Helpful Real Estate Contract Clauses
I have found the following contract clauses can be of help in avoiding problems.
"Or the appraised value whichever is less"
Add this to the contract sales price area. "Buyer agrees to purchase for (the price offered) or the appraised value whichever is less." This clause has saved me money the few times that a properties value came in below what everyone thought the value should be.
"This contract is subject to approval".
Add to every purchase contract. "This contract is subject to approval by (blank)". Name a friend or type of firm such as structural engineer, or your contractor. This clause allows you to back out of a bad deal if your named person does not approve the deal.
"This contract subject to a remodeling or repair estimate from (blank) acceptable to buyer."
If you do not feel comfortable with your own repair estimates then this clause will let you back out of the deal if the cost estimates get too high.
"This contract is subject to a phase one environmental study unless waived in writing by the buyer."
If there is any question about the presence of lead paint, chemicals, or other contaminants spend the money for a study. You do not want to buy someone else's problem. Commercial deals that are financed will require a phase one environmental report.
Proration of rents and deposits clause.
When buying an rental property you want a clause covering the pro-rations of rents, security deposits, utility bills, and interest owed on security deposits. Check the contract the real estate agent uses for this clause.
"This contract is subject to a survey satisfactory to the buyer."
This is money well spent. You do not need to find out later that the fence the prior owners installed is on the neighbors property, or the lot is smaller then you bargained for. This can be paid by either party so try to negotiate who pays, or split it.
Certificate of occupancy.
You could request a current "C of O" to be sure the building is in compliance with local laws.
Other Clauses To Check For
Most real estate agents use a standard contract approved by your state. Be sure you read it each time, and check for the clauses I have outlined for you. I will not go into a lot of detail, as you should read a book that covers real estate contracts. These are available at most college book stores with titles like, "modern real estate practices", and they are written specifically for your state. If the sellers attorney prepared the contract for sale, you should have it reviewed by your attorney. It is advisable to have all contracts reviewed by your attorney prior to signing.
Termite inspection.
Insect infestations can be expensive to remedy. A termite inspection should be required.
Condition of property.
This is where you list any inspections you may want, and anything you want the seller to do. Allow yourself enough time to get the inspections. For example, "This contract subject to a (add your item) inspection and report except-able to buyer." Examples, survey, trash removal, mold inspection and so on.
Inclusions.
List on the contract anything that can be removed that you expect to stay. For example: portable storage rooms, ceiling fans, appliances etc.
Request the right to re-inspect the property 24 to 48 hours before closing.
Utilities.
Whenever possible have the utilities transferred to your name a day or two prior to closing. You want to avoid the utilities being cut off, and a delay in getting them back on.
Radon gas and mold.
Have a clause added for inspection for radon gas, and mold. For example, "This contract subject to a Radon inspection and report acceptable to buyer."
Title insurance.
The seller should provide you a title insurance policy. This policy compensates you if the title is contested The insurance company will have to defend the title, or pay off on the policy amount.
Risk of loss.
Be sure the contract states that the seller is responsible for any loss until the closing. Have your property insurance take effect the day of closing.
Other Things To Look For In The Contract.
Insurance.
Be sure your insurance agent covers the house from closing on and that you have a million dollar liability policy.
Occupied houses or apartments.
If you are buying a tenant building, use a due diligence clause that allows you to check all leases, rental applications, and tenants background checks prior to closing and add a clause that calls for the current owner to have any tenants in arrears on their rent removed from the building prior to closing. Verify all rental amounts with the tenants and all expenses against the actual bills
Hazards.
Have any hazards to health, or possible injury, remedied prior to closing unless you are willing to assume the risk. Such things as old cars, unsafe basement doors etc.
Flood area.
Check, or ask the seller to certify that the building is not in a flood zone.
Zoning.
Finance Notes.
When you are financing an income producing property, you are using other peoples money to make money. The more flexibility you have in financing, and re-financing, the more options you will have to make money using this OPM.
Keep the rental income accounts separate from your personal accounts.
Keep a reserve for vacancies, taxes, insurance, plus expenses, and you will avoid most problems.
Pre-Payment Penalties:
Pre-payment penalties greatly reduce your flexibility in selling, or trading the property later. Avoid them unless you are the seller and want the interest from a note you are carrying back.
"Due-On-Sale" Clause:
This clause is found in most real estate financing documents. If the seller is financing the property, try to avoid "due on sale" clauses. The "due on sale" clause greatly restricts creative financing.
Escrow Payments:
Avoid escrow accounts for taxes and insurance whenever possible. Escrow accounts allow someone else to use your money for free, or almost free.
Points:
They are negotiable, so ask for lower points or none.
Balloon Notes:
Avoid them if you can, if not avoidable plan for them with care. Short term balloon notes are problematic in that you run the danger of losing a property because you cannot raise the money.
Condos & Town Homes.
Have your attorney check over all the paperwork when buying into a cooperative unit starting with the offer to purchase. Condos, town homes, and co-ops all have underlying agreements covering common areas, common walls, garages, gates, use restrictions and common area expenses. You will find that you are restricted by the rules and restrictions of the governing body. Be sure you know what you are agreeing to, and what it will cost.