How the Purchase Contract Protects *You* , the Buyer

Discussion in 'First Time Investors' started by Mary, Mar 7, 2016.

  1. Mary

    Mary Mary Hirsch (Admin)

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    Let's say you've fulfilled your new-investor goal of locating a rehab prospect with a homeowner who is willing to talk to you ...


    Are you hesitating to negotiate and sign your first purchase contract with a Seller,
    for a rehab or wholesale property, for fear of committing to a legally-binding contract that could lead to a costly real estate investment mistake? Even if you’ve already researched your comparables and have an idea of top-of-market ARV … why would you sign a contract after no more than your own look-over inspection of the property?

    What if you sign a purchase contract, only to discover before closing that the only thing you want from this property is - OUT?

    When you found it you thought it looked like this ..... but after your contractor's report and estimate it started to look to you like this ...
    [​IMG] [​IMG]

    It’s important for first-timers to keep in mind that, so long as the contract is properly written, you can terminate the contract before closing so long as you do so properly and in a timely manner, per the simple contract terms.

    A sample of a purchase contract Buyer's inspection clause.
    Worded correctly, the purchase contract serves as your safety net, while giving you the exclusive right to negotiate a purchase of this property for the duration of the contract, so long as you are acting in good faith within the contract’s simple terms.

    A purchase contract, also known as a purchase agreement, is NOT a sale.
    You haven’t bought anything – yet!
    The purchase contract is just a firm starting price, while taking the property off the market to other buyers.

    The purchase contract (aka "purchase agreement") also starts the clock ticking toward closing (or not closing) this sale.

    So how does it work?

    A purchase contract that is good for the Buyer (you) includes terms that will
    • allow you to do due diligence,
    • allow you to legally terminate the contract before closing if the deal doesn’t shape up well, and
    • gives you the right to assign the purchase to another Buyer if you decide to do so.

    If your due diligence discovers it is necessary to fix far more expensive problems than you bargained for when you first negotiated and signed the purchase contract, go back to the Seller with a price amendment to the contract, and explain that due to these expenses you will have to secure their agreement to the new price, or cancel the sale.

    If you can't negotiate the price down enough to leave you a sufficient profit, the "Inspection Clause" is your way out of the contract.

    So - Why negotiate and sign a contract BEFORE you do due diligence?

    Having the Seller sign a purchase contract …
    takes the property off the market for purchase by other Buyers, and
    locks in a starting price that you can try to negotiate downward if necessary.​

    Your purchase contract allows you to legally back out if …
    the property doesn’t pass your inspection criteria after a closer look for defects, or if
    • based on the defects you find, the seller doesn’t agree to your amendment for a price decrease, or if
    you can’t get the financing together to complete the purchase.​

    From the Seller’s point of view, the purchase contract is their assurance that, per the contract terms,
    you are serious about your offer and will terminate only for good cause, and that
    • even if you want to re-negotiate the price, they are reassured that they have a contract for an as-is sale, and they do not have to fix anything.

    Once you have the signed purchase contract in hand
    , time is of the essence to do your due diligence and finalize your terms with the Seller. Before the contract expiration date you want to negotiate and get signatures on an amendment to your purchase price, and close (or have your assigned Buyer close).

    If you wish to terminate the deal, you must do so in the manner required by the contract, within the timeframe allowed by the contract! In most cases a one-paragraph written statement of termination, signed and delivered to the proper address by the deadline, is sufficient. You and the Seller can go on with your lives.

    The purchase contract is your way forward to make this a successful wholesale, flip or rental project, and your way out before closing, if you are not satisfied with the deal.

    What questions do you have about purchase contracts? (aka "purchase agreements")

    Experienced Investors: Have you ever needed to terminate a contract - if so, why did you terminate?

    Just below is the box “Write Your Reply”. Type in your answer and then click “Post Reply” to the lower right.

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