I’m looking right now at a purchase agreement that a client brought in the other day. He’s a real estate investor and it’s a “one pager.” If you can see here, I’m not going to show you too much about it, but he brings in a one page purchase agreement. He’s a real estate investor and he’s purchasing a property for $75,000 and he downloaded this purchase agreement off the Internet. I always like to say “nothing of value is free” and this would be proof positive. So I want to share with you some of the do’s and don’ts that you, as a real estate investor should be looking at when you review a purchase agreement. Actually if you use any purchase agreement, you should first have an attorney review it. But if you’re trying to save money and cut corners and cut costs, there is a problem with purchasing a $75,000 home cash and then using a document where the paper’s worth more than the document and the words, in this document, it’s just absolutely terrible.
I want to share with you a couple items here that hopefully will help you when you’re looking to purchase a piece of property and invest that you go out and get a more solid, thorough document that you can use comfortably and competently, and also hopefully with the approval of a real estate attorney.
So one of the first things that I note on this purchase agreement, it’s again, one page, is the language that says that this purchase transaction is going to close “on or before a certain date.” Now, I like to have my clients actually put “on or about a certain time” not “on or before” because if you’re a real estate investor who’s buying from a distressed seller, you may need to have more time than what you’re allowing yourself on the purchase agreement. So let’s say you’re supposed to close on or before April 1st and something comes up. A title company is not going to allow you to close a transaction without an addendum to the purchase agreement. And that means that you may have to chase down your seller in order to endorse a new addendum that says, “Hey, it’s April 2nd and we need to make this purchase offer valid because it’s already expired. So I need your signature.” So it becomes very difficult sometimes for a real estate investor to trace or a rundown their seller. So a better way to do that is to have a purchase offer that says on or about a certain date. And this gives you around, on average two weeks of time, to work with in Michigan, in order to close your transaction.
Another item that becomes problematic, especially in this purchase agreement is there’s two areas that reference the type of deed that the buyer is going to receive from the seller. The buyer in this case is going to be the wholesaler and he needs a deed in order to be able to flip the property to his new investor. Or if you’re a real estate investor who is going to be holding this property for awhile, you’re going to want to have a deed that is probably better than a quit claim deed. In this purchase agreement, there’s language that basically says we’re going to give, the seller is going to give marketable title to the buyer. But then in another paragraph, there’s a item that says the seller is going to provide a special warranty deed to the buyer. Those are two different types of deeds. Well actually a special warranty deed is one type of deed. It really doesn’t reference the other type of deed when it talks about marketable title, you can actually get a quit claim deed from your seller and that would be considered, if the title work comes out okay, a marketable piece of property. So the type of deed that you’re going to want to get from your seller is very important and you should specify that deed in writing.
The best type of deed to receive from a seller is going to be a warranty deed and then a special warranty deed. And then lastly, a quit claim deed. Quitclaim deeds are pretty much what the documents that say, “I’ll convey to you whatever title I might have.” It doesn’t give the purchaser a lot of comfort or warranties with regards to the validity of title. And, I have a bunch of articles and some videos dealing with deeds themselves that you should look into. Right now we don’t have much time to speak on deeds itself. But here the problem with this purchase agreement is that there are two paragraphs or two provisions that call for two different types of deeds.
The other item that becomes problematic on this purchase agreement it’s not in here actually, but my client had told me that they’re purchasing this property and there is an occupant, a tenant, and they intend to keep the property and then lease it back or continue with the lease for the current tenant. Here’s the problem with this purchase agreement, there is no reference to a tenant being in the property currently or that the property’s occupied. There should be provisions within the purchase agreement that deal with who keeps the security deposit. Also, is it the buyer or the seller who gets the security deposit. But more importantly, what about late payments that were incurred prior to the sale of the property? Who do those payments then belong to? Do they belong to the new buyer or do they belong to the former owner? The seller. So you have to be very careful and clear as to who’s going to get this property with the tenant. What are the benefits of the lease and who gets those benefits of the lease?
These are three items that I’ve just looked at in a period of like probably 10 minutes. And so if you’re spending $75,000, do yourself a favor – go get yourself a real estate attorney and spend a little bit of money. Invest the time and energy, get a good document that you can use over and over and over again. But don’t use this type of document, a “one pager.” It’s going to get you in trouble.