“I have a problem with too much money. I can’t reinvest it fast enough, and because I reinvest it, more money comes in. Yes, the rich do get richer.” – Robert Kiyosaki
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.[Ed. Note: David Finkel is the best-selling author of The Real Estate Fast-Track, The Maui Millionaires, and The Maui Millionaires for Business. He’ll reveal the secrets that have made him a self-made multimillionaire in an exclusive teleseminar with Justin Ford on Wednesday, November 28. This presentation is free, but slots are limited.]