Category Archives: Real Estate Loans

When Should You Sign A Contract for a Purchase or Sale?

If you are a seller, the usual inclination is to sign a contact as soon as possible with a buyer. This will lock in the sale of the property and get a deposit in your hands that may or may not be refundable depending on the terms of the contract.

However, what if your buyer wants an inspection period of 5 – 10 days and he also wants conventional financing instead of paying cash or using a hard money lender? The problem is that by signing a contract you have locked in a buyer who may or may not actually be a buyer.

The inspection report will likely come in with things that need to be fixed and the prospective buyer will try to renegotiate his offering price. This re-negotiation can be expected and you should do it yourself if you are an investor trying to get the best price possible. If the inspection is for 5 days, your property will essentially be off the market for this time and you may or may not have a deposit in the closing agent’s escrow account.

You can take back-up offers but investors are reluctant to make back-ups, especially when they find out another investor declined to take the property. Back-up contracts do work, but they are a distant second choice when selling a property.

At the end of the inspection period, the buyer decides not to purchase the property and gets his deposit back – if he made the deposit. Next you will be faced with the issue of cancelling the buyer’s contract. You still have a contract that you may believe to be invalid for various reasons, but you should get a cancellation of contract to keep the former buyer from coming back after you sign a second contract.

If you don’t think this can happen, you haven’t been in the business long enough. Usually, the cancellation is signed when the escrow money is returned to the buyer – again, if he put up the escrow. Some investors will stall putting up the escrow because they don’t have it and are trying to resell the property and use the end-buyer’s deposit to cover his deposit. This is standard operating procedure for most wholesalers so be prepared for it.

Because of this subversion, I have taken a different tact in getting a contract signed by a buyer. I ask the buyer to do his inspection first before I sign a contract and when he completes his inspection and re-negotiations, he signs a zero-day inspection contract. His escrow check must come with the signed contract or wired into the closing agent. The escrow is now non-refundable and you have a “reasonably” legitimate buyer.

The buyer may still not close but you will receive compensation for your work. The buyer may have resold the property to another investor who decided not to close. Your buyer will lose his deposit and so will the end-buyer. The end-buyer’s deposit is being held by the investor and should be twice what his deposit is so the investor will make money even if he doesn’t close.

These tactics are not unscrupulous, just good business practices among investors. If you are on the receiving end of not closing, you can get frustrated because you have carrying costs that go on and you have to start marketing your property all over again. My solution of not signing a contract until I am comfortable that the inspection period is “over” and I have money in the escrow account doesn’t insure the buyer will close but it goes a long way toward a solution.

The other potentially huge benefit is that a new buyer coming in with a stronger offer (higher price and bigger escrow) is common. In this situation you have the opportunity to re-negotiate with the original buyer or just take the stronger offer. The first buyer will complain that he had to pay for an inspection, but he would have had to anyway whether or not he accepted your contract.

Professional investors very seldom hire an inspector because they have the experience to do it themselves. If you get a higher offer and you aren’t under contract, don’t be intimidated that you shouldn’t sell it for more – this is a business and should be handled in a businesslike manner.