Making Offers On A Real Estate Investment
By: Carey H.
Most of the sellers you deal with will not be sophisticated real estate investors; because of this, they often have a lot of emotion attached to their property. It may be the sellers’ first home they bought, or their deceased parents’ house... or any number of other reasons there are for why someone would be emotionally attached to a piece of property.
One way to avoid these potentially emotional minefields is to try to understand the emotional side of a real estate transaction. Be sensitive to the seller’s needs and feelings by asking sensitively worded questions or by expressing real sympathy and concern. It can mean the difference between making the deal and missing out on a lucrative opportunity.
Before you make an offer, take the time to gather the following information:
· How long has the seller owned the property?
· Does the seller own other income property?
· What are the seller’s plans for the proceeds from the sale?
· Has anyone else made an offer yet?
· If so, what were the terms and what happened?
· How flexible is the price?
· Will the seller consider carrying any financing?
· Is the seller easily offended?
· Is the seller willing to negotiate on price and terms?
Answers to these questions and any others you can think of will help you achieve your ultimate goal, which is to buy the property at a more profitable price or in a more profitable way using creative financing techniques.
Writing the Offer
After you’ve gathered the necessary information regarding the buyer, you may feel you’re ready to write an offer. However, before you do, there are still some decisions to make.
First: decide the kind of format to use in order to write the offer. The trick is to meet the wants and needs of both the buyer and seller; this way, everyone comes away feeling like they’ve won – a win-win situation.
Because the offer is a legally binding contract signed by both parties, the decision of how to write the offer is an important one. The offer needs to be written in such a way that it reaches an agreement with the seller on price and terms, which varies from state to state, and even varies from city to city within some states. You also want to try to have the offer meet the needs and wants of both the buyer and seller, so everyone feels like a winner.
There are three ways in which you can write and make an offer:
1. Have an attorney draw up a contract of sale.
2. Use a standard pre-printed contract (often called a deposit receipt, this contract is usually supplied by an agent, though a sample copy of a contract has been included in the appendix of this manual).
3. Create a simplified letter of intent.
Keep in mind that whatever method you use, laws regarding contracts vary from state to state. Make sure you familiarize yourself with the real estate laws and codes of the state in which you are looking to purchase property.
Using a Lawyer
An attorney is rarely used to draw up an initial real estate contract, despite its importance. This is probably because it often takes many offers and counter-offers and contract drafts before both the buying and selling party come to an agreement. Using a lawyer from the get-go can be fairly expensive if that lawyer has to continually draw up and review countless contracts.
Where you will want to use an attorney is when you’re purchasing larger properties with complicated financing and intricate leases, such as:
· Complicated changes to the preprinted contract.
· Complicated leases on the property.
· A seller using an unusual financing format, such as a land contract, AITD, or lease-option.
· Subordinating the financing to a new loan in the future.
· Potential title problems.
· Potential problems with easements, hazardous waste, or zoning issues.
In these instances, you will want to have an attorney review your documents.
However, this does not mean you shouldn’t have an attorney review your final draft of the contract before it becomes legal. Thus, ask around for referrals of good attorneys; it is best to find one who specializes in real estate. A specialized lawyer might charge more per hour, but it will pay off when he/she is able to give you better advice, which could save you money.
Pre-printed Sales Contracts
In most real estate transactions, deals are put together using preprinted sales contracts provided by real estate agents, though we’ve also included a sample contract form in the appendix of this manual you can use as is or as a template to help you create a contract more suitable to your needs. If you are using an agent who is a realtor, the contract will probably have been drafted by the national association with which the realtor is affiliated and in that realtor’s state.
If you are using the preprinted forms, make sure you use the form designed for the specific type of property on which you are making an offer. In doing so, you’ll need to look for the following types of forms:
· Residential (homes and condominiums)
· Residential (1-4 rental units)
· Income property
· Commercial and industrial
· Exchange forms
· Lease with an option to buy
The reason for using the correct form is that each includes all the necessary clauses, which allows you and your agent to make offers without having to hire an attorney every time.
However, keep in mind that these preprinted forms can be considered a binding contract if the seller accepts your offer. Therefore, include a provision that is contingent upon your attorney’s approval.
This offer is contingent upon review and approval of the final agreement by the buyer’s attorney. The buyer’s acceptance of the purchase contract is contingent upon this approval.
As your real estate deals and the properties you buy get bigger and more complex, you might want to include such a clause as the one seen above in all your original offers.
Letter of Intent
Many unsophisticated sellers are scared off when they receive offers written on pre-printed purchase contracts. This is because these contracts are usually lengthy and complicated. Thus, sometimes it’s better to use a less complex approach, known as a letter of intent. This is used as a more simple expression of the buyer’s desire to purchase a property. A letter of intent outlines how much the buyer is willing to pay and the kind of terms he/she is looking for.
By eliminating in-depth legalities, the buyer and seller can quickly find out whether they’ll be able to agree to terms and put a deal together. For the simple reason that the agreement is not legally binding, this allows the parties to concentrate on working out the more important issues, which works to solidify a transaction. Though this is not a legally binding document, it’s a good idea to have your attorney draw up a standard form, one you can use again and again, just to be safe.
One downfall to letters of intent is that sellers not familiar with them may not take your offer seriously. Thus, be sure you warn the listing agent before hand (if the property is being sold by an agent). In fact, have your agent fax the seller a generic letter of intent in advance. This way, there won’t be any surprises if he/she is not familiar with this type of agreement.
Good Faith Deposit
No matter which method you use to make an offer, you still need to decide how much of a good-faith deposit to include with that offer. A good-faith deposit is how much money are you willing to put down as an initial deposit on the property. This initial deposit is something known as “earnest money.” This puts some money at risk after due diligence is completed – it makes you “put your money where your mouth is.”
While there is no law that demands you must include such a deposit, it has become an integral part of the offer process. In doing so, the deposit serves two functions:
1. It tells the seller you’re serious about the property.
2. Upon acceptance of your offer, the seller takes the property off the market.
The good-faith deposit isn’t money that is lost if you go through with the purchase of the property. Simply put, it’s money that goes toward the price of the property, though paid in advance to show you are to be taken seriously.
Once you put up the good-faith deposit, the issue becomes who will hold the money. Unless your offer specifies otherwise, the seller usually holds the deposit. This is all fine and dandy, as long as you go through with the purchase of the property, as that money is part of the payment. However, you can imagine it could cause some problems if the deal goes sour and you want out of the agreement – and you want your money back. Therefore, always address this issue when you write your first offer on the property. In doing so, here are some general guidelines to keep in mind:
1. There is no need for the seller to cash your good-faith deposit check until you have a basic agreement in place. You can write into the offer that the deposit be held uncashed by the agent until the offer is accepted by both the seller and the buyer.
2. When it comes time to cash your check, give it to a neutral third party. In doing so, you’ll better protect your money until the transaction closes. Many states have escrow companies and titles companies that assist in closings and will hold the funds in their trust accounts.
Once an agreement is negotiated, the due diligence period begins. This period of time allows you to do an overall interior inspection and a thorough analysis of the property without risking any of your deposit.
During this time, clear up any final issues you have regarding the property. Such issues should be expressed in your offer as contingencies (legally defined as a condition(s) upon which a valid contract is dependent). Contingencies give the seller notice that you will be researching specific items pertaining to the deal.
If you decide not to buy after the due diligence period has expired, most contracts are written so that you will forfeit your deposit. This is one reason why sellers usually want large deposits. They want it to be big enough that you feel committed to the deal. It could cost them a lot of time and money if you back out at the last minute because you find something that looks better. However, you don’t want to get into a property that you don’t feel would make a good investment. Take this into consideration when you write the contract and put down a good-faith deposit.
If after the research you find the issues to be satisfactory, make a final decision and proceed with the purchase.
Purchasing property is a serious investment. If you decide to back out of a real estate purchase after the due diligence period without good cause, the seller can sue you for what is called “specific performance.” If this happens and a court rules in favor of the seller, you will be ordered to complete the purchase under the terms of the signed agreement. To avoid the possibility of expensive litigation, many contracts offer buyers and sellers an opportunity to agree to liquidated damages.
A liquidated damage clause allows the parties to decide ahead of time what the amount of the damages will be in the event of a dispute. In a real estate transaction, damages are the money forfeited by the buyer in the event the buyer backs out of the purchase. Remember, this is not the case if the contract is terminated due to unresolved issues or disapproval of contingencies. Damages only apply when the buyer fails to close the transaction for any reason other than a contingency.
Properly Presenting an Offer
Once you find a property and you decide to make an offer, make sure your offer is not way below the asking price and that it is presented properly. Otherwise, you may insult the seller.
Hurting the seller’s feelings is one thing, but having him tear up your offer and refuse to make a counter offer is an entirely different matter, which can happen if he/she feels insulted by what you present him/her with.
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