One of the most complicated aspects of real estate are real estate investing contracts.
They’re a requirement to protect all parties involved but the language inside of them can get incredibly confusing at times.
Whether you’re a buyer, seller, or wholesaler, you’ll need to understand which contracts are used and the language in them — as well as how it impacts your deals.
In this guide, we’re going to break down some of the most common types of real estate investing contracts, show you the required language, and help demystify them a bit.
5 Common Types Of Real Estate Investing Contracts
With real estate investing being so high stakes (and even cutthroat at times), it’s worth knowing what’s in a contract, which one you should be using, and how to make sure you’re staying protected.
A contract acts as a binding agreement between two or more parties for any type of real estate transaction.
These contracts ensure that the terms you and other parties have outlined are adhered to after negotiations have begun.
Real estate contracts are required by U.S. law and must be signed by both parties in order to be truly enforceable.
They form the basis for any action that may be taken legally if any parties involved in the transaction fail to fulfill the terms they’ve agreed to.
Below are 5 of the most common types of contracts for real estate investing.
Purchase Agreement
Purchase agreements are the most common type of contract you’ll use and encounter.
Also known as a sales contract, this is a binding agreement for two parties (buyer and seller) to transfer a specific type of property.
The contract lays out the details surrounding selling and transferring the property.
With purchase agreements, there’s typically 3 types that you’ll run into.
State/Association agreements, general purchase agreements, and property-specific purchase agreements.
State/association agreements are used when a real estate agent is involved while general purchase agreements are used when you’re purchasing without an agent.
Property-specific agreements are used for properties like land or mobile homes.
Assignment Contract
An assignment contract refers to a wholesaling agreement that facilitates the sale of a property between the homeowner and a separate end buyer.
These contracts give an investor the rights to purchase the property without actually purchasing it.
Then, they can sell those rights to another buyer. The investor will be paid an assignment fee by the end buyer who will then purchase the property from the owner.
These contracts do not give the title to the property and the assignment contract will now show up in the title chain.
Lease Agreement
A lease agreement is a contract between a landlord and a tenant.
With these contracts, a landlord agrees to rent their property to a tenant for a specified monthly amount.
Aside from the rental amount, these contracts also include provisions around security deposits, utility payment responsibilities, and others.
Power Of Attorney
A power of attorney contract is one of the most unique that you’ll encounter.
These are used in situations where a property owner has given their permission to have someone else act in their place in the transaction.
This is typically because the owner, themselves, is unable to physically sign the contract.
They will appoint another party to act as their power of attorney so that the contract will be signed on their behalf. This happens most often when the owner is mentally disabled, hospitalized, out of the country, or an elderly parent who may not be able to sign the agreement.
Subject-To
A Subject-To (or SubTo) contract acts a bit differently.
Instead of selling the property outright, a buyer will take over the seller’s existing mortgage payments without having to go through the process of obtaining a new mortgage, running a credit check, or putting their own cash down.
These contracts are used when a home is at risk of foreclosure and allows sellers to escape their current mortgage obligations without negatively impacting their credit.
Essential Elements Of A Real Estate Investing Contract
Every real estate contract you’ll encounter will have a specific set of clauses inside of it.
Intent To Create A Legal Purpose – This is a requirement in real estate contracts and makes the contract legally binding and enforceable between the parties involved.
Authority And Legal Capacity – This element indicates that the parties involved in the contract are of legal age and have the mental capacity to understand the terms and act on the contract.
Offer – The offer is a part of the contract where both parties are agreeing to a set amount and terms in exchange for transferring the property from one party to another.
Acceptance – Acceptance in a real estate contract shows that one person is in agreement with the terms of the offer made by the other party involved.
Consideration – Consideration is the legal term used to identify the benefits that each party is going to receive when the purchase has been finalized.
Certainty – Certainty in a contract ensures that all parties involved have fully understood and interpreted the terms listed in it, leaving zero room for ambiguity.
Payment Terms – Payment terms outlines how the buyer will pay the seller and can outline what happens if the buyer fails to pay on-time or in-full.
There may be additional clauses but these are the foundation of a contract.
7 Conditions You May Want To Include In Your Real Estate Contract
Depending on the type of deal you’re doing, you might want to include additional conditions and clauses inside of your contracts.
Remember, contracts are designed to protect both you and the buyer (or seller) so covering all of your bases is better than ending up in a situation where you’re arguing your case in court.
#1 – Financing
If you aren’t in a position to make an all-cash purchase on the property, you’ll want to make sure you’ve included a clause around how financing will be obtained.
If you’re planning to use financing or funding to help close the deal, you need to include clauses and conditions around the approval of that financing or funding.
You want to be able to be released from the agreement if you fail to obtain the necessary funds to move through to closing.
You can lay out the maximum terms on financing that would make it feasible for you to move forward, too.
For instance, if you know you can’t afford more than a 5% mortgage interest rate, you can include that in order for the deal to move forward you must be able to qualify for a mortgage at 5% or lower.
#2 – Seller Assist
When you include a Seller Assist clause in your contract, you’re essentially asking the seller to assist you with closing costs above the property purchase price.
Typically, these are shared between the buyer and seller.
While it seems counterintuitive that a seller would offer to help pay the expenses you would incur when you’re buying their house, this is actually a pretty common practice.
It ultimately depends on how motivated each party in the deal is.
If the seller wants to get their home sold, they’re more likely to agree to a Seller Assist clause.
#3 – Closing Costs
If you’re asking for Seller Assist, you’ll also want to document what the closing costs are.
Then you’ll need to specify who is responsible for paying each of the fees, such as any escrow fees, title search, notary fees, title insurance, transfer tax, recording fees, etc.
Who pays each of these fees may vary from area to area so you can either ask your real estate agent (if you’re working with one) or your attorney who should be responsible for covering them.
Once you know, for sure, you can include that language inside of your agreement.
#4 – Inspection
Unless you’re purchasing the property knowing it will require a full gut or rebuild, you’re going to have to have the inspection included inside of your contract.
A contingency clause around being released from the contract if the home inspector finds any structural problems or major damages can keep you from running into unforeseen costs — and being stuck with it.
The inspection is one of the most important parts of the buying process so this shouldn’t be taken lightly.
A home inspection clause will let you walk away from the property if you’re unable to afford the expenses and repairs that the inspector finds.
#5 – Appliances
For some properties, you may want to include a clause around ensuring that the appliances in the property stay within the property after closing.
For instance, the dishwasher, stove, washing machine, drying machine, refrigerator, etc. can all be incredibly expensive to replace.
If you want to keep those appliances in the property, your contract must state that they are to remain in the property after closing.
Otherwise, you may find yourself in a situation where you take control of the property and it has an empty kitchen and all that’s left is the carpet and windows.
#6 – Closing Date
Your contract will also need to disclose how much time you will need to complete the purchase.
Commonly, this ranges from 30 to 45 or 60 days.
If you’re financing the purchase, you’ll want a longer time to close so that you give yourself enough time to go through the loan origination process.
Also, if you’re currently renting or need to wait for an existing lease to expire, you can include the lease end date as your closing date in order to have enough time to move.
Occasionally, some sellers may want you to close in two weeks, or less. If you’re funding the deal with cash, that may be possible, but it definitely places limits on being able to get the home inspected and give you time to get funding lined up.
#7 – Sale Of Existing Property
If you’re using the funds from the sale of one home in order to fund the purchase of a new home, you’ll want to include a clause around the sale of an existing property.
This should be a contingency where you’re able to walk away from the deal in the event that your existing property doesn’t sell in time.
Just like you may want to push the closing date out if you need to wait on an inspection or secure your funding, you’ll also want to give yourself enough time to get your current property sold.
This clause will typically only work if you already have a buyer lined up for your property since most sellers won’t be willing to take their property off the market unless you have a buyer in place already.
Should You Download Real Estate Investing Contracts?
Since contracts can be so confusing and trying to understand them can feel like learning a new language, one of the biggest questions we see from people is whether or not they should just download some real estate investing contracts.
While this may be sufficient for some people, you have to remember that a contract’s purpose is to protect you AND protect the other party.
This is why we recommend you speak directly to an attorney who has your best interests in mind when they’re putting together contracts for you.
If you do download some contract templates off the internet, you still want to put them in front of an attorney who is looking out for you in the transaction.
If you don’t run your contracts by an attorney, you run an extremely high risk that you’ll be taken advantage of in a deal where the other party has had their attorney protect them.
For this reason, we think that downloading a real estate investing contract and using it in your business is a really, really bad decision.
Use this guide to understand what terms, clauses, and conditions inside of the contract mean, and then contact an attorney who can put together a contract that works specifically for you.
