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Real Estate Investing - Put it in Writing!
By Tom Dunn
The information presented in this article is for instructional purposes only and should not be understood to be legal advice. The author is not an attorney and is not engaged in rendering legal, tax, or other professional advice. The information contained in this article represents the opinions of the author only. For legal or other expert advice and information, you should consult an attorney or other competent professional.
Ah, the power of the written word! From the Holy Bible to the Magna Carta, from Homer's Odyssey to The Declaration of Independence, from your driver's license to your marriage license, we are surrounded with ample evidence that the pen truly is mightier than the sword. The written word shapes and guides our lives in ways we often are not even aware of. Perhaps no single area of your life is more influenced by the written word than your Real Estate Investing business.
In my experience, many investors are far too flippant about the agreements and contracts they sign, and therefore the commitments they make, often without even a cursory read-through. I have been guilty of this from time to time, and it has come back to bite me. In that light, spending a little time thinking about and understanding the written contracts that form the framework of our investing relationships and transactions is definitely a worthwhile pursuit. Let's dig in!
This Happened To Me
Recently, I purchased a house I intended to flip. It was a foreclosure listing, priced at $169,000, but a previous deal had fallen through at that price, and the bank was desperate to sell the house. I was given an opportunity to buy the house for $140,000, admittedly a great price, and I jumped at it. In the act of leaping, I hurriedly signed a purchase offer without reading it thoroughly (after all, hadn't I signed hundreds of these before- pretty much boilerplate stuff?).
Well, lo and behold, there was a clause tucked into an addendum to the contract that read "all structures located on the subject property may not have been issued building permits." After taking possession, I was unceremoniously informed by the town building inspector that I would need to get a permit for a recently added outbuilding on the property, and no permit could be issued with the building in it's present state. Substantial revisions would need to be made to bring the structure into compliance. Net cost to me? About $5200.
Now, I still made a decent return on the house, but that's not the point. If I had simply spent ten minutes reading the contract completely I could have saved myself both time and money. At least I would not have received such a nasty surprise in the middle of my flip. I should have known better, and I do! Now, I read agreements thoroughly before I sign them, and I almost always GET IT in writing or PUT IT in writing, depending on the situation.
When To Put It In Writing
The question I am often asked is, "Do I really need to put ALL my agreements in writing?" The answer is, of course not. For instance, if I hire a plumber to fix a broken pipe, I can simply tell him where the pipe is broken and ask him verbally to repair it. That is a simple and easily communicated instruction. If, however, I want the same plumber to replumb my bathroom and install new fixtures, the issue becomes complicated by an almost infinite number of choices.
For instance, what type of toilet do I want? Should he install a white one with a round bowl, or an ivory one with an elongated bowl? Do I want a md-priced model from American Standard, a high priced antique style from Kohler, or a bargain basement model from Mr. 2nd? And what about hookups? Do I want him to install a shutoff at the tank, or simply a flexible supply line? By now you are getting the idea, and these are just a few of the hundreds of options I have. Multiply those choices by the number of fixtures, add in all the other decisions that have to be made, and you can see the problems my plumber and I are about to run into unless we have a detailed agreement in writing.
It constantly amazes me when I hear a fellow investor say something like, "But I told my contractor to hang drywall and paint it beige! Why does it look so awful?" What an investor says and what a contractor hears are almost always two very different things. To a contractor, "Hang drywall and paint it beige," may sound like, "I'm getting more than one estimate, so give me your lowest possible price to slap it up cheaply and get it done fast." That's fine if it's what you want. But what if you really expect, "Smooth walls, properly primed with Kilz, and two coats of Benjamin Moore Antique Eggshell in Amber Pecan?"
This is just one example of how a written agreement can insure that both the investor and the contractor are on the same page. Presumably, you've worked hard to find a contractor you can work with. Why endanger your relationship, as well as your rehab project, because you are too busy (or just too lazy) to write out a specific and detailed agreement. Whenever your instructions to someone require either or both of you to make multiple choices, that's the time to put it in writing.
This isn't just true of working with contractors. Any time you are asking someone to provide a product or service for you, and giving them something of value in return, a written agreement is the only way to insure you get what you want.
How To Put It In Writing
Some people are intimidated by contracts, but you should not be. A contract is simply a tool for clear communication, and is used to define a working relationship. It can be as basic as a single sheet of paper, handwritten with the terms and scope of the work to be performed. It doesn't necessarily need to be filled with lots of legal jargon, although the more complicated an agreement, the more detailed the contract should be. When in doubt, consult with your attorney. As I already stated above, the information in this article is not intended to be legal advice, nor should you construe it as such. I am not an attorney.
What I do intend is to teach good, common sense tactics for using written agreements so that all the parties understand the nature and scope of the relationship. Whether it's a lease, a contract for construction services, or any other business relationship, all written agreements should contain certain basic elements.
First, the agreement should name the parties involved.
Second, the agreement should state the relationship that is being created between the parties, ie. buyer and seller, contractor and property owner, lender and borrower, etc.
Third, the agreement should stipulate and detail the work to be performed or product being sold, as well as when it is to be completed or delivered.
Fourth, the agreement should define the type and quality of materials to be used.
Fifth, the agreement should state the amount and method of payment for the work or product, including how and when it is to be paid.
Sixth, the agreement should spell out any remedy that may be pursued if any party defaults on their end of the agreement.
In my experience, the issue isn't "will this agreement stand up in court." The purpose of any agreement you write is to keep you out of court in the first place. To that end, write your agreement as simply and clearly as possible. Do that, and you will eliminate 97% of all problems before you encounter them. The other 3% you could not have prevented anyway, with or without an iron-clad agreement.
The format of your written agreement will follow this very basic outline:
1. I, the buyer of the service or product will pay such and such.(State the price you are paying.)
2. In exchange you, the provider of the product or service, will do such and such. (Spell out all details.)
3. On _______ date you will have completed such and such, and I will pay you $______. (Never pay all the money upfront.)
4. On ________ date you will have fully completed all work, and I will pay you the final installment. (Never pay the final installment until 100% of the job is completed. I typically withhold ay least 25% of the money due until after the final inspection.)
5. If you, the provider, perform all work or provide all product before _______ date, I will pay you a bonus of $______. (Contractors love bonuses, and they provide a much better incentive than penalties!)
All parties should read the entire agreement together and make sure every point is mutually understood. Clear up any disagreements before signing.
Final Thoughts
You're busy. You have better things to do than read or write contracts and agreements. But unless you get excited at the idea of hiring a second contractor to repair or completely re-do a job you thought was being properly handled, you'll find the time. It will make your investing life a whole lot easier.
Now, go make more offers!
At the risk of being redundant, this article is not intended to be legal advice. I am not an attorney (nor do I play one on television). You should have any written agreements and contracts examined by an attorney before you sign them. Do not construe the contents of this article to be legal advice.
You are welcome to share this article, unedited and in it's entirety, with anyone you like. You may not remove this text. © 2006-2008 by Tom Dunn Website: www.dealfiles.com email: tom@dealfiles.com
Real Estate Investing - Put it in Writing!
By Tom Dunn
The information presented in this article is for instructional purposes only and should not be understood to be legal advice. The author is not an attorney and is not engaged in rendering legal, tax, or other professional advice. The information contained in this article represents the opinions of the author only. For legal or other expert advice and information, you should consult an attorney or other competent professional.
Ah, the power of the written word! From the Holy Bible to the Magna Carta, from Homer's Odyssey to The Declaration of Independence, from your driver's license to your marriage license, we are surrounded with ample evidence that the pen truly is mightier than the sword. The written word shapes and guides our lives in ways we often are not even aware of. Perhaps no single area of your life is more influenced by the written word than your Real Estate Investing business.
In my experience, many investors are far too flippant about the agreements and contracts they sign, and therefore the commitments they make, often without even a cursory read-through. I have been guilty of this from time to time, and it has come back to bite me. In that light, spending a little time thinking about and understanding the written contracts that form the framework of our investing relationships and transactions is definitely a worthwhile pursuit. Let's dig in!
This Happened To Me
Recently, I purchased a house I intended to flip. It was a foreclosure listing, priced at $169,000, but a previous deal had fallen through at that price, and the bank was desperate to sell the house. I was given an opportunity to buy the house for $140,000, admittedly a great price, and I jumped at it. In the act of leaping, I hurriedly signed a purchase offer without reading it thoroughly (after all, hadn't I signed hundreds of these before- pretty much boilerplate stuff?).
Well, lo and behold, there was a clause tucked into an addendum to the contract that read "all structures located on the subject property may not have been issued building permits." After taking possession, I was unceremoniously informed by the town building inspector that I would need to get a permit for a recently added outbuilding on the property, and no permit could be issued with the building in it's present state. Substantial revisions would need to be made to bring the structure into compliance. Net cost to me? About $5200.
Now, I still made a decent return on the house, but that's not the point. If I had simply spent ten minutes reading the contract completely I could have saved myself both time and money. At least I would not have received such a nasty surprise in the middle of my flip. I should have known better, and I do! Now, I read agreements thoroughly before I sign them, and I almost always GET IT in writing or PUT IT in writing, depending on the situation.
When To Put It In Writing
The question I am often asked is, "Do I really need to put ALL my agreements in writing?" The answer is, of course not. For instance, if I hire a plumber to fix a broken pipe, I can simply tell him where the pipe is broken and ask him verbally to repair it. That is a simple and easily communicated instruction. If, however, I want the same plumber to replumb my bathroom and install new fixtures, the issue becomes complicated by an almost infinite number of choices.
For instance, what type of toilet do I want? Should he install a white one with a round bowl, or an ivory one with an elongated bowl? Do I want a md-priced model from American Standard, a high priced antique style from Kohler, or a bargain basement model from Mr. 2nd? And what about hookups? Do I want him to install a shutoff at the tank, or simply a flexible supply line? By now you are getting the idea, and these are just a few of the hundreds of options I have. Multiply those choices by the number of fixtures, add in all the other decisions that have to be made, and you can see the problems my plumber and I are about to run into unless we have a detailed agreement in writing.
It constantly amazes me when I hear a fellow investor say something like, "But I told my contractor to hang drywall and paint it beige! Why does it look so awful?" What an investor says and what a contractor hears are almost always two very different things. To a contractor, "Hang drywall and paint it beige," may sound like, "I'm getting more than one estimate, so give me your lowest possible price to slap it up cheaply and get it done fast." That's fine if it's what you want. But what if you really expect, "Smooth walls, properly primed with Kilz, and two coats of Benjamin Moore Antique Eggshell in Amber Pecan?"
This is just one example of how a written agreement can insure that both the investor and the contractor are on the same page. Presumably, you've worked hard to find a contractor you can work with. Why endanger your relationship, as well as your rehab project, because you are too busy (or just too lazy) to write out a specific and detailed agreement. Whenever your instructions to someone require either or both of you to make multiple choices, that's the time to put it in writing.
This isn't just true of working with contractors. Any time you are asking someone to provide a product or service for you, and giving them something of value in return, a written agreement is the only way to insure you get what you want.
How To Put It In Writing
Some people are intimidated by contracts, but you should not be. A contract is simply a tool for clear communication, and is used to define a working relationship. It can be as basic as a single sheet of paper, handwritten with the terms and scope of the work to be performed. It doesn't necessarily need to be filled with lots of legal jargon, although the more complicated an agreement, the more detailed the contract should be. When in doubt, consult with your attorney. As I already stated above, the information in this article is not intended to be legal advice, nor should you construe it as such. I am not an attorney.
What I do intend is to teach good, common sense tactics for using written agreements so that all the parties understand the nature and scope of the relationship. Whether it's a lease, a contract for construction services, or any other business relationship, all written agreements should contain certain basic elements.
First, the agreement should name the parties involved.
Second, the agreement should state the relationship that is being created between the parties, ie. buyer and seller, contractor and property owner, lender and borrower, etc.
Third, the agreement should stipulate and detail the work to be performed or product being sold, as well as when it is to be completed or delivered.
Fourth, the agreement should define the type and quality of materials to be used.
Fifth, the agreement should state the amount and method of payment for the work or product, including how and when it is to be paid.
Sixth, the agreement should spell out any remedy that may be pursued if any party defaults on their end of the agreement.
In my experience, the issue isn't "will this agreement stand up in court." The purpose of any agreement you write is to keep you out of court in the first place. To that end, write your agreement as simply and clearly as possible. Do that, and you will eliminate 97% of all problems before you encounter them. The other 3% you could not have prevented anyway, with or without an iron-clad agreement.
The format of your written agreement will follow this very basic outline:
1. I, the buyer of the service or product will pay such and such.(State the price you are paying.)
2. In exchange you, the provider of the product or service, will do such and such. (Spell out all details.)
3. On _______ date you will have completed such and such, and I will pay you $______. (Never pay all the money upfront.)
4. On ________ date you will have fully completed all work, and I will pay you the final installment. (Never pay the final installment until 100% of the job is completed. I typically withhold ay least 25% of the money due until after the final inspection.)
5. If you, the provider, perform all work or provide all product before _______ date, I will pay you a bonus of $______. (Contractors love bonuses, and they provide a much better incentive than penalties!)
All parties should read the entire agreement together and make sure every point is mutually understood. Clear up any disagreements before signing.
Final Thoughts
You're busy. You have better things to do than read or write contracts and agreements. But unless you get excited at the idea of hiring a second contractor to repair or completely re-do a job you thought was being properly handled, you'll find the time. It will make your investing life a whole lot easier.
Now, go make more offers!
At the risk of being redundant, this article is not intended to be legal advice. I am not an attorney (nor do I play one on television). You should have any written agreements and contracts examined by an attorney before you sign them. Do not construe the contents of this article to be legal advice.
You are welcome to share this article, unedited and in it's entirety, with anyone you like. You may not remove this text. © 2006-2008 by Tom Dunn Website: www.dealfiles.com email: tom@dealfiles.com
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