Contingency Clauses Make for Risk-Free Real Estate Investing
Mary just found what she thinks might be a great real estate deal. The property is being sold for a below market price and it has lots of potential. She hasn’t run the numbers, so she’s not positive that she wants to buy it. But she knows that if she doesn’t get it under contract now, another investor will come along soon. How can she put it under contract--without financial risk to herself--in order to analyze it further?
The answer is simple. Use a contingency clause.
When real estate investing, it is essential that you include language in your contracts that protects you and gives you greater control. This is true whether you are dealing with:
- For Sale by Owner (FSBO) properties,
- Properties marketed through the MLS, or
- Properties that have been repossessed by financial institutions.
Every buyer’s contract should contain at least one contingency clause. But what exactly IS a contingency clause? It’s simple: A contingency clause is language that let’s you get out of a real estate contract--if everything is not what it initially seemed to be--without losing a penny.
Three Savvy Clauses
There are literally hundreds of contingency clauses you can use as a buyer. But you don’t need hundreds in your contract--you only need one to get you “off the hook” if you decide not to go through with a deal. Here are three popular and powerful contingency clauses:
- This offer is contingent upon buyer receiving favorable financing.
- This offer is contingent upon buyer’s inspection and approval of property before closing.
- This offer is contingent upon buyer’s partner’s inspection and approval before closing.
(The third clause can generally get you out of any contract and could easily be modified for use with someone other than your “partner”--perhaps your CPA, attorney, spouse, or another friend or family member.)
Canceling a Transaction Is Your Right
Some people refer to contingencies as “escape” clauses or “weasel” clauses as if it were somehow wrong to cancel a transaction. But remember, a real estate contract gives you--the Buyer--the specific right to do additional research to make certain that you want to conclude the transaction. And the Seller agrees to give you this right when you use a contingency clause.
What if Mary inspects the house the day before the closing and says, “This is not what I thought it was. I don’t want it.” Can she get out of the contract? Yes. Does she have to close now? No. Assuming she put down earnest or escrow money, can she get it back? Of course. So what is her risk? None!
Make Offers with Peace of Mind
Obviously, this doesn’t mean you shouldn’t go around writing contracts on properties you have no intention of closing on. Discretion and integrity are important, no doubt. But it does mean that when you use a contract that contains a contingency clause, you can relax and make the best decision for you--with no financial risk.
Get out there and enjoy your risk-free real estate investing!
Real Estate Ownership without Personal Liability
Many real estate investors don’t realize they can take title to a piece of property while leaving the mortgage in the seller’s name. Although this seems to go against traditional thinking, not only is it legal, it happens all the time. It’s called a “subject to” deal.
A "subject to" deal is when the seller gives you the deed to his home but leaves his mortgage in place for you to make the payments. You don't have to qualify for the loan, have your credit checked, or come out of pocket with cash. You just use a piece of paper to transfer title (the deed).
A Common Scenario
Let’s say a seller is behind on his mortgage payments, and does not have the financial means to bring them current. You, as the buyer, can agree to make his mortgage payments for him, if he’ll sign the deed of his property over to you. Meanwhile, the loan stays in the seller’s name, but you own the property!
The seller--faced with losing his house to foreclosure--has very little to lose with this arrangement and much to gain. If you bring his payments current and eventually pay off his loan (through sale of the property), he owes you a debt of gratitude for rescuing his credit along with his dignity... and taking a huge weight off his shoulders.
Changing Ownership with Real Estate
Taking title in this manner is called “subject to” because the buyer is taking title subject to the underlying loan. Many real estate investors will also refer to this type of transaction as “getting the deed.” That’s a little misleading, however, since you don’t actually get the deed. In reality, you must get the sellers’ to sign a new deed prepared by you or some other professional. Changing ownership of real estate isn’t like buying a car. There is no previous title or ownership document to use because their interest in the property is recorded in public records.
How Did This Happen?
Buying real estate “subject to” has become more and more popular over the years as the number of assumable loans has diminished. A couple of decades ago, it was very common for a buyer to be able to assume a seller’s existing loan without qualifying. Although a few assumable loans still exist (some FHA, VA, and private loans), in general, lenders don’t issue them anymore.
But why would you want to assume a loan anyway? By assuming the seller’s loan--you must submit paperwork to the lender, get approved, and become personally liable for the debt. Why do that when you could take title “subject to” instead? “Subject to” eliminates personal liability to you because you have not guaranteed the note to the bank. Yet the deed transfers all the ownership rights of the property to you!
The Demand for “Subject to” Deals
In today’s soft real estate market, many people need to sell. Some simply can’t find a buyer. Others are in pre-foreclosure and have no way out. “Subject to” is a great way for you to purchase properties without using any of your own money. Motivated sellers are everywhere, and some will even PAY you to take their deed. With “subject to” deals, it’s always a great time to invest in real estate!
