JKL Properties wanted to buy a piece of property that they could turn into an apartment complex. They found a site that had once been apartments, but had been turned into offices, and could easily be returned to residential housing. JKL signed the purchase agreement after they checked with City Hall to be sure that the zoning still permitted apartments on the site. Just before closing they hired a lawyer to look over documents. He noticed a restriction in the title papers that prohibited residential use of the site. Rather than risk a lawsuit by neighboring property owners, JKL forfeited its $5,000 deposit and backed out.
This hypothetical problem illustrates just one of the difficulties that real estate investors can get themselves into if they fail to use utmost care in how they draw up purchase agreements.
Here are some guidelines to use when you buy property:
1. Include all the details of the transaction in the first paper you sign. It doesn’t matter what it is called, every locality calls it something different. The rule of thumb is, if you sign it, it is binding. Don’t let anyone tell you, “We can fill in the details later.” Fill in everything now.
The first thing you sign offering to buy should answer all of the following concerns:
• The purchase price
• Due date of the purchase price
• What is being sold (personal and real property)?
• Type of deed and title you will receive
• Under what circumstances you get your deposit (earnest money) back
• What warranties the seller provides on the condition of the building
• Possession date
• Division of taxes and utilities
2. There is no such thing as a “standard contract.” Absolutely everything in a real estate agreement is negotiable. If you get a pre-printed sales contract, a PDF filled in by the seller, be extremely careful. Just because it is neat and tidy, doesn’t mean you can’t cross things off and add pages. Know in advance what you want, not just in purchase price, but terms and condition of the property.
3. Make sure that all parties sign the contract. Be wary of agreements signed by executors, personal representatives and agents of the seller. Get a lawyer’s advice before you accept a signature from anyone other than the owner. If the owner is a corporation, be sure that the person signing actually has the authority to do so. In some states wives automatically have an interest in her husband’s property (called a dower), regardless of whether her name appears on the title or not. In those states, be sure she signs the agreement as well.
4. Get the full legal description on the agreement. Street address just won’t do. The seller may be leasing a parking area owned by someone else that you would naturally think was part of the property. If you have a question that doesn’t seem to be answered by what the seller is telling you, ask for a survey that shows exactly what you will be buying.
5. List all fixtures and personal property that go with the property. Assume nothing. Too often sellers have stripped a property of appliances, air conditioners, shelves, counters, washers and dryers and everything else that wasn’t nailed down (and some that was), when the buyer thought all those were included in the purchase price. Even better yet, make a list of what is in the property that you assume is part of the purchase price and attach it to the sales agreement. List everything by brand, color and even serial number, if you can get it. Be sure you know what is tenant and what seller property.
6. Time is of the essence. If that clause is not in the sale agreement, put it in. For a 50-unit apartment complex, closing two weeks late could mean several thousand dollars in gross rents you won’t be getting. Figure it out. Even if all the apartments were renting for just $300 per month, that is $7,500 gross you would lose in two weeks. Chances are you budgeted for the property closing on a certain date. To protect yourself against the loss, you can add a “liquidated damages” clause that would require you be compensated for any loss due to a late closing and/or possession.
7. Watch out for restrictions. JKL Properties would have been $5,000 to the good if they had. Zoning doesn’t cover everything, and sometimes even the information you get from the city is not correct. Write into the agreement that you are not required to go ahead with the transaction if you cannot use the property for the use you had in mind. That will encourage the seller to disclose any problems with the use of the property that he might not otherwise tell you.
8. Use contingency clauses. These let you cancel if certain things don’t happen. For example, if your financing falls through, you don’t want to lose your deposit. If the CC&Rs don’t meet your standards, you can get out scot-free. If you find pending, unreported city lien issues, you are out of the deal without penalty. You add the sale is contingent on a favorable inspection report on the condition of the property. Don’t volunteer what constitutes a “favorable inspection” unless the seller demands it.
9. Get the seller to sign warranties. These could include warranties as to the condition or approved uses of the building, the amount of rent received from each unit, the length of the leases for the units, or anything else you are concerned about. Generally these are bunched together in a clause called “warranties and representations.” These give the seller a tough row to hoe if he has misrepresented anything to you.
10. Get estoppel certificates from each tenant. Those show that the seller has made no side deals with current tenants and that the rents are as he stated.
Experienced real estate attorneys and agents can be a big help in buying property. Just be sure you find one who is experienced with a verifiable track record. Too often attorneys don’t know how to do anything with a real estate deal except kill it, and real estate agents can’t do anything with a deal but mess it up. Delay dealing with a trained professional until a problem comes up, and it could be too late for anyone to help.