Real estate owners want sales contracts that protect their interests against an unrealistic or unscrupulous Buyer. The real estate sales contract should make sure that Buyers’ conditions are realistic and balanced. The owner does not want the Buyer to contractually tie up his real estate for long periods of time without compensation. Here are some “killer clauses” that which the most experienced real estate owners want to insert in their contracts to sell their investment property.
Control Over Buyer’s Deposit
Seller would like to get immediate access to Buyer’s deposit. Seller does not want the Buyer’s money held in the escrow account of a third party with whom he has no history. . Seller’s contract revisions can provide that the Seller may cash the Buyer’s check immediately once the contingencies have expired. After the contingency period, Seller does not want to have the deposit held in an escrow account and applied only at the closing. Seller can try a contract that provides that following expiration of all Buyer conditions the Seller can cash the Buyer’s deposit check and spend the money
Buyer’s Real Estate Broker
Seller wants to avoid dealing with a single real estate broker who represents both the Buyer and the Seller. Seller wants to have its own broker who works exclusively for him. The Seller’s own broker has a fiduciary duty only to the Seller. The Seller’s exclusive broker cannot provide information to the Buyer without the Seller’s permission, and Seller’s broker is required to tell Seller everything the broker knows or learns about the Buyer. A dual agency broker offsets the broker’s duties to either party. Buyer then has no broker working exclusively for his interest. A dual agency broker is a good arrangement for the broker because his fiduciary duty to either party cancels each other out and he is responsible to no person in particular.
Buyer Is Experienced and Sophisticated
Seller should insert a contract provision where the Buyer represents himself to be sophisticated in the purchase and sale of real estate, has experience in real estate investments, and that he has had opportunity to fully inspect the property. Seller wants Buyer to also represent that he has received in a timely manner all information he expects or has requested from the Seller. If there is a dispute over the contract or a dispute at closing, Seller wants to make sure that Buyer does not claim that he is either inexperienced or ignorant regarding any material facts about the property. Buyers can use their self-proclaimed innocence to portray themselves as “victims” in an uneven negotiating process. If the Buyer does not know something about the property, it is because the Buyer did not ask for the information not because Seller refused to give information to a Buyer who was too inexperienced and unsophisticated to know what he should ask for.
Seller Must Stay In Control Of Existing Debt
If Seller is selling property subject to existing financing, Seller wants to retain control of his own debt and his relationship with his existing lender. If Buyer is assuming financing, or purchasing the property subject to financing and agreeing to pay Seller’s existing mortgages, Seller wants to retain a right to cure any loan default so that in the event the Buyer does not pay the debt timely, the Seller can step in and make payments to preserve his financing and then proceed to sue Buyer for damages or foreclosure of the property.
Know Buyer’s Intended Use Of Property
Seller wants to make sure that any financing and inspection contingencies are reasonable in light of Buyer’s interned purpose and in light of the property condition. Seller wants the Buyer to specify what the intended use is and what particular contingencies Buyer needs during the inspection period. If Seller believes the Buyer’s intended use and development is unlikely to be approved and permitted, or is not economically feasible, Seller should resist the contract conditioned upon approvals for that unrealistic use. The Seller does not want to tie up his property because the Buyer imagined a business or property use which Seller believes will never come to fruition. Seller should not allow Buyer to tie up Seller’s property so that the Buyer could pursue an improbable real estate dreams.
Buyer’s Utilities To Service Seller’s Retained Property
In many situations, the Seller will be selling part of his property to the Buyer for development, but the Seller will be retaining the balance of the property for his own use or for a subsequent sale. In such instances, when the Buyer purchases and develops his part of the property, he will be installing improvements such as storm water retention, utilities, and access from adjoining roads. The Seller wants to integrate Buyer’s physical property improvements to the Seller’s future use.
Seller may want to provide in the contract that Buyer will increase the size and capacity of the Buyers’ utility improvements and storm water retention to accommodate Seller’s future use provided that Seller pays the incremental cost of the larger improvements. Seller may also want to negotiate for easements over any ingress or egress roads that Buyer builds or to increase the size of access roads to serve both the property being sold and the retained property. The Buyer will insist that most of the costs of shared improvements be born by the Buyer because it is the Buyer who requires the improvement be made now.
Buyer’s Improvements Should Not Adversely Impact Seller’s Retained Property
When the Buyer is purchasing only part of Seller’s property, Seller wants to make sure Buyer’s improvements do not diminish the value of the remaining property or interfere with Seller’s intended use of the remaining property. Therefore, Seller wants a contract provision that gives Seller the right to approve any of Buyer’s improvements as to their design, architecture, and use so that the Seller retains the maximum value of the retained land.
Title Issues
When investment properties are sold issues with the property title frequently come to light during a title search. The Buyers and his third party lender will insist the Seller to cure any title defects. Seller should put a dollar limit on how much he is willing to pay and how much time he is willing to spend to fix title problems. Seller can give the Buyer the option of either from the Seller a credit at closing for the cost of the title cure or alternatively getting out of the contract. Buyer does not want to invest too much money to fix title problems in advance of a closing.
Seller’s Representations Of Property Condition
Buyer will want Seller to make representations about the conditions and use of the property. Seller must limit his exposure against liability for things he actually does not know about. Otherwise, Seller would be giving a warranty about all property conditions relevant to the Buyer. Seller should disclose early any problems with the property which Seller actually knows of. However, Seller’s representations in a sales contract should have the condition of “to the best of Seller’s knowledge” Seller does not want to held liable for problems the Buyer discovers when Seller honestly had no knowledge of the property’s problems and could not reasonable know about them either.
Buyer Must Actively Pursue Approvals and Due Diligence
Seller needs to guard against a Buyer tying up his land for an unreasonably long time during the Buyer’s contingency and approval periods. Seller’s contract should specify that Buyer must actively pursue all required approvals and actively pursue inspection of the property. Buyer may be required to submit written monthly updates to Seller to show what Buyer has been doing to pursue approvals and inspection. Seller should be given access to Buyer’s agent(s), such as engineers, planners, etc. to make sure that Buyer is moving forward, is paying the professionals, and that the Buyer’s intended use is still feasible..
Sell For A Fair Price
Seller has an interest in contracting for a reasonable sales price – not necessarily the highest price. A Buyer may initially agree to an inflated sales price in order to tie up the property, but in consideration for paying top dollar the Buyer will expect the highest potential use and profit from the property with the lowest cost of improvements and permitting.
An inflated contract price may be counter-productive for the Seller. When Buyer finds that the investment in the property does not justify Seller’s high price, Buyer will then demand concession or renegotiate the price. If Seller then still does not reduce the price to fair market value the Buyer will probably exercise his right to cancel the contract under inspection or permitting approvals.. Seller may initially feel good about contracting for a high sales price, but when that price turns out not to be justified, Seller will have tied up his property for an extended period of time only to have the contract cancelled by the Buyer.
If a Seller agrees to a reasonable price from the outset, Buyer will be more motivated to close the deal even if he finds problems or unforeseen costs with his use or expected profit from the property. Buyers want to buy a reasonably priced property. Good properties that can generate development profit are hard to find and harder to get under contract. The Buyer is unlikely to jeopardize losing a reasonably priced property by demanding concessions when the Buyer has found and contracted to purchase a reasonably priced property.
Conclusion
A seller should have an experienced attorney carefully review any customized contract submitted by a prospective buyer to make sure that the buyer has not included one of their own “killer clauses” that may have a detrimental economic effect for real estate owner or that would hasten the failure of what could have otherwise been a mutually satisfactory real estate transaction.