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Real Estate Contracts

6 Must-Have Contingencies for Your Real Estate Contract

Financing

What if the mortgage, for whatever reason, isn’t granted by the lender?

Without money, the rest of the contract is useless.

A brief clause in the contract that addresses financing can be a shield for you.

It would allow the buyer, you, to be released from the contract in the event that financing is not secured and you’d receive your earnest money back without penalty.

Title

Always verify the seller’s absolute right to convey title to the property free of encumbrances, errors, liens, or any restrictions.

You can do this by employing a knowledgeable title company or attorney. A property title search in real estate involves a thorough process of searching and finding any documentation evidencing the history of a piece of property.

This contingency in the real estate contract states that if, during the title search, any liens or clouds on the title appear, the potential buyer is allowed to rescind the contract with no penalty.

Appraisal

An appraisal determines the market value of a property. The amount is usually considered to be the amount of money that the property would sell for if placed on the market.

The mortgage company will generally depend on an appraisal to guide the amount of money that is granted to be mortgaged. If the appraisal comes in below the price of the property, most lenders will require the buyer to either make up the difference or ask the seller to lower the price.

Simply add a contingency in your contract that makes it clear to both you and seller that if the property does not appraise at the asking price, you, the buyer will be allowed to cancel the contract, receive the deposit money back and not be penalized.

Seller Documents

Gather the following documents before submitting your earnest money deposit. Request ALL of the following docs within 5 days of executing your real estate contract:

– All Leases
– Past 2 Years Tax Returns
– Rent Roll
– Profit and Loss Statements
– Trailing 12 of Utilities
– Utility Bills

These documents reduce your risk and provide detailed insight on a property’s financial performance.

If you do move forward without gathering 100% of the documents, know the risk that you are taking and have an exit strategy if you choose not to move forward.

Property Inspection

Secure a reputable and thorough property inspector. They should be educated and extremely knowledgeable as it relates to examining properties.

A good inspector will see evidence of things like damage to the foundation, moisture in the walls, and other significant issues that may not be readily visible to the average person.

A contingency addressing the results stemming from a property inspection is important because it allows the you to clearly stipulate the dollar amount and extent of work that you are willing to invest in a potential investment.

100% Occupied

Investment properties should be purchased for the sole purpose of returning cash flow. Because an investment contract in real estate is unique, it is entirely reasonable to ask that the property is 100% occupied at the time of closing.

Add this money-making contingency in your contract. If, for any reason, this contingency is not agreed upon or the property is not occupied, then you as the buyer have the right to back out of the deal. Vacant properties don’t make money!

Contingencies

If these 6 contingencies are addressed in your real estate contract, you will be well protected from the major, deal-changing problems that could occur during the buying process. Use a reputable real estate attorney, to assist you in drafting contracts specific to your state.

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