Real Estate Investing
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Today's Article: "Use of Paperwork as a Real Estate Investor"
One of the things that can strike fear in the heart of the novice investor is the idea of doing paperwork. Call it lack of familiarity or just fear of fine print, but this issue can be very intimidating and it also can have a big impact on your perception with others. Your clients will expect that you have some basic understanding of the paperwork you present to them and the alternative of just running everything through an attorney can get expensive real quick so where does that leave us? I suggest a happy medium and that medium is the subject of this article.
Let’s start with a basic overview of what it means to effectively use paperwork in a real estate transaction. Unlike other commodities, real estate can be structured and greatly leveraged when you have a strong command and understanding of the paperwork with your deals. This is also why paperwork is sometimes intimidating for most people. However intimidating it may seem to you or people you do business with, it is imperative that you strive to fully understand the paperwork you use. The good news is that having a thorough knowledge of paperwork is something that can be simplified and that can be learned over time.
As far as simplifying paperwork, my basic suggestion is to create packages of forms for each type of deal you commonly do. For example, subject to deals vs. short sales.
The hard way is to obtain a new client, scramble around feverishly to gather and print the forms you’ll need (hoping you don’t forget something), and then go meet with them. The easy way is to get the same phone call, grab a packet of pre-prepared forms off your shelf, and go. Which way seems easier to you? Which way will be less stressful? I think you see my point. Beyond that, let’s discuss this further by highlighting the three main kinds of paperwork you’ll need.
- Paperwork with sellers (purchase contracts)
- Paperwork with buyers or tenants (sales contracts, leases, etc.)
- Supporting paperwork
First of all, remember that I don’t say the words “purchase contracts” with anyone I do business with. Instead, I say, “this is the piece of paper that says you are selling and I am buying.” This is less threatening to the other party. For some reason, the word “contract” scares people.
The types of purchase contracts you may wish to use for your deals may vary considerably and I’m not one to hang my hat on one in particular and suggest it will work well in any situation. First, I’m not in a position to rightfully do so, and second, it just wouldn’t be fair for you to be thinking this is the way to go. Every situation is different and your choice of contracts should reflect this. Some basic choices to consider include the following:
- A formal Realtor contract
- A private contract that is “full-length’
- A private contract that is intentionally short
When selecting a purchase contract, remember that beauty is in the eye of the beholder. It’s not just about what you prefer to use; it’s also a function of what the recipient will think. For example, you may have learned the business from someone who subscribes to the theory that you should use your own paperwork at all times. This is a decent theory but what happens when you want to pursue listed properties such as a bank repossessed property? Realtors will often avoid and discourage contracts they are unfamiliar with so you need to be prepared to use something that is not your own for certain situations.
I tend to have a more liberal view of contract selection and can easily adapt contracts that aren’t from my own ‘library’ by adding certain key addendums if necessary. Addendums to consider might include a right to show, right to assign, or a right to inspect the property and can include whatever you want to include. In this way, any prohibitive features of a foreign contract can be “undone” by the addendums you choose and make the contract more like one you would more normally use. Keep in mind that too many addendums and contingencies in a contract can and will very often kill a deal because it scares the other party away. Keep it simple and only add when necessary.
Some sellers are accustomed to receiving contracts that are of the full-length variety and might object to something that is unusually brief. That said, for simple transactions like cash purchase wholesale (contract assignment) deals, a brief contract is all that is really needed and you can sell the simplicity to your clients as a reason why you are easy to work with. This can add integrity in the right situation. For other more traditional deals, even the simple addition of addendums or specific terms can show that you are on the top of your game and give you a defined amount of professionalism.
In my next post, I’ll discuss contracts with buyers/tenants and supporting paperwork.