Episode #6 – Writing a Contract THE RIGHT WAY with the Seller
Welcome to EarlToms podcast. Today we’re going to talk about how to write a contract. You’ve already heard from us about how to find buyers, sellers, and wholesale in a legal way. So now that you have that information, you need to understand what you need to have in a contract to make sure that your interests are covered, that you don’t get in any trouble when you write the contract. Also how to extend the contract without actually extending it. It’s all in the language written in the contract.
So what we want to start with the contract is really simple. You start with the contract date. You always date it somewhere at the top. Maybe the top paragraph, something like that. This contract was written on this day. You also want to have your buyer and seller listed. A lot of times when you come across these deals, it may be an inherited property or a foreclosure, something that you’re not necessarily sure what you have. A sellers is listed in the courthouse because a lot of times your tax assessment won’t show up. So when you’re searching your courthouse records or your owner thinks, well, it’s in this name, but it may not actually be recorded that way just yet. So what you do to get around this is just write in seller of record and that will tell the attorney, do the research. Then whoever was listed as the seller, let’s just go with that. But part of that also is whoever selling it actually has the permission to sell it. When you come in with an estate, it may be listed the estate of such and such. But did they probate it? Do they have the ability to to actually sell? A lot of people will, say, I’ll just give you a quick claim. Whoa, What you run into a lot of times with a quit claim deed is all that really means is if someone is transferring their rights to that property. That doesn’t mean that everything is free and clear or that they actually have the ability to sell. So somebody in the family may have written a quit claim deed to another family member, but they never recorded it. What you want to have them do in those situations is actually have them go back, find a quit claim deed, and then you do what’s called a stacking. The attorney will file a quit claim deed first and then record your deed.
When you’re looking at these deeds, though, the deeds are very simple. A lot of people call a quit claim deed, quick. It’s not quick. It’s quit. It means they’re quitting their rights. The other type is a warranty deed. A warranty deed is the exact same thing as say a contractor, electrician, somebody coming over doing some repairs on the property and giving you a warranty on their work. That property is now warrantied. The exact same way that a contractor would warranty their work. Real estate in its most simplest form is exactly that, it’s simple. People have convoluted it to the point to where it gets confusing. When you look at things in a very simple way, you have a quit claim deed. I quit. You have a warranty deed. I warrant this property, whether it’s a special or general. It doesn’t matter. There is still a warranty on that property. When you go through this process, you need to actually figure out what type of deed they actually have. A lot of times it’s not going to matter because they have a warranty deed. It doesn’t hurt to ask, because if they don’t know, then you could wind up having some trouble down the road. If they’ve got a mortgage on the property, you can almost bet they have a warranty deed because I don’t know any mortgage companies out there that are going to write a mortgage with a quit claim deed. So with that said, we’re going to move to one thing that a lot of wholesalers struggle with, the legal aspect of it.
Earnest money goes on all of my contracts, I write $100 and the reason that I write $100 is because that gives the ability to cloud the title. If somebody goes in and tries to clear the title now, it actually shows that money, not a substantial amount, but enough to cloud that title. A lot of people will go out there and just put $10. Every single attorney out there that sees $10 as an earnest money is going to override that and go ahead and close that deal. So you will get passed over. You will lose the ability to cloud that title when you put $10 on that contract. So always make sure that you put at least $100 on that contract as far as earnest money and that you actually delivered the earnest money to the attorney. If anything ever comes of it and that attorney has to testify or get involved, get deposed. They say, well, no, they didn’t actually deposit this in my account. Well, now you’ve lost all the ability to get paid on that contract because the seller breached the contract. You always have to make sure that even though it’s written on the contract that you’re actually following through and putting it on the contract.
Another aspect of it is your closing date. What I always do is write closing in at least 30 days. It doesn’t always take 30 days, but I like to have that ability for a couple of different reasons. Number one, it gives your buyer the opportunity to go out, look at it themselves. A lot of times, buyers want to bring a contractor after they’ve seen it and expressed interest in it. So they have to have the ability for the contractor to go out there to write up an estimate. I don’t know how many times that you’ve actually flipped a house or wholesaled these houses but when a contractor comes out there most times, they’re not going to give a turnaround on the same day, next day of an estimate. They’re out there swinging a hammer, doing what they have to do and looking at other projects. They have to actually have time in the office to be able to type that estimate up, and that does take a little bit of time to do it. So typically, your contractors will give the estimate back to your investors 3 to 5 days after they’ve looked at it. But given that you basically lost a week, if you have on investor, go look at it, you know, the next day after you put it on the contract.
Another reason for the 30 days is because if there is an issue with the title or the seller’s ability to transfer, convey that property to you, it gives them enough time to actually remedy it. Now we don’t have to go write an extension. People get frustrated, get stressed out. Well, I’m not going to be able to close it by this time, you know, and all that is avoided most times. If you put 30 days and explain it to a seller. It’s just in case. I don’t think there’s anything that’s just going to stop you from selling it. But just in case title finds something, this gives us enough time to have that fixed, and then we can get to the closing table and I can put money in your pocket. Once we get the title back, we’ll know for sure. Usually the titles are back in seven days. So you’re already buying time trying to say that the title might take a little while, but at the same time, it may come back in 2-3 days. So if you tell your seller it’s come back, that’s completely up to you. Usually I won’t tell a seller the title is ready until I actually have a buyer ready to close on it. All that does in the seller’s mind is think OK, titles back. We’re ready to close. Give me my money. When you start stretching it out, you know 20 more days they’re wondering why you’re doing it. It’s important to understand the process behind it, why you’re stretching these things the way that you are. One thing that I always do in my contracts. It’s so easy to do that sellers typically don’t even care, but always write in my contract. Instead of a 10 day inspection period, I put a 21 day inspection period, but also put in there that it excludes holidays and weekends. So essentially, what I’ve done is take my inspection period the full 30 days. If I don’t have a buyer in that 30 days, I’m still under my inspection period, and I could back out of the contract and keep the $100. But at the same time, I would rather the seller keep the $100 than have to go through the process of Oh, you owe me $100. The next thing you know, you get a phone call from an attorney saying they’re going to sue you. That’s another reason that you put the $100 in the closing attorney, the title attorneys account. It’s so if you do have to back out of it, it’s just over. At that point, did you put a you put a paragraph, a clause in there as a disclaimer that basically says, if the buyer breaches the contract for any reason, the seller is entitled to the earnest money but has no other courses of action against the buyer. It’s resolved right then and there when the buyer breaches the contract. I’m not going to buy, even if it’s after the inspection period, then you get $100, we go our separate ways, and it’s over at that point. How you actually accomplish that is if you have another clause in the contract that basically says the buyer and the seller both are voluntarily signing this contract and understand what it means. The seller has been afforded the opportunity to have this contract reviewed by an attorney. If they choose to do it, that’s up to them. Nine out of 10 sellers are not going to do that but that clause is in there. It says they have been afforded the opportunity to consult with an attorney prior to signing this contract. If they go ahead and sign it, they basically agreed that $100 is all they’re going to get. So drop it from that point on, because then when they put that contract in front of an attorney, the attorney’s going to say that you could have called me before you sign this, but you didn’t. Now you’re stuck with it, and it’s over.
One of the ways that you have to make sure in your contract that everything is up front, that you’re not going to have any hidden surprises is another clause that basically says that they are no liens or encumbrances on the property. And really, all that means is an encumbrance or a lien is a deed restriction. A deed restriction is really simple. Take the FHA investor flip rule. You can only sell a property for 5% more within 90 days, or you can’t sell it. That’s a deed restriction. If you think of an encroachment, basically that somebody is putting their fence a foot inside the property line. That’s all that really means. Just somebody is encroaching on that property. If you have an easement that somebody has shared, a lot of times you’ll have a house at the front of the road. Then somebody, a family member, decides that they want to build a property behind the house. So now they’ve just cut a driveway to the back of the property. Now you may have two acres with a house behind one, but now they share that driveway so you actually have to sell that property with that easement involved. That doesn’t mean that you can’t sell that property. What an encroachment does, it’s kind of like an adverse effect to the property. One of the things that you have to watch out for is, does it decrease the value? If you have an easement that you’re sharing and somebody is developing a neighborhood behind it, now your driveway has turned into a main road that you’re going to have cars constantly coming in and out of when you’re leaving but you’re not actually a part of the neighborhood. Does that increase your value or does it decrease your value? You have to watch out for those things.
One of the things that most don’t put in their contract or don’t phrase it the correct way is when you write a contract in your you have the right to inspect that property, whether they want to give you a lockbox and tell you to call him every single time that you’re going out there to look at it. But you have to have the ability to put your buyers there. Contractor’s real estate agents, home inspectors, whoever it may be has to have the ability to go to that property in a timely fashion so that you can get that property, that deal closed within 30 days. It gets real hard to do when you have a property that’s already occupied by tenant because you have to give that tenant you say 48-72 hours notice before you could go. Some tenants don’t care. They’ll say, come on. But when you’re trying to get this closed, how agreeable your seller is for access to that property depends a lot on whether or not you’re going to be able to get that property closed within 30 days. You have to stress to the seller, I’m going to have contractors coming in here giving me a bid. If everything comes back on that bid the correct way then I’m going to have a home inspector come look at it to tell me if there’s anything that we can’t see. One thing that I always tell sellers is I can estimate in my own mind, and the contractor can estimate visible areas. When the inspectors come in, they’re checking things between the walls. They’re going under the house. They’re checking things that are not technically visible. That’s just another layer of doing your due diligence, but also buying you time to get everything situated. If you don’t phrase it like that, your buyer may require inspection. They may not, but you put it out there in order to have that ability. That expectation from the seller knows that it’s coming so be ready for it. Some kind of advanced warning is going to help you in the end. Some of the best news that you could give the seller is, we don’t need an inspection. The contractor came over here and they stuck the testers in the outlets. They tested the plumbing so we don’t need an inspection. We’re just going to go ahead and go directly to the closing.
One of the ways that you actually get the ability to get this property sold, and we have to kind of back up prior to the inspection, but it kind of goes hand in hand, is you put in that contract that you have the ability to assigned property, and you have the ability to list that property. You can basically market that property. How you worked that in your contract is important but you make sure that you have in that contract. Both sides have signed that you can assign the contract and that you can list that property whether you’re sending it to a buyer’s list, sending it to an agent to put on an MLS, or you listed for sale by yourself on Zillow or Craigslist, Facebook groups, wherever you want to go, you you make sure that you have that in your contract. So when Tom’s neighbor is searching the Internet, they magically find the house listed for sale. You’ve got the house under contract for $100,000 but you’ve got it listed for sale on, Zillow for $150,000. The neighbor tells them you’re trying to sell the house for $150,000. You get a phone call from the seller. Hey, what you doing? Well, sir, I’m just trying to go ahead and see the appetite for this house to see what I might be able to get for it, you know, as is because I’m in this business to make money. I don’t get rich off of every property, but I’m still in the business to make money. It’s how I keep my doors open. If somebody is willing to give me $130,000 for it, does that make it worth it for me to go ahead and sell it without renovating it? Or do I want to go ahead and renovate it so that I could get to that $150,000? I’m just testing the waters right now. You overcome that objection, and it really does make sense because they would do the exact same thing if they could, that’s why they called you. They won’t repair. So if you can get that done it’s just another avenue for you to actually make money the fastest way instead of actually having to renovate, put it on the market, sell it with a real estate agent. You’re maximizing your dollars and your time by trying to get it sold online prior to actually doing anything else and getting it closed. If you have that in your contract, whether the seller gets upset or not, it’s not going to matter but you need to explain it to them in a way that says, You know how you called me because you didn’t want to renovate? I’m not saying I won’t renovate, but if I could make a dollar to without having to do it, that’s the smartest business decision that I could make, so that helps them understand where you’re coming from. It doesn’t mean you’re not going to close or you’re doing something funny. You don’t always tell sellers your intentions but you don’t lie to them either. If they ask you a question, if you tell him 1/2 truth versus a complete lie, that’s when you start getting in trouble. Lying will get you in trouble because what you’re saying is contrary to what’s in that contract. So by you saying, Well, sir, I’m trying to see if I can get it sold prior to renovating, that’s in the contract. I can list that property. I can assign that property. So if I make $10,000, $20,000, or $30,000 off of this, it’s in the contract that I could do that. If the seller starts balking on it and now doesn’t want to close it with you because they think they’re getting ripped off, the way that you’ve written this contract now gives you the ability to go record that contract in the courthouse and actually cloud that title because you’ve got the earnest money and it’s been deposited. You’ve got the seller in breach there. You have the calls. You have the clause in it. I can list it. You’ve got the voluntary signatures where everybody was afforded the opportunity to have this reviewed by legal counsel whether they took it or not is on them. So when an attorney or a title company, once they’re going to sell it to somebody else, that property is now going to be clouded. If somebody overwrites that property and then closes it now, you actually have a claim against that title company plus the seller for the breach of the contract. If a seller breaches it because you’ve got the the language in the contract that says you can do it. I’m afforded all the rights and remedies to make sure that everybody keeps this contract hole. Then you look at the title company that insured it, knowing there was a cloud on that title because that contract was recorded with it specifically mentioning that the seller breached their contract. Now, whether you cloud a title and record that is completely up to you. Personally, I never do it because to me, that is, it’s just kind of bad business to me. That’s my own personal opinion. That doesn’t matter. That doesn’t mean somebody else shouldn’t do it. One of the reasons I don’t do it is because when I started out, I didn’t necessarily have the means to actually close every one of these properties so I made it a habit to not go all in, so to speak. In the event that I upset someone, they talk to a friend that was an attorney and said Hey, do this. Call the attorney general, call the commission. I didn’t want to get in trouble. I was trying to stay under the radar. Since then, I’ve actually just kept that same principal about how I do things. Even though you might cloud that title, if you get a knock on your door and you have to actually prove that you had the means, you did everything the correct way, that’s still going to tie you up for a little while and you’re still going to have to pay money out of pocket for an attorney to represent you. If you don’t do it and the seller just goes ahead and sells it to someone else, that’s fine. That was their house, the same way that you have to do what’s best for you. They have to do what’s best for them. Now what motivates that action? You can only be responsible for your own actions. If you do that and you record that contract, you’re responsible for your own actions. If the seller breaches it and tries to sell it anyway, they’re responsible for their own actions. It always comes back to how you do business, what you’re comfortable with, and the risk you’re willing to take.
When you write a contract, having all of these things in the contract will help you. If anything ever arises, some contingencies that always I put in the contract. I will never use a one page contract. It’s not going to cover you the way that you need it covered. I know a lot of people use these little one page contracts. They basically just say I could get out of this if I want to. That’s how you do it. Eventually you’ll get out of that habit because something will happen. My dad always said it when I was growing up in this business. If you’re in this business long enough, you’re going to get sued. It’s just going to happen. I got sued years ago. Luckily I was prepared for it because of things that I learned from my father. They didn’t have a case. They wound up having to drop it but I still had to pay attorney fees just because somebody was upset. At the same time, I kind of took it as a badge of honor because it was also always told to me, If nobody’s talking about you, you’re not any good. This is a very cutthroat business, so you have to always kind of have one eye over your shoulder to see what you’re doing. That’s why it’s important to worry so much about your reputation before you worry about anything else. Once your reputation starts taking a hit, then you’re going to have all these other examples, they did this, and they did this in the event you get sued or you get a phone call, a knock on the door from the commission or whoever. All these things are going to start adding up and it’s going to be a pattern of behavior. You may skate by whatever you’re facing right then, but you’re on somebody’s radar. Now and they’re going to watch you a little bit closer. You always put your reputation before everything. You make sure that your documents are in order, they are organized, they have the correct language. You do the process the right way. You put the earnest money and these contingencies in the contract. For example, the buyer is going to choose the closing attorney, title company. Seller has to produce a marketable title. There can’t be any liens or encumbrances on it. If it’s an occupied property and the tenant wants to stay, write in the tenant to remain. If you want to write it in there without having a paragraph, the inspection period excludes holidays and weekends. The more you write in as contingencies, the better off you’re going to be because it gives you more outs and sometimes you’re going to need them. If they’re not in that contract and you don’t have the habit of putting them in the contract, then you’re going to wind up one day facing the situation that you wouldn’t have been in had you put those contingencies in there and you had the language in the contract the correct way. Every attorney will tell you it’s all how it’s contracting and it’s all how it’s titled in this business. If you don’t have a contract the correct way and it’s not titled the correct way, you have no leg to stand on and you’re going to lose every single time. Even though you may think you’ve got the strongest case, you’re still not going to win. You’re going to wind up spending money. So figure that out.
With that being said, I want everyone to kind of just think of it in the way that I discussed in the previous episode. Don’t rush. Take your time, do it the right way. Even if something does come up, you’re not going to be in any trouble because you did it the right way. It was contracting. The language was in there. It was titled the right way. No one is going to be able to do anything to you other than maybe give you a negative review on Google or Facebook. When it comes right down to it and you’re in front of a judge, you’re going to walk out of there with a clean record because your contract, the language in it, was written the right way. You had the right contingencies in there. You put earnest money down. You don’t have anything to worry about. The dates in the contract are the right way. Everything was on the up and up. The only thing that wasn’t on up and up is how the seller performed. So when you’re in front of that judge, the seller is going to be the one that is getting in trouble, not you.
I want I want to thank everyone for listening to this week’s episode. If you have any questions feel free to ask with the link below. If if you need any any further advice, I would recommend going over to EarlToms.com to check out some more ways to build your business. Some of the processes, some of the things that you need to do. That way you’ll actually wind up having a legitimate, sustainable business that keeps you out of trouble. Again, thanks for listening. We’ll see you again next week.