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                                   Contract Clauses

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Contract Clauses

                     Always be the one to write the Contract

The heart of Negotiating starts with a verbal give and take that moves the parties from their individual wants and needs to a point of agreement.
That, of course, is negotiating, but the most important thing is to formalize the verbal agreement and translate that to a written contract
.

You can have several contracts when you are buying and selling, you can use standard contracts, but it is the clauses in the contract that are the most important.

There are 7 clauses you should use in your purchase agreement when you are buying a property.
Make sure you go over this list before you sit down and meet with a seller or buyer so that you understand what you are asking for.
You should refer to these clauses when you are buying or selling.

    Clause One: Liquidated Damages Clause:

A liquidated damages clause is critical to your minimizing risk because it lets you contain the cost of walking away from a deal.
When you enter into a contract with another party you both have the right to expect the other party to perform everything that was mutually agreed to in the contract.
If one party doesn't do what they agreed to do, the other party may sue for "specific performance."
This means that they ask a court to make the defaulting party live up the terms in the contract.
When you are buying real estate and you sign up an agreement to buy a property, you want to be able to walk away from the deal if after doing your due diligence you discover something wrong with the deal. 
Most investors believe that subject to clauses will give them an easy out if they want to get out of the deal. 
         For example, "This agreement is subject to Buyer's inspection and approval of the property." Or, "This agreement is subject to Buyer obtaining satisfactory financing."  These escape clauses give the seller and their lawyer concerns about your commitment as a buyer.

A liquidated damages clause merely spells out the exact payment one party must make to the other party in a contract should a default occur.
When you're buying a property, you use a liquidated damages clause that spells out that if you as the buyer default, then the seller gets to keep all the money you've paid to the seller so far as "full and complete liquidated damages."
This sounds pretty strong and sellers like that, but remember, you are only giving the seller a small upfront payment. 
I usually give no deposit or a very small amount until the contract is accepted. 
You should delay the payment of any serious up front money until the point that you have done your due diligence and are sure you want the deal.
(Preferably you will have already found your end user for the property before you ever give the seller any serious money, whether you put a tenant buyer in the property or are selling to a buyer for all cash.)

Here's what a version of a liquidated damages clause looks like:
"In the event of default of Buyer, all money paid to Seller by Buyer shall be retained by the Seller as consideration for the execution of this contract and as agreed liquidated damages and in full settlement of any and all claims for damages."

    Clause Two: "Or assigns, Buyer"

To give you maximum flexibility whether you buy and hold or if you want to quickly move  the property for a fast-cash profit, is the ability to assign your interests in the deal over to another party for a quick cash payment. 
Even though most contracts are assignable, you should pre print into the contract the words "or assigns" right after the blank where you fill in who is the buyer.

The reason you pre print it into the contract is because if you write it in by hand it calls it to the attention of the seller.
Anything that is printed directly into the agreement usually flows smoothly past the seller and is usually accepted without comment.

Remember if the contract that your seller wants you to use has a "non-assignment" clause, make sure you cross out this clause and have both you and the seller initial the change.

    Clause Three: The Closing Date and Closing Agent

Controlling the closing is critical for your success when buying or selling.
You always want to be the one who gets to control who will be doing the closing so that you can make sure they do it in a way you are comfortable with.

Also, when you are buying you want to be able to have a degree of flexibility in case you need a little extra time to finish getting your financing together, find your renter for the property, or just to do other preparation for the closing.

You can accomplish both these things by using the following clause:

"Closing shall be held on or about ___________ unless extended by no more than 60 days by either party in writing. Closing shall be at a time and place designated by Buyer, who shall choose the escrow, title, and/or closing agent."

Clause Four: Get Access to the Property and Permission to Start Your Marketing BEFORE You Close

You want to get started on marketing the property to an end user as soon as possible. To do this you need access to show the property and ideally permission to put your marketing sign in the front yard while you are waiting to close.

Remember you are working with a motivated seller who has a specific need or problem you are helping them to solve, and should work with you to complete the deal.

Here's what a version of this clause looks like:

Buyer shall be entitled to a key and to access the property prior to closing to show partners, lenders, inspectors, contractors, and other interested parties prior to closing. Buyer may place a sign on the property prior to closing to help Buyer find end user for the property. (Be aware, if the seller still lives in the house and it's not empty then usually rather than him giving you a key, you simply arrange to bring any interested parties, whether they be prospective buyers or renters or contractors, over at a time when he can leave the house for a few hours and take the kids to a movie or to the park

Clause Five: The Inspection Clause

The inspection clause should clarify that everything should be working in the property and that the seller will pay for any needed repairs prior to closing, but it also says that unless otherwise noted you get all the personal property, and appliances, ect. It also comes with a guarantee from the seller that survives the closing that everything is in working order when you buy.

Here's a version of the clause:

Buyer or his agent may inspect all appliances, air conditioning and heating systems, electrical systems, plumbing, machinery, sprinklers and pool system included in the sale. Seller shall pay for repairs necessary to place such items in working order at the time of closing. Within 48 hours before closing, Buyer shall be entitled, upon reasonable notice to Seller, to inspect the premises to determine that said items are in working order. Unless specifically excluded in this agreement, all other items of personal property located in or on the property shall be included in the sale shall be transferred by Bill of Sale with warranty of title. Seller expressly warrants that property, improvements, buildings or structures, the appliances, roof, plumbing, heating and/or ventilation/air conditioning systems are in good and working order. This clause shall survive closing of title.

    Clause Six: Automatic Renewal or Extension of Note

Most of the time when you are structuring owner financing deals the seller doesn't want to have to wait for 30 years to get all of their money, this is where a balloon note works

A balloon note is a loan that has a clause saying that the unpaid balance becomes due at some future date.
       For example, this note will balloon in (3) years, at that time the remaining balance will become due.

At the time you wrote the contract 3 years may look like a reasonable amount of time, but things happen along the way and it's important to protect yourself when everything doesn't work out as planned. 
This is why it's important to ask the seller to be flexible and ask for either a one or two time renewal of the term of the loan, or for an extension if you need it. 
To give the seller incentive to renew or extend the loan, offer to make an additional payment, if you do make sure you spell out that this payment is of principal and it counts towards the money you would have had to pay the seller. 
The time to ask and to get it in writing is up front, NOT at the end of the loan.

Here's a version of the Automatic Renewal or Extension of Note:

"Borrower may renew this note for _________ additional terms by paying to the Note Holder $X of principal on or before 30 days prior to the expiration of this promissory note."

    Clause Seven: Substitution of Collateral

This clause means the seller gives you the right to free up the property you are buying of any lien and move that lien over to another property you have.
Imagine you are buying a $200,000 house and the seller carries a second mortgage of      $50,000 at 7.5% interest.
You want to sell that house but don't want to want to lose out on the low interest use of the  $50,000.
If you have a substitution of collateral clause in your loan agreement with the seller you can move that low interest second mortgage of $50,000 over and secure it against another property you have that has enough equity in it to be fair to the seller.
Again, you don't have to use this clause, but it does give you maximum flexibility.

Here's what a version of the Substitution of Collateral Clause looks like:

"Note Holder agrees to allow Borrower to substitute any property or properties in which the Borrower has a total amount of equity equal to or greater than the amount of equity as existed to secure this note at the time this note was created, as collateral for this promissory note and accompanying Deed of Trust. Furthermore, Note Holder agrees to execute in a timely manner any documents necessary for the implementation of this substitution of collateral."