "real estate meltdown."

Here is a quick overview of how to look beyond the headlines that everyone sees… so you can find the true opportunities that few can see.

• Tune out the noise: Get facts and figures from media outlets, professional associations, and government outlets. But draw your own conclusions. Look for the emergence of "value gaps" and the flow of money from overvalued to undervalued areas.
• Always buy cash flow: If you do this, you dramatically reduce your chances of seriously being hurt in any market. Even if you don’t want to be a landlord and you prefer to "flip" houses, why not flip them at prices where you could rent them out on a cash-flow-positive basis if you had to? If you like million-dollar deals, why should you deal with luxury homes when you can do million-dollar cash-flow apartment houses or offices or warehouses instead? If cash is king… cash-flow is the Holy Roman Emperor.
• Buy at or below market value: Know your target-market values cold, on a dollar-per-square-foot basis and on a price/rent basis. If you’re in a good value market that also has strong growth and where real estate sales are brisk, it may make sense to buy cash-flow properties close to, or even at, market value. But the more overvalued your market, the more undervalued a purchase should be. The greater the discount at which you buy, the more of a cash and equity cushion you’ll have if and when the market corrects.
• Fix your interest rates: This alone would have prevented half the foreclosures going on in the country right now. If you have to do some negative-amortization, adjustable, time-bomb mortgage to make a deal work… chances are it’s not a deal after all.
• Focus on value and growth cities: Remember, real estate is local, yet all markets are connected. Extreme overvalue in certain markets can create extremely attractive undervalued investment opportunities in other markets.

When you combine these criteria and buy undervalued properties in undervalued, growing markets… consistently making money in real estate almost becomes "easy," as Sam Zell says.