There are a lot of ways to structure a real estate contract. The focus of this article is on providing you with some helpful clauses and addendums that can be used to minimize risk and maximize profit.
Weasel Clauses – You’ve probably heard this term before. It’s associated with a clause that lets a buyer out of a contract. Regardless of the negative connotation that might be associated with them in some circles, a good weasel clause is essential to structuring a risk-free contract as a buyer.
One of my favorites to use is “contract subject to approval of buyer’s partner”. Your partner does not have to be named in the contract and could be anyone (or anything, if it’s an entity like a corporation). If after doing your due diligence on a deal (or trying to quick turn it if you’re wholesaling), you determine it’s not really a deal for you, simply exercise this clause at any point prior to closing. As long as your earnest money has been placed at a title company/attorney of your choice, you should be able to get this money back.
Sometimes, you might feel uncomfortable incorporating such a strong pro-buyer clause in the contract. Another way to protect yourself with a clause that is a little less slanted in the buyer’s favor is to limit your “free look” period to the inspection period. For example, you might state “agreement is subject to the final inspection and approval of the property by the buyer 14 days after effective date.”
Using a small earnest money deposit is another way to protect yourself. If you have little earnest money at stake, you have little money you can lose if you default on the deal. I suggest putting a minimum of $10 down as an earnest money deposit; $100 would be better in the eyes of the law if you ever had to go to court to settle a contract dispute.
However, there is a caveat to this approach. If you attempt to default on a contract after your inspection period has expired, unless you have another weasel clause in the contract, you could be liable to the seller through a remedy known as specific performance. Essentially, this doctrine enables a seller to take a buyer to court to enforce the terms of the contract, i.e. the buyer has to purchase the property, whether he/she wants to or not. In order to prevent this from happening, you’ll need a liquidated damages clause in the contract. For example, “earnest money shall be forfeited as total liquidated damages upon buyer default. This shall be the sole remedy without further recourse between the parties.” What that means is that if the buyer defaults and no weasel clause applies, the seller’s only recourse is to keep the earnest money deposit; specific performance is not an option for the seller here.
DISCLAIMER: This article is not intended to be legal advice, but rather an overview that provides the reader with some general ideas of how to protect him- or herself in a real estate contract. Always consult an attorney in your area regarding your specific situation and the best way to structure your contracts.
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