31 Oct Do I Need a Special Investor Contract to Make Offers?
When I first started in real estate investing over 15 years ago, I believed that I needed a special “investor contract” to make offers on properties. My intention was to have the perfect contract template filled with tons of clauses that were favorable to me (and unfavorable to the other party). I attended numerous seminars held by real estate gurus and lawyers, writing down a number of “weasel clauses” so I could plug them into my ultimate investor contract. Weasel clauses are lines that allow a buyer to weasel out of their obligations, such as being able to unilaterally terminate a contract with no penalty just before a planned closing.
For example, here are a couple of weasel clauses:
“This Contract is subject to inspection by Buyer’s home inspector, with results acceptable to Buyer in their sole discretion.” This clause doesn’t have a date, so technically the buyer could back out of the deal shortly before the closing.
“This Contract is subject to Buyer’s partner approval.” This clause also does not specify a date for the approval to be granted, so technically the Buyer’s partner could nix the deal right before the closing.
“If Buyer obtains a contractor estimate that exceeds $5,000, then Buyer may terminate this Contract and all deposit monies will promptly be returned to Buyer.” In this case, the scope of work is undefined and so the Buyer could terminate the contract by easily coming up with an estimate exceeding $5,000.
When I asked my first attorney for an investor contract, he gave me a blank copy of the standard contract used by the Realtors® from the state. He told me that would suffice, and if I really felt I needed more I could add an attorney review addendum in which I could have a few days for my lawyer to review the contract with no penalty to me.
Dissatisfied with that advice, I hired another attorney to create an investor contract. When talking with him, I got the sense that he didn’t understand what I was seeking. After several weeks of no responses from the attorney, I insisted upon getting my money back. The lawyer ultimately refunded my retainer, having never drafted the investor contract I so badly wanted.
Disappointed with my lack of progress in building the perfect investor contract, I took matters into my own hands. I spent hours typing up much of the standard Realtor® contract into a Word document, and then I added as many weasel clauses as I could. Feeling that I was ready to make an offer, I filled in the blanks with the offer price and other dates before sending my offer to a listing agent. The agent and seller became upset with my demanding terms, and they rejected the offer.
After several more instances of having offers rejected because of the multitude of weasel clauses, I got the sense that I needed to simplify my offers. Furthermore, I felt I was being a little manipulative especially when dealing with unrepresented sellers. In some instances, I signed a contract to buy a house and then did not follow through after determining that I probably wouldn’t be able to sell it for a profit. I decided to stop using the investor contract I created. I also decided that I wouldn’t make an offer on a house unless I was able and willing to buy it.
These days I use the standard Realtor® contract template to make offers, and I find that I often do not need any additional clauses. In the standard contracts I’ve used, the basic Inspection Contingency allows a buyer to unilaterally terminate the contract within a certain number of days after conducting an inspection with a licensed home inspector. For instance, if I elect a 10-day inspection contingency period, then if I am unsatisfied with my home inspection results in those 10 days I can terminate and receive my earnest money deposit back.
Why would an investor want a bunch of weasel clauses? My experience is that a wholesaler would want one or more weasel clauses just in case they cannot find a cash buyer. A wholesaler is someone who goes under contract to buy a property yet never intends to actually buy it. A wholesaler seeks to assign the rights to their contract to another buyer for a fee.
Another reason an investor might want weasel clauses is because their financing is uncertain. Perhaps their cash is tied up somewhere else, or maybe they are relying upon a private lender or hard money lender to fund their purchase.
I have learned through the years to keep my offers simple. While it is imperative that I protect myself and my interests, I don’t need to engage in overkill with the protective clauses.
As with any real estate investment, you should consult your attorney, tax advisor, and perhaps a Realtor® to ensure your particular interests are protected. Every situation is different, so rely upon your advisors. I am not an attorney, nor am I an accountant. I am a proud Realtor®.
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai has made colossal mistakes in investing (and learned some things along the way). He has owned over 200 properties with various investment partners, and he has been involved in over 200 more transactions as a real estate broker in both Pennsylvania and Tennessee. Tai and his wife Amira enjoy hunting for investment properties. Contact Tai if you need some consultation on real estate investing. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com. Tai is passionate about helping investors make money and avoid mistakes.
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