Contract Contingencies Every Wholesaler Needs

In this episode EarlToms talks about contingencies to include in your contracts. These contingencies originated from lessons learned wholesaling and investing in Real Estate. 

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https://earltoms.com/earltoms_blog/episode-31-contract-contingencies-every-wholesaler-needs/

Transcript

0:00  
Welcome to another episode of EarlToms podcast today I want to talk about the the contingencies that we all put in our in our contracts to kind of help some of you avoid sticky circumstances at times. 

0:22  
I know they're everyone always puts in an inspection calls and you know, it's always a good idea to put in a cash and or financing as part of your contract just in the basic verbiage of the contract, you know, you can have anywhere from 10 days, seven days, always put 21 days and my contract for inspections, whether I'm buying it or wholesaling. It is just something that I've that I've learned over the years to do. You know, sometimes when people read the contracts, that inspection time kind of gets, they question it to wonder why it's it is that way. But one thing I have found over the years, is that if you're doing this the right way, you almost need that 21 days and for the inspection period. And just to give you a couple of examples, I mean, sometimes we go out and we buy these houses that are not in the best condition. So it gives you enough time to have a contractor give you an estimate. But one of the things that I've found, and it's and it's gotten me out of trouble at times, is whenever you go when you call the king, the condemnation department, wherever you are, sometimes the house is under condemnation, it's on the docket to be torn down. So what you what you wind up finding is you have to have a local city inspection to come out to tell you what is required to get it out of condemnation. And that's not going to be something that is, you know, overnight, so to speak, they need a little time to come out there and tell you those kinds of things, then you need to be able to go back to the contractor, your investor and say, hey, it's under isn't condemnation, but you can do this to get it out and give them the full disclosure of it and then let them make the decision. And then if if they decide that they don't want it now that you've got that 21 days, you can sit there and and get out of the contract. So there's a lot of things that go in, because contractors, most times aren't going to give you an estimate the same day next day, it usually takes three to five days to get the estimate on paper and get it back to to the investor or to you to be able to you know know what, what kind of rehab budget is going to be needed to get the property situated, you're going to have to have a little bit of time to run numbers to see whether or not you know what the ARV is what the rent amount is, if it's if you're planning on getting it rented. So that 21 days, a lot of times gives you enough time to get all of that situated. 

3:30  
Because when you go through, let's just say that, because I almost got caught one time doing this. But I was selling a house, you know, real cheap because it wasn't in great condition. But the wound up calling the condemnation department. And it was it was on the docket to be torn down. So I told the investor about it. We got the city inspector out there to find out what was needed to get it out of condemnation. And it was things that the inspector wasn't wasn't an I mean, the investor wasn't expecting. So it wound up not being a deal. But because I had that 21 days in the contract, I was able to get out of that contract. And it saved me from doing a bad deal and wind up hurting the relationship with an investor. 

4:22  
One thing that everyone needs to understand is that sellers are never going to tell you the truth. It's just something they don't they're trying to get as much money as possible the same way you are. So you actually have to go and dig to find out what the actual truth is. And you can ask them questions. You know, sometimes they'll tell you the truth on it, but they're never going to tell you the full truth. So you need to get that mentality that a lot of these things that you're being told, is either the half truth Allah and very rarely is the full truth. So you almost have to turn into kind of a private investigator to be able to figure out whether or not you know what, what what you're seeing is actually truthful. Because that will lead you into a better relationship with your investors. Because if your investors know that you're doing a lot of the legwork before you present it to them, then they're gonna trust your opinion. And they're gonna trust you, because they know you're, you're, you're actually one of the very few wholesalers or someone in real estate that's doing the actual due diligence. And taking this taking this business serious, you know, you look at something as simple as a as a basement. Have you ever had or foundation? Have you ever had any kind of work on a foundation, if you're not looking at it, you're just going through snapping some quick pictures thinking, Okay, well, I'm just gonna send pictures and let the investor figure out all that they need to know, you're, you're not doing them any favors, and you're not doing yourself any favors, because one thing that you really need to understand is you are providing a service. And just like an HVAC company, an electrician, a plumber, there are countless other people out there providing the exact same service. So what sets you apart from the others. And that is your willingness to actually put effort into finding out the truth, giving them a full picture of what's going on with that property. So that you can you can get the deal sold, they're going to trust you. And if you ever need it, you're gonna get the benefit of the doubt. Because you're not you're not perfect, you're gonna make mistakes. But if if you miss something on one or two deals, but you give them 10 deals that you know, wound up being exactly what what they were expecting, you'll get the benefit of the doubt on those because they'll sit there and think to themselves, you know, he's not, they're not perfect. So they just missed this, my contractor missed it, we all missed it. It happens at times. So, you know, everybody kind of shares them the blame, instead of them having the feeling of, Oh, well, they just got one pass me, I'm never gonna work with them again. And now you lose, you know, the ability to have income coming in every month. So to make sure that you're doing a good service, giving them you know, professional service is something that you need to pay attention to, because every investor that's out there is I mean, every wholesaler that's out there is providing a service to these investors. 

7:56  
So what is it that's going to make you separate yourself to be the most trusted, the one that doesn't get questioned often, and the one that gets their deals taken, whenever they're presented, that's what's gonna separate you. So you go in, and you look at a lot of these contingencies that some of you are not aware of, but they're what I put in every single contract that I write. And I actually manually write them in there. Now they're in there, you know, as part of the contracts now as part of the template, but they're at the very end of the contract right above where the signature is, so that someone can actually see him because it's something that you know, for lack of better term with his I don't play with because I've been burned in deals before. So that's what actually brought these contingencies out. Because one thing that I can promise you, and I've told you this before, sellers, whether it's a homeowner or another investor is not going to tell you the truth. My dad always told me, no one sells a house that is making them money. If it's not making money is when they sell. So when somebody sits there and says, Okay, well, this tenants paying $1,000 You know, this is what I'm going to sell it for. Something's wrong, something is absolutely wrong. So for you to sit there and just stop and go this $1,000 is great deal. Stop, immediately stop because something is wrong in the either the tenant calls them every week to get something renovated. Get a repair on it, the tenant is hard to deal with. The investor is maybe has medical issues and needs to liquidate because they know that they're not going to be able to handle it. Something in that is off or they would not be selling it now you a lot of people say I'm gonna go and You know, I need to sell these so I can go buy something else. That may be the case. But you always have to take it with a grain of salt, because like I said, if it's making the money that they say it's making, and it is the situation that they're that they say it is, what's wrong with them going to the bank and getting a loan for it, because they obviously have equity in the house, or you know, cash flow coming in something, something will allow them to go get a loan, now, they may choose that they don't want a loan. And that may be why they're selling it. But anytime someone sells a property, there is something wrong, it's your job to figure out what that is, they may just be burned out, a tenant may have moved out, they're tired of being a landlord. That may, it may be as simple as that. But there is something wrong, is the reason that they're selling it. So what I always do at the very end of my contracts, and I do these on every single contract, whether it's a vacant house, just a homeowner selling or an investor, that's that is selling a house that's got a tenant in it, I put always put in there, that the buyer is going to choose the closing attorney and the title company. Now sometimes you'll have a title company, you're not actually going to have a closing attorney, so to speak, you just go straight to the title company. But always put that in there. And a lot of you put that in there as well. But you write that in at the very end of it above the signature. So there's no mistaking what's going on, because whatever you write at the very end, that's not part of the verbiage of the contract, overrides what's actually in the contract. So it's important to put it in so that there's no confusion. And if anything ever, you know, happens, it's sitting there written right above a signature. So when someone says I didn't see it, it's literally two inches away from where you signed. So if you didn't see it, that's your fault. It's not in some kind of law, your written language up, you know, on page two of the contract, it is right above where you sign. So when you sit there and try to say you didn't see it, it's not going to hold water, because it's two inches above where you signed. 

12:27  
Another thing is, always put in there, the closing cost on this now that this is another thing that's usually in the contract somewhere. But again, it avoids confusion because it's two inches above where they sign where it says either the buyer is going to pay closing cost or buyer and seller going to split them equally. seller is going to pay them whatever is the normal in your market. Always put that on that same page two inches above where they sign. So there's no confusion that overrides whatever is in that in that template contract that we're also in and out. And it sits right there. So again, if they say, That's not what I agreed to. It's two inches above where you sign. So Yes, you did. One thing that I put in there because it's it's happened before, but it's a very sticky scenario. Because you rely a lot of times on a closing attorney or a title company to have your best interest as far as buying a property, but sometimes you will come across an attorney that is not paying attention or overlook something themselves and wound up you know, selling you a deal that didn't actually go the way that it was needed. So what I always put in there is that the seller is going to provide a clear and marketable title with a warranty deed. Now what that means is there's no liens, no encumbrances, no encroachments, anything, any kind of detrimental effect or adverse condition associated with that property. If it's marketable, that means it's clear. So if you have a clear and marketable title, that means you can turn around and say, Hey, I have a clear title, warranty deed. It's not a tax deed. It's not a quitclaim it there's there's not a foreclosure date, nothing, nothing of the sort is in there that is going to give you some kind of hesitation to buy this and know that there might be some claim on it in the future, or there may be some duress and involved in that, in that deed, what a lot of where this where this really came from was one time someone tried to sell me a property right after HUD came out with their 5% investor role. And I wasn't aware of it because it had only been out about a month. So basically, what it says is, you can only sell a property for 5% more than you pay for it within 90 days. It's a deed restriction. So I get in this property, I'm renovating it, and then I turn around and try to sell it. And I'm sitting at the closing table. In the end, the attorney looks at me and says, You've got a deed restriction of 5% set and only us. And I'm just thinking to myself, no, you know, we're, we're ready to sell it. So I wound up actually having to wait it out for another 30 days to be able to sell this property. So luckily, the buyer stayed because they wanted the house. But because the deed restriction was on there, I wasn't actually able to sell it for what I wanted to sell it for. Because it wasn't marketable. It was marketable at 5%. But it wasn't marketable at what I could sell it for. So like I said, that deed restriction was on there, and it just, it almost cost me that deal. So a lot of times, you have those things that you're not aware of that are involved in it. So when you put on there, seller to provide clear and marketable title with a warranty deed that can be special general. But it's a warranty deed, no deed restrictions, no liens, encumbrances, encroachments, things like that. So make sure you have that line in your contract two inches above where they sign as well. 

16:48  
Depending on how you buy the house, you'll have some kind of improvements, you know, what I typically do is just try to do it as is, if you put something in there that you know, seller is going to install a new toilet. Before you close, you need to be very specific as to what they're doing. So let's say for example, they're installing a toilet, you need to have in their cellar to install the toilet and hall bathroom functionable. no leaks, things of that nature, you need to be very specific about what it is. Because if you go in and they say okay, well, I'm gonna go and put a toilet in there. You know, for all you know, they might go get a used toilet that has a crack in it or something like that. But they they call that new because it's not the one that that was there. So you need to be very specific. If you ever put anything about improvements in there before you close, I would just personally say go ahead and just do it as is. Because it avoids a lot of he said, she said, because their standard may not be yours or what you're expecting. So I would just always just recommend going with the as as part of it. But again, if you do that, right on that same page of the signature page where it's two inches above where they sign, so if they say, That's not what we agreed to two inches above where they signed, so yes, it is. 

18:24  
Now one thing that I do when we get to these rental properties, if there's a tenant in the property, this is where you can get into some trouble with your investors that you're selling to. So you always need to have a way back. If another investor that has this has told you a story. And it's not really true. So these are ones that are put in with with properties that are occupied with tenants. Because again, they only go in there if I've been burned on it before. And I'm very detailed about it. Because once you close on it where I'm at, unless it's in the contract, you have no recourse I live in a buyer beware state. So everything that a buyer, a buyer assumes everything once they close with no recourse unless it's sitting in the contract. So you have to you have to put it in the contract to make sure that there is a recourse there. So what I want up putting in there are some very simple contingencies. When tenants are involved. The first one I put in there is the tenant is to remain. That's the easiest one. That's common sense. Everyone should know it. But you would be surprised how many times that you buy a rental house, and then all of a sudden, the previous owner has told them that they were about to sell it and then they they're free to move. And then all of a sudden, you have a vacant house and now you've got to go renovate it and you weren't expecting it. So instead of you having money coming in, now you actually have money going out. So you need to, you need to pay attention and have these contingencies in when you're dealing with tenant occupied properties. So make sure you always have tenant to remain in, in the contract, and it can be just that simple ticket to remain after close. That's simple. 

20:26  
Another one is, and a lot of people miss this, your investors aren't always going to ask for it. But, you know, if you if you ask for it, it may be an extra bit of money that you make on it. If you're assigning it, you're not gonna get it. But if you're double closing, you might get it. But I would tell you this one to go ahead and pass through, because it's just good business is ethical. But you always put in there the security posit, for whatever amount that the owner has told you to be transferred at closing. So let's say that your tenant has $1,000 security deposit, you write in the contract, security deposit of $1,000, to be transferred to buyer at closing. And then that way, it winds up being on the hood. So your investor gets that $1,000 for their security deposit. So when the tenant moves out, your investor is not technically having to come out of pocket for the security deposit if they have to return it. I have been caught before on this one.

21:33  
It was it was about 10 years ago. And I was not aware of it when I bought it. So that's what made me put it in my contracts. Because this is another one of those things like the tenant to remain. Sometimes a tenant will be in a house, but they've got a piece of paper that says they're going to lease option or they're doing a rent to own or the owner said at any point in time, they can decide to buy the house from them, whether it's a rent to own or lease option, they have a piece of paper, a private agreement that you're not aware of because it's not on the lease wasn't included. And you have no way of knowing that, because I didn't disclose it. So you basically put on as a contingency on the contract, no private agreements with the tenant to own and or have an option to buy. After closing, you leave it at that. And if the owner signs it, and there is an agreement, you have recourse because they didn't disclose it. And that has an impact on value and whether or not you would have bought it. So again, no private agreements with the tenant to own and or an option to buy in place. leave it at that. 

22:55  
You also have something in there. And I've been called on this one before, this was a section eight property that I bought that the second, the amount that I was told that the tenant paid was actually different than what was supposed to be collected. The previous owner had been collecting $200 or $250, every month from the tenant, because I had this little agreement going, but they didn't tell the Housing Authority about it. Well, two months after I bought this property, the tenant decided that she was going to stop paying. So I called her and I said, Hey, I need your portion. And she said, I don't have a portion. I don't know what you're talking about. And I said, Well, you know, you're supposed to be put this is the total amount of the rent, I get this amount from the Housing Authority. And I get this amount from you every month, you know, you paid it last month, whatnot. And she said, Well, I don't have a portion with the Housing Authority. It's not on my contract. And I thought to myself, you know what, let me go look at this hat. And I actually had the taste the guy down. That sold it to me, because he gave me a lease, not the actual Housing Authority agreement. And I bought it that way, instead of doing it the way that I should have done it. Because I bought houses from this person before, so I didn't think anything about it. I let my guard down and I was to blame for it. The the actual Housing Authority agreement stated on it that it didn't have a tenant portion. So the amount that I bought the house expecting to get every month was $200 or $250 less than what I was actually able to collect by law because unfortunately, if the Housing Authority doesn't agree that the tenant has a portion and you collect rent on that you just committed a felony. So to avoid me going to jail, I accepted $200 or $250 less until I could wind up getting a woman out of the house. And then I had to go in and renovate it again and Get another tenant in it. So I wound up costing me more money than it should, because the seller just had a private agreement on it. And he didn't even think anything about it, it was just the way he did business. But it was awesome, honestly, the last house ever bought from him, because if he's accepting money from tenants when he's not supposed to, I don't want to get caught up in that in any way intentional or not. So I just stopped buying from me. So you, you have an, you have another contingency in there that says there are no agreements between the tenant to reduce the rent after close at a date after close. And that means that whatever the rent amount is, when you close will be the rent amount going forward, the owner does not have an agreement to lower the rent to a tenant. Going forward after the close in six months, three months a year, whenever they renew, whatever, they don't have that agreement. So you leave everything the same way. So you don't have any, you know, agreement for the rent amount to be reduced after close, you leave it at that they say I wasn't aware of it, that that was in the contract. seller, it's two inches above where you sign, Yes, you did. So you can get recourse on that in case you run into that scenario where somebody is collecting $200 or $250, more than what they should, and then you can actually force it to where it goes back. And they have to, they have to give you that money. Because it was something that they didn't disclose, and basically in breach of contract, committed fraud. So they can either go to jail, or they can pay you the money. And you'd be surprised. I mean, it's it's not an easy situation, makes it uncomfortable, but leaves you in the in the driver's seat, because you you put it in the contract, they signed it. So they can either pay it or go to jail if if you wanted to enforce it. So you put in there that that the the seller has a specific rent amount. And that's another thing when you go in there with they don't have a reduced amount, or there's no private agreements, you put in there that the tenant is to pay this dollar amount. So just for argument's sake, let's say $1,000. So you actually put in their tenant to pay $1,000, rent, after close per lease slash seller. And then that gives you again, recourse gives you the amount that the owner stated that the tenant was paying. So if something winds up being different after you close, again, you've got resource recourse, it's two inches above where they signed in one thing right under it, and this is this is where it really gets a seller, if they do commit fraud or don't disclose something, as you put in there seller responsible for any differences, and rent them out after close. If they if you put that in there and they sign it, they are basically giving you free rein of the winning side, if anything changes, so like go back to that example of the housing authority, whether it's $200 to $250, less of what I was able to collect, had I had this contract this contingency in the contract, then I would have been able to collect that $200 or $250 for a year, two years, whatever. You know, my attorneys wanting to enforce on by the law of the state or city or wherever you're at. So you put in the contract if it's if it's occupied, seller is responsible for any differences and rent them out after close versus what stated on the lease per the seller. And when they sign that, like I said you have given you have given yourself the driver's seat because they are basically saying everything that I have told you about the rent amount is as true and accurate. If If I've sold you something based on the statements not disclosing something, then accept responsibility for it. 

29:41  
So when you it's in this day and time it's not enough to just go out snap some pictures taken owners word for condition, rent them out anything that goes on with a property, you actually have to dig own these on. These deals, because if you don't, you're gonna wind up making those costly mistakes that I've made over the years, that led to me putting all these things in the contract. Now, if a seller is telling you the truth, they will not have one drawback to sign and that contract with every bit of this in there, if a seller is not telling you the truth, they're going to complain about these cons about these contingencies. And that in itself is going to tell you whether or not you need to proceed on that deal. So you're basically drawing a line in the sand and saying, if you told the truth, you have nothing to hide, sign the contract, let's get the deal done. If you're lying to me, these contingencies, basically telling you that I'm gonna hold you responsible for it. So you either tell the truth, or get held responsible. And that, you know, some sellers like it, some don't. But you'll be able to weed out the ones telling you the truth, versus the ones that are just, you need to take a bath after you talk to them, because they're like a used car salesman. We all know those people in this business. It's contingencies are unfortunate. But they're necessary now, because of the way real estate has evolved over the years, there's too much money on the line, there's too much involved. So you have to be that person that is willing to go out, investigate, but also cover your backside. Because there are some very slick people in real estate that can lock and do these things and think they're never going to get caught. But when they run up against you, maybe they get called, or maybe they finally have to tell the truth. So are they going to like you if they're not telling the truth? Probably not. But one thing I was also always told by my dad, is when they run up against you, and you've got these contingencies in there that you're holding them accountable on, they're gonna talk about you behind your back. No, you don't do business the right way. Or you don't do this, and you're terrible, and blah, blah.

32:12  
Well, like I said, one thing my dad always told me, if they're not talking about you, you're not any good when you're good. Your competition to them. So if no one's talking about you get better get people talking bad about you. Because that tells you you're a player in this game, take it as a badge of honor. Because obviously, you've done something that held them to account. They didn't like it, your competition now. So now they got to try to, you know, cancel you for lack of a better term in society right now. Let them do it, let them try. Because the one thing that you own, the only thing that you have in this business is your reputation. And more people that you work with are going to understand now why they do business the right way. So whatever they're saying about you is not true, because I've done business with this person before. And it is exactly the opposite of what you're saying. So basically, what they're doing is they're telling themselves that they're the shady one in the whole thing. And then that tells that investor or that wholesaler, hey, maybe I need to watch out for this guy. Because if he's sitting there bashing such and such, I know that person and I know how they're going to do business. So if they're bashing them, then that's raising my radar, or Hey, do I need to watch out for you always keep people to account in this business, you're gonna upset some people, you'll lose some bills over it. 

33:45  
But at the end of the day, you're going to stay out of trouble. And you're going to gain trust from these other investors. And that's going to eventually lead to you being able to do more deals on an on an easy basis. Because once you gain their trust, because of the way you do business, you're not gonna actually fight the same hurdles, that a lot of these others in this business are fighting because no one in real estate trusts them anybody else. Because of the nature of the business, the amount of money that's out there. So if you want a being that person that can be trusted in this business, you can essentially write your ticket. 

34:24  
Now with that, I think we've we've covered a good bit today. We've kind of gone over time a little bit, but but I hope this helps, I would tell every one of you to write these contingencies down. And depending on how you're buying the deal, start using them because they will come in handy and I promise you, eventually, they will save your backside because they've saved mine. I've learned from them, but when I learned from them, they cost a lot of money. So I wouldn't I wouldn't go down that road being cost a lot of money, I will just go ahead and, and put these contingencies in the contract. So that that way if anything ever happens, you're basically and and one thing that you need to do as well is whenever you are selling the property to the owner, you need to actually include these exact contingencies in your contract to yourself to whoever you're selling the property to, so that you give them the recourse because what's gonna wind up happening is you just need to change the buyer and the seller, because now you're going to turn into the seller. And they're going to turn into the buyer, instead of you being the buyer on the A B side. So what what you wind up having is, it's unfortunate, but it's a necessary evil of business in real estate, but your buyer is going to wind up having to technically sue you. And then you're going to wind up technically having to go after the original seller. But if you include it all the way through the net gives your investor a clear path back to the original owner and pretty well keeps you out of out of trouble. Because whatever you have to give to your buyer, you're gonna get from the A B seller. So it's an even trade, you have to pass these these contingencies own on the b2c side, just changing buyer and seller. So don't forget to do that, whenever you're putting these contracts in there. And then that way, it's kind of a wash all the way through from your investor back to the original seller and you're in your your buyer is actually going to appreciate that you did that, because it gave them a little bit of accountability and a way to recoup the original seller lying because you took the time to take care of your buyer.

36:47  
That will gain you a lot of trust and a lot of business down the road if you were willing to do that, and pass it through. So make sure you put those in there. 

36:57  
But with that we're gonna draw to a close. I hope you've enjoyed this this episode. If you need any more information about how to grow your business and just real ways, you can head over to EarlToms.com. There's plenty of material on the website about different little things that will help you grow your business. Not a lot of fluff on there. It's just actual ABC is a business as far as real estate goes. But again, if you want to just head over to EarlToms.com. And with that, we'll have another episode for you on a couple of weeks. 

37:38  
Thanks for listening