Real Estate Investing
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Today's Article: "Use of Paperwork as a Real Estate Investor-Part 2"
Paperwork with buyers can be remarkably similar to that for your sellers, so long as you don’t forget to remove many of the protective features you might want to see in there as a buyer. You don’t want to extend the same flexibility to your buyers unless it is absolutely necessary and just remember that how you buy and how you sell are not the same. Other types of “sales” contracts include those used for rental properties or for creatively financed deals like lease options. Examples of such documentation include:
- Residential leases
- Options to purchase
- Land contracts
- Promissory Notes
When you are working with a tenant, a lease form that is approved for your area is advisable, since tenant/landlord rules can vary from place to place. Some tenants are very savvy, and a poorly drafted lease can haunt you later. Creative financing documents come in several forms and your choice may just be a matter of personal preference.
The key thing to remember is that the paperwork may change but the basic idea remains the same. A lease option is basically a lease that is accompanied by an option to purchase agreement that gives the occupant an effective first right of refusal to buy the property for a set price. A land contract (also referred to as a contract for deed in some places) is basically a purchase contract that stipulates the completion of the terms between a buyer and seller will result in a transfer of ownership to the buyer. A promissory note is the written promise that one party agrees to repay the other party. A mortgage is the legal instrument that is publically recorded and officially attaches the note to the property as collateral.
I strongly suggest that you always have your attorney close your standard closings and your lease option agreements with your clients. No “table-top” closings. Why you may ask? There are multiple reasons; (1) the fact that you use a professional attorney exhibits a tremendous amount of trustworthiness with the people you do business with. (2) It should cost you nothing because you are going to have your buyer pay the attorney fee. (3) You have your attorney’s blessing when they close your deals. (4) You’ll find no better witness if somebody wants to come back and cry foul about something in the agreement down the road. (5) Your chances of people doing what they say they will do are much greater than they would be if you signed closing paperwork with them at a coffee shop. Bottom line, let the professionals do what they do best so that you can do what you do best.
The paperwork that is more ‘behind the scenes’ is often as important as the basic contracts you will use, because they serve two primary functions. First, this type of paperwork helps glue your deals together by answering questions your clients may have and disclosing various other specifics to a deal that your contract might not expand on. Second, this type of paperwork protects you. Whether it’s to authorize you to do something pivotal to the completion of the deal or simply what I call a ‘CYA’ form (CYA standing for “covering your assets”), sometimes the simplest of forms can go a long way by keeping you from getting into hassles or even legal entanglements with your clients.
Examples of supporting documentation might include the following:
- Authorization to release information (allowing you to contact a client’s lender)
- Affidavits of agreement (allowing you to file the existence of your purchase contract against the title of the property in question, securing your interest in it)
- Disclosure forms (good for foreclosures and creative financing deals)
- Waiver forms (disclosing what you are and are not responsible for)
- Short sale package documentation
Any of these types of documents are available in many real estate software or contracts packages and a real estate attorney can also create them. The more you educate yourself in the business, the more apparent it will be when and where these types of forms need to be used, so pay attention, keep learning, and you’ll know better how to use these documents properly.
Always have your attorney review your paperwork to make sure that 1. It is your state friendly and 2. your attorney is comfortable with everything.
My suggestion to help you get past a basic ‘contractophobia’ is to first sit down and really take a close look at the documents you will be using with your clients. No, you don’t have to know them line-by-line and I have yet to work with a client who wanted to go through one line by line. That doesn’t mean skipping through major sections with no explanation. What it does mean is that you should try and capture the gist of each section and be able to explain this gist in layman’s terms to your clients. This will satisfy most and, if they have issues or questions you can’t address or answer, then have them consult with an attorney. This way, you’re never on the spot or feel like you need to elaborate on something you don’t have the professional qualifications to address.
I would also encourage you to sit down with your real estate attorney as you are getting your business going. Have them review your paperwork, make suggestions for changes, make them your state friendly, and as needed, help you understand what the content means. This one-time expense can give you a lot more confidence and also permit you to announce when appropriate that your attorney has reviewed your paperwork. You’ll also naturally become more comfortable with your paperwork as time goes on so that should be of some reassurance as well. Take this seriously, but also take it easy on yourself and the paperwork dilemma you may be facing right now should work out just fine over time.