OfflineEscape Clauses And Getting Out Of Contracts
By: Matt G.
Submitted: 12:00PM on Friday 15 August 2008
The author has permitted the reprinting and redistribution of this article.
GETTING OUT OF CONTRACTS
When it comes time to get out of a contract you will want to have set things up correctly ahead of time.
Let the seller know that you have to meet with your business partner and go over the contract with them. Always project your next meeting with your business partner to 3 (or more) days into the future. This will give you enough time to pitch the property to your list (wholesale) or do your proper due diligence (rehab or rental) before putting yourself at risk.
As far as escape clauses go...you want to use a standard state contract but alter a few words in your favor. When I first got started I would show up with these seminar contracts and the sellers, while motivated, would tell me they cannot in good conscious sign my contract.
In Florida we used the Far-Bar, removed the state info so we were not in violation and then changed specific clauses throughout the contract to protect ourselves, give us the right to make up to $1,000 in repairs and even list the property on the MLS should we choose to do so. In Washington, New York and New Jersey we applied the same principles.
Our contract has been reviewed by at least 30 attorneys (that we know of) and has only made it to court once. It has been on the closing table of at least 250 transactions and I am certain many other investors have copied it after challenging me on it.
Enough about that, here are some very specific 'escape clauses' if you will.
Let's go over each of the items in detail.
1. The ability to back out for whatever reason. The amount of time (20 days) is notated in another section of the contract. The wording here is crucial. Notice it says, "Buyer's Satisfactory Inspection". The standard state clause requires you to have a 'licensed' individual inspect the property and submit in writing the reasons why the property is not acceptable. We have also changed the contract on page three "Inspections, Repair and Maintenance" to reflect the same.
2a. Forty-five days from acceptance. Lets face it, this is a very cut-throat business. I am a very nice person, but I don't like losing money. If you are not able to close within the forty-five days but can close on the 47th, 'Acceptance' is defined as the date of the final signature to the contract. If necessary you may sign the 'Final Corporate Approval' and extend the contract as needed.
2b. This is a what I like to call a 'friend-builder' clause. By signing the contract they are agreeing to get the tenant out before closing. You will help them along the way but essentially they are committing themselves to a closing date sometime in the future after the tenant is out. This keeps them from letting the contract expire because they were unable to evict their tenant.
Important to notate: Your preliminary and final corporate approval will only hold up in court if you remember to sign the 'final' corporate approval on every contract before closing. Not doing so could subject you to liability in a court case. In other words a judge may consider this only a weasel clause if you do not practice it throughout your business. Still, 80% of all court cases never make it in front of a judge and it will cost a seller $1,500 to start a lawsuit for $1,000.
Some of my recommendations may sound harsh. You need to keep in mind that this is business, not a popularity contest. Just like you, I don't like surprises, but when they come, I like to be prepared. Being prepared can mean the difference between handling the situation with a phone call or losing $25,000 in a lawsuit.
Our clauses were developed over time through trial and error. Error meaning they cost us money. For those of you that have fear about putting properties under contract, I fully understand. Hopefully as cowboys we have Pioneered before you and 'caught the arrows' so you are now able to setup camp.
One of the stories I used to relate to new investors is an analogy of Brinks armored car service. Funny, because here in Bogota, when Brinks makes a pickup, they completely triangulate the place, three guards with fingers on triggers. It feels more like a robbery than a courier service.
The analogy says Brinks does not start over in each city and experiment with their policies and security measures. They use the same systems in Pahokee, Kansas as they do in Brooklyn, New York. The toughest cities determine the rules.
Whichever contract you choose to use, make sure it has been tested in tough markets. This will keep you out of court and let you live a more peaceful life.
Hope this helps,
Matt Gerchow
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"
You forward the best threads and bring them to our attention.
You must post at unusual times though!
I never saw this posting until today, on the recently viewed list. I think that I have missed many of your postings, because when I got up and logged on your "title" thread was not there to click on.
Bump your stuff back up!
We will all benefit.
While I have you, How is your nephew? What is his name? How are his parents? How are you?
This article was written by Matt Gerchow who is a really really smart REI. He is great!
"THE ARCHITECT OF YOUR DESTINY IS YOURSELF"
"SUCCESS WALKS HAND IN HAND WITH FAILURE"
Thats really valuable information. Appreciate you sharing.
That was reall good stuff for me to know, but now I'm real real nervous. If I went to a real estate attorney would be able to tell everything I need to know. As far as my exit clause. Because Dean state in his book that you can get the earnest money from the end buyer. That way it would come out of my pocket. would the attorney be able to tell me the right exit clause?
you never know until you find out...
This is the contract that I use with my agent, please let me know if this is a good Escape Clause contract:
Buyer/Interested Party:
Bryan Slade
111 Bridge St
New Cumberland, PA 17070
Edwin Tichenor
Keller Williams-East Shore Branch
530 N Lockwillow Ave
Harrisburg, PA 17110
Let this letter act as the intent to purchase 912 Wertzville Rd, mls#10170213. The reason for this letter is to allow for an expeditious offer to purchase the aforementioned property at $119,940.00 without the future consideration of a counteroffer. In the event that the following terms and conditions are acceptable to you it shall be rendered to a Standard PA State A/S-R Contract.
Please note that the intent to purchase is based upon the following contingencies, and it is in no way a legal, binding document:
· contingent upon; a home inspection to the buyer's satisfaction
· contingent upon; a clear title
· contingent upon; subject to approval of buyer's partner
If the following contingencies are acceptable please contact Edwin Tichenor directly. If they are unacceptable, I apologize for the inconvenience yet appreciate both your time and consideration concerning the matter.
Regards,
Edwin Tichenor
Bryant Slade
Sorry for the double post I did.
Bryant Slade
^^^ sounds good to me,
impossible is nothing!
Thank you for the valuable info.
Is any one using small nonrefundable earnest money to engourage sellers or are sellers agreeable to what is suggested in Deans making money now book?
Jim
If I work out a deal with a seller, what are we supposed to be signing and what form am I to be modifying to protect myself and my earnest money?
Hi Jim,
I have been using small EMD's ever since I started(at least I have it stipulated in my contracts concerning it). I only offer to put up five hundredths(.005%) of a percent of any selling price. After all, it's not the earnest money that the seller wants, it's the price of the property in whih he is trying to sell that he wants. And another thing as well, I don't use any clauses that would make me loose the EMD if i decided to use an escape clause to back out of a deal either, especially if I'm going to be using my money and not the buyers if I dont have one lined up yet.
Bryant Slade
If you've got a deal with a seller then the two of you would just use the "Agreement To Purchase" contract located in the Student Resources section under Forms and Docs. Just scroll up and use any of those contingencies or even add a few more if you'd like in order to protect you and your earnest money. If you'd like you could just omit a contingency and add something that you might think would be a better excuse to pull out of a contract. Hope that helped you?
Happy hunting!
Bryant Slade
I like your style friend. I can tell you are hard-core REI. You will go far pilgrim, this I am sure. My best to your hunt...Jan
Sissy, my girl with with the answers, I always love your posts, and I always learn....Jan
Hi, I am new to re investing and have not completed a deal as of yet. I want to be sure I am covered and was hoping to see a contract that someone else uses but I don't see it if it is posted here. Is there an attachment that I am missing?
What about for "as-is" purchases where they do not accept contingencies?
Knowledge is Power
- Pimpedoutgeese
Allow your fear to gently pass. Then genuinely ask yourself,
“What needs to be done?”
then you perform your due diligence and make the decision on whether or not you're confident enough that it's something that's not over your head with rehab costs. Also, even though they state as-is, sometimes(if not most) they're pretty flexible with negotiations, but perform your own due diligence first. That way you'll know how/what to negotiate about.
Hope that helped you a bit?
Bryant Slade
Another "exit clause" you can use in an as-is contract would be:
Buyer agrees to purchase the property in as-is condition, but retains the right to perform, at his expense, termite and home inspections to assess the structural integrity of the building as well as the functionality of the plumbing, heating, cooling and electrical systems. Should said inspection reveal deficiencies which would cost in excess of $5,000 (or any predetermined amount) to repair, buyer reserves the right to cancel this contract and receive a full refund of all deposit monies.
You are not asking the seller to make any repairs at this time. Most sellers will agree to allow you to do your due diligence and claim that they aren’t going to fix anything. Should any major deficiencies show up, you have the right to walk away, but I have seen sellers negotiate credits for the repairs to keep the deal alive. Remember, in most states, there are disclosure laws so the seller would now have to tell all potential buyers these things up front before any negotiations begin (especially if they are presented with a written report). I always politely remind them of that as I am cancelling the contract. Act fairly, negotiate in good faith, but protect yourself.
Live well, laugh often and love much.
Walter Fabiszewski
Southern, FL
I wanted to bring this thread back up. It is really helping me to get more time on my offers. Thank you everyone who has contributed to this thread because it is really beneficial.
Richard
Bothell, WA
Know what truely matters in life, consume yourself with that, and you shall never be disappointed, afraid, or alone. Give your gratitude always, give respect to everyone, and you shall never be anything less than what matters the most. Give praise to the Lord, forgive yourself and others, and with all of this together you will get a taste of what heavens lie ahead.
I'm going to see a FSBO that has an approved short sale at $150,000 in a neighborhood of $280,000+ homes. The short sale agent said the house is terrible inside, mold in the basement, the rooms need to be done over, etc. The outside is not bad, needs paint. This is my first deal and i've never bought a house. How do I know how much work it needs and what do I need to make an offer on a short sale. She said it has to be a cash buyer which I have but I'm concerned about the contract process and making an offer. Also the amount of repairs. Does this sound like a good deal?
Deshone
I looked at a property that was an as is sale, there were some questionable things pertaining to the property as to what it would cost to have this checked out and taken care of, the listing agent asked how much earnest money I would be putting down I let open for the time being when I signed the contract to make an offer that got accepted, the escape clause I used was that I would continue with the purchase depending on whether or not my buyer would buy the property in the current condition which my buyer was not for sure if he wanted it then turned out he did not want it after he said he did so I was able to cancel the purchase agreement made with out any problems.
Shawn
"Subject To" is a very powerful (but seemingly subtle) Escape Clause that is really all you need.
You can position yourself like an investor who is not going to nit-pick the details of the property by offering to buy it "as is" and state that inspections to be performed are merely for "informational purposes".
However ... always protect yourself by contractually stipulating that the deal can only go forward "Subject To" the approval of your partner (for example).
This means -- technically -- you can still walk-away because of some info you
learned during the inspection (although it implies that you won't) ...
You just need to do it UNDER THE AUSPICES OF "your partner not approving of the purchase" (for whatever, not-mandatory-to-disclose, reason).
It was my impression from THE EDGE 2009 DVD's that this is a clever way to proceed.
Naturally, if you give a laundry list of air-tight escape clauses along with your offer ... the seller can simply choose someone else who appears more user-friendly to work with.
Like most things, this is partly a game of perception.
I hope I've done some justice to sharing a piece of information (about Escape Clauses) contained on those very helpful DVD's.
I could not attend it, but I look forward to obtaining the 2010 version of THE EDGE on DVD (again this year) and using the info to keep widening my areas of expertise!
Thank you DG !!!
I will be using the " · contingent upon; subject to approval of buyer's partner" In all of my future offers
Sissy, you bring me the best information. Any new
updates, anyone?
By: Matt G.
Submitted: 12:00PM on Friday 15 August 2008
The author has permitted the reprinting and redistribution of this article.
GETTING OUT OF CONTRACTS
When it comes time to get out of a contract you will want to have set things up correctly ahead of time.
Let the seller know that you have to meet with your business partner and go over the contract with them. Always project your next meeting with your business partner to 3 (or more) days into the future. This will give you enough time to pitch the property to your list (wholesale) or do your proper due diligence (rehab or rental) before putting yourself at risk.
As far as escape clauses go...you want to use a standard state contract but alter a few words in your favor. When I first got started I would show up with these seminar contracts and the sellers, while motivated, would tell me they cannot in good conscious sign my contract.
In Florida we used the Far-Bar, removed the state info so we were not in violation and then changed specific clauses throughout the contract to protect ourselves, give us the right to make up to $1,000 in repairs and even list the property on the MLS should we choose to do so. In Washington, New York and New Jersey we applied the same principles.
Our contract has been reviewed by at least 30 attorneys (that we know of) and has only made it to court once. It has been on the closing table of at least 250 transactions and I am certain many other investors have copied it after challenging me on it.
Enough about that, here are some very specific 'escape clauses' if you will.
Let's go over each of the items in detail.
1. The ability to back out for whatever reason. The amount of time (20 days) is notated in another section of the contract. The wording here is crucial. Notice it says, "Buyer's Satisfactory Inspection". The standard state clause requires you to have a 'licensed' individual inspect the property and submit in writing the reasons why the property is not acceptable. We have also changed the contract on page three "Inspections, Repair and Maintenance" to reflect the same.
2a. Forty-five days from acceptance. Lets face it, this is a very cut-throat business. I am a very nice person, but I don't like losing money. If you are not able to close within the forty-five days but can close on the 47th, 'Acceptance' is defined as the date of the final signature to the contract. If necessary you may sign the 'Final Corporate Approval' and extend the contract as needed.
2b. This is a what I like to call a 'friend-builder' clause. By signing the contract they are agreeing to get the tenant out before closing. You will help them along the way but essentially they are committing themselves to a closing date sometime in the future after the tenant is out. This keeps them from letting the contract expire because they were unable to evict their tenant.
Important to notate: Your preliminary and final corporate approval will only hold up in court if you remember to sign the 'final' corporate approval on every contract before closing. Not doing so could subject you to liability in a court case. In other words a judge may consider this only a weasel clause if you do not practice it throughout your business. Still, 80% of all court cases never make it in front of a judge and it will cost a seller $1,500 to start a lawsuit for $1,000.
Some of my recommendations may sound harsh. You need to keep in mind that this is business, not a popularity contest. Just like you, I don't like surprises, but when they come, I like to be prepared. Being prepared can mean the difference between handling the situation with a phone call or losing $25,000 in a lawsuit.
Our clauses were developed over time through trial and error. Error meaning they cost us money. For those of you that have fear about putting properties under contract, I fully understand. Hopefully as cowboys we have Pioneered before you and 'caught the arrows' so you are now able to setup camp.
One of the stories I used to relate to new investors is an analogy of Brinks armored car service. Funny, because here in Bogota, when Brinks makes a pickup, they completely triangulate the place, three guards with fingers on triggers. It feels more like a robbery than a courier service.
The analogy says Brinks does not start over in each city and experiment with their policies and security measures. They use the same systems in Pahokee, Kansas as they do in Brooklyn, New York. The toughest cities determine the rules.
Whichever contract you choose to use, make sure it has been tested in tough markets. This will keep you out of court and let you live a more peaceful life.
Hope this helps,
Matt Gerchow
Check out my journal:
http://www.deangraziosi.com/real-estate-forums/investing-journals/64065/...
My free website from Dean:
http://paradiseacquisitions.usapropertywholesale.com/
The Sky's the Limit!
I am looking for my first deal to be a rehab that I am willing to buy as-is. I need your help as the only contingency that I need is for rehab funding. How can I word the purchase agreement to get out of it if I can't find funding to fix it up. Thanks for you time.
You could say "This offer is contingent upon rehab funding approval within XXX amount of days". Or "This offer is contingent upon my partners approval". The partner in this case would be the lender of the rehab funds.
Thanks for the quick responce.
Found just what I needed in this post. Plenty of info on what to put in a contract for escape clauses. The article that sistreat posted does give one food for thought, and is a little scarey. But I see that many of you have used simpler methods and come away winners. I'm ready now to go out there and tackle that giant called fear.
Sharon
Summerset Enterprises
NO Man Ever Got Lost on a Straight Path
Thank you all for the abundance of information in this post. I was wondering if anyone knows if there are limitations to the kind of contingencies you can use with a bank owned/ REO property? I want to put in an offr on ahouse my realtor just came across, but am affraid to do it because what if my end buyer decides he's not interested? I can use the "subjec to patner's approval" I guess,but will a bank accept that? I'm sure someone on here has dealt with this before. I appreciate the feedback.
Life is full of choices, and these choices become your reality... YOU are in control of your future! YOU decide the direction your life will take. YOU have to make things happen, no one will do it for you!
When opportunity knocks, will you answer?
Careful guys, what worked two years ago won't work with 99% of REO offers today. If you put subject to my partner they will say get his approval before you sign the contract. These guys know exactly what you are doing when you do that. They have seen it 50,000 times from newbie investors that have no money. They know you are looking for a buyer while you control the property. There is NOTHING wrong with that, that is what we do! You just have to be smart enough to actually get a property (that is a REAL deal) under contract and flip it!
Michael Mangham
MD Home Acquisitions LLC
Knowledge is power, but execution trumps knowledge. Tony Robbins
http://www.mdhomeacquisitions.com Seller site
http://www.mdhomeacquisitionsbargainhouses.com Buyer site
http://www.mdhomeacquisitionshousehunter.com Bird Dog Site
http://www.mdlodeals.com Tenant/Buyer site
I want to bump this post as it is a very important subject to everyone on here.
I know that the banks are seeing a lot of these clauses and savvy investors are even teaching students to avoid these clauses in their REO offers. Obviously we have to do something so I want to pose the question to all: "What are your favorite clauses you use, to leave yourself an out, when dealing with bank REO's"?
Thanks
Steve
"Do something you LOVE and you will never work another day in your life."
"Nothing can ever stop you without your permission."
"So long as you haven't quit, then you haven't lost."