contract

Contracts Class

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Real estate investing involves contracts.  We do not teach contract law here.  We do supply information where you can learn on your own and get your own attorney.

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Lesson 1 Real Estate Contracts Overview

Contract Basics

3 Elements to Any Contract:

  1. Offer
  2. Acceptance
  3. Consideration

See these websites

NOTE: Every understanding and agreement you have with the seller or buyer of the property needs to be in writing!

WARNING!!! At some point in time in your investing career you are going to be tempted to be satisfied with an oral promise. You’ll think that it would be uncomfortable to get the seller to put it in writing, or that you’re too busy to get it down on paper…

PLEASE trust us on this rule:

 

ALWAYS get it in writing. If they promise to let you extend a balloon note by one year if you need it, the time to get it in writing is up front. It has been our experience (both good and bad!) that if you follow this rule you’ll not only make more money, but you’ll save yourself tremendous amounts of stress and heartache.

11 Hints to Writing Effective Contracts:

  1. Clearly identify and label all parties involved (including addresses if possible)

 

  1. Make sure all print is of readable type size

 

  1. Fancy language is NOT needed; your goal is to have your agreement so clear that a neutral third party with no background knowledge of your agreement could read it over and understand who agreed to do what by when (and any other conditions or qualifications to your agreement)
  2. Attachments are done at the time of the original agreement, addenda are done afterwards
  3. Clearly label any attachments inboth main contract and in attachment: e.g. in main contract… “See Attachment A which is part of this agreement”

And in the Attachment…”Attachment A to (name of main agreement) dated / /   between (insert all parties in agreement) ”

  1. Make sure agreement clearly sets out all dates
  2. Make sure the agreement has a defined term (otherwise you run the risk of having the agreement be unenforceable)
  3. Make sure agreement is signed by people with authority! (e.g. is the Seller who is signing really the one on title?)
  4. When possible, spell out clearly what happens in the event that either party defaults
  5. Who pays for attorney’s fees in case of dispute?   (NOTE: We feel that you should always have parties responsible for their own attorney’s fees… this makes it less likely for any party to sue…)

 

  1. Use examples to make the terms and conditions of your agreement clear e.g. “For example, should World Savings choose to accelerate the first mortgage on this property then the Seller wil lbe responsible to get the house refinanced.”

4 Secrets to Make Your Paperwork More Friendly

  1. Always start off with a simple one page agreement (it can be two sided)
  2. Always have the language of you taking title subject to the existing mortgage(s) PRE-printed in the document
  3. Use a “Universal” looking document (i.e.it should look like a stationary store document
  4. Always label the paperwork as an “Agreement” and not a “Contract”

What does it mean when you “record” your paperwork?

When you record you are giving the world knowledge of your agreement.

(Missing blank is “constructive” knowledge.)

Why is this important?

The best way to protect your claim to a property is to tell the world that your claim exists. You do this by “recording” your interest at the county recorder’s office in the area in which the property is located.

You can find out exactly how much it costs (usually $4-9 per page of document you want them to record) and how to do it in your area by calling the county recorder’s office and asking them

You’ll find the phone number in your local white pages (internet) under “county government.”

Insider Secret: You can save yourself a lot of time by calling the recorder’s office and finding out how you can MAIL in your documents for them to record.

You’ll need to send payment along with the documents. Find out the exact amount over the telephone.

Also make sure you write the address you want the documents returned to after they have been recorded on the reverse side of the document.

 

How the concept of “Precedence” or “Priority” affects your claims to a property…

Basic Rule of Recording:

The first party to record is the first one in line with a claim to the property so long as:

o He received title in good faith, and

o He paid value, and

o He had no notice of a prior transfer

 

Three Things You Need On Your Paperwork to Record It:

  1. Legal description (or tax parcel number will suffice in many counties)
  2. Names of parties
  3. Notarized signature

What Is the “Foreclosure Timeline” in Your State?

For Example In California:

Step One: Notice of Default recorded and mailed to homeowner (N.O.D.)

Step Two: Lender waits 3 months during which time homeowner may pay back payments due and bring loan current and REINSTATE the loan

Step Three: Notice of Trustee’s Sale

Step Four: 21 days until sale at auction on the proverbial courthouse steps during which time property will be advertised for sale ina “general circulation newspaper”

What is the period in your state for a defaulting homeowner to be able to REINSTATE the loan? (If in fact you can even reinstate the loan.)

E.g. California is 3 months from NOD

Ask several real estate attorneys and judges in your area what the minimum consideration needs to be for you to buy a property subject to the existing financing in your area.

A Few More Thoughts on Foreclosure

Deficiency Judgment. – If the proceeds from the sale aren’t enough to cover the amount owed to the lender, the lender may be entitled to a deficiency judgment against the borrower and anyone else who guaranteed the loan.

 

NOTE: Some states (e.g., California) forbid a lender from obtaining a deficiency judgment against a borrower if the loan was issued for the purchase of the borrower’s principal residence -unless the lender uses judicial foreclosure vs Trustee sale which is very uncommon in states that have deeds of trust and trustee’s sale.

Lis Pendens.

Just before the foreclosure process begins, the lender will often file a lis pendens or notice of pendency in the real estate records to give the world notice of the foreclosure proceeding.

Reinstating the Loan.

Most states which use deeds of trust let a borrower reinstate the loan prior to the actual sale.

 

In mortgage states, lenders are usually not required by law to reinstate a loan in default (i.e. they don’t have to accept just the payments owed and start the loan up again.) This means that in these states, once the loan is accelerated by the lender, the entire amount usually must be paid off.

CASE STUDY:

California Foreclosure Sales

If the house is in foreclosure (ie: the Notice of default has been recorded and

delivered) and the seller’s property is an owner occupied One to four units then all of the following apply.

  • Seller has 5 day right of recission-This means the seller has right to cancel purchase contract up to midnight of the fifth business day following the day the contract is signed OR until 8a.m.
  • On the day scheduled for the sale of the property via Trustee Sale, whichever is to occur first (a “business day” is a Monday-Saturday, excluding major holidays, and the DAY of the contract beginning does not count for this period)

o        Contract MUST be in language that the negotiations primarily took place in

o Contract must include buyer’s:

o Name

o Business

o Phone

o consideration to be received by the seller (including any services performed as part of the consideration with very clear description of services to be performed)

o The above consideration CAN NOT be given until five day right to recission has expired

o Type size of contract must be at least 10 pt or larger

o Fully completed and signed and dated by both parties

o Must state the TIME at which possession shall transfer from seller to buyer

o Terms of any lease back to the seller must be stated in contract (BE CAREFUL HERE!)

o Following clause in at least 14 point type size completed with the Buyer’s name IMMEDIATELY above the Right to Cancel statement (see below)

 

“NOTICE REQUIRED BY CALIFORNIA LAW Until your right to cancel this contract has ended, (name) or anyone working for (name) CANNOT ask you to sign or have you sign any deed or any other document.”

https://california.public.law/codes/ca_civ_code_section_1695.3

  • The following clause “in immediate proximity” to the seller’s signature and in “conspicuous” position and at least 12pt BOLD type:
  • “You may cancel this contract for the sale of your house without any penalty or obligation at any time before (Date and time of day). See the attached Notice of Cancellation form for an explanation of this right.”

 

o        Attached to sales contract will be the Notice of Cancellation form in at least 12pt. Type

o        UP UNTIL TIME CANCELLATION RIGHT HAS FULLY ELAPSED, BUYER MAY NOT:

o        Allow seller or induce the seller to convey the house or any interest therein to buyer.

o        “Record with the county recorder any document, including, but not limited to, any instrument of conveyance, signed by the equity seller.”

o Pay the seller ANY consideration

o Within 10 days of cancellation by seller, buyer must return ALL original documents signed by the seller

o IF BUYER gives seller an option to buy back, then buyer may not cause any encumbrance to be placed on the property or convey any interest in the property without the WRITTEN permission of the seller. AND

o        Court will interpret any transaction where you buy and the seller stays in house with option to buy back as a LOAN unless the buyer can PROVE otherwise (and it is not clear what would need to be done to satisfy a judge on this point!)

 

o If the buyer doesn’t comply with ALL of the above, the seller has 4 years to sue for damages (actual damages plus an MINIMUM of three times actual damages as a penalty)

o No waiver of above right to sue shall be enforceable

o If judge says you took “unconscionable” advantage of the seller, for up to 2 years the sale can be set aside. This would affect any subsequent purchaser and in the case of you buying contract from a wholesaler this could STILL affect youif the wholesaler was not ethical in dealing with the homeowner.

O The above won’t affect you IF you bought the property from another investor as a “bona fide purchaser” for value BEFORE any notice of recission was recorded against the property

In California, Section 2924g(6)(l) of Civil Code allows “Trustor” (i.e. Seller) to be granted a 24 hour postponement of sale upon written request to Trustee.

(See sample notice)

https://codes.findlaw.com/ca/civil-code/civ-sect-2924g/

Good clauses to include when buying a property in foreclosure:

  • Seller understands and is aware that the present fair market value of the Property probably is higher than the purchase price set forth herein.
  • Seller hereby expressly waives any and all claim to any potential or actual income, profits, or other sums in excess of the amount stated above in this agreement, that may or may not come to pass from the Buyer selling the property for more than the purchase price to Seller.
  • Furthermore, Seller hereby acknowledges that the purchase price stated herein is fair and equitable and is in the Seller’s best interests, and that the Seller’s decision to sell was based on Seller, and that the Seller has not relied on any representation of Buyer which are not contained expressly herein.
  • Seller hereby represents that all negotiations and dealings with the buyer have been and are at arm’s length, and that no duress or undue influence has been exerted by Buyer over Seller or Seller’s family in connection with this purchase and sale. Seller is aware that Buyer maybe purchasing the Property for immediate resale and that Buyer’s intention is to make a profit from this transaction.
  • Seller understands that Buyer is a licensed real estate agent in the state of ___
  • Furthermore, Seller understands that Buyer is buying this house for an investment and is acting as a principal to the transaction and in no way is the Buyer representing the Seller.
  • Seller acknowledges that the Buyer intends to make as large as a profit as possible in this transaction by reselling the property at some future date, which may or may not be an immediate resale.

Simple Questions to learn answers over the next 30 days:

o Title Instrument you use (when buying outright, when transferring title to land trust)

o Are you a Mortgage or Deed of Trust State?

Future Things to Learn About Over the Next 12 Months In Your Home State:

General Questions to Ask:

o Are you a community property state?  How will this affect your investing?

o How do “Dowers Rights” affect me when I am investing in my home state?

 

Tenant/Landlord Law:

o What is the eviction process in your county?

o What is the state regulations on security deposits (leases)?  When do you have to return them?  Do you have to keep them   n a separate account?  Do you have to pay interest on them to the tenant?  What are the penalties if you don’t do this?

o What are the disclosure forms you must give to a tenant in your hometown?

O If you go before a judge to evict a tenant in an eviction proceeding, are your state and county judges going to

  1. a) go by the exact language in your contracts if they are extremely clear (e.g. Nevada) or are they going to
  2. b) go by the state law regardless of many of the tough provisions in your contract (e.g.  California) or are they going to  c) make an equity decision based on how they are feeling that day (e.g. Texas)

o How are the default notices filed to the general public?  Via “Notice of Default” or via “Lis Pendis” or…?

o What are the main investor pitfalls in your state?

o Do the borrowers have any redemption rights? If yes, what are they?

o How are land contracts handled in your state when the buyer defaults?  Can you evict your buyer?  If there a hybrid foreclosure/eviction process to handle this?  Will you have to do a Judicial foreclosure?  Find out what the local practice is in your state and county.

When Selling:

o What disclosure requirements do you have in your state and county?

o What are the transfer taxes / doc stamp fees?  When are they due?

How is this affected

  • If I am buying subject to?
  • If I am buying on a lease option?
  • If I am buying on a land contract?

o What are the property taxes in my area?  How does this affect when I am buying a house?  (e.g. Proposition 13 in California as a constitutional limitation on property tax increases for homeowners.)

Doing Your Own Legal Research Online:

SEARCH ENGINES

Below is a list of search engines you can try to conduct your own online research:

FindLaw http://www/findlaw.com

The World Wide Web Virtual Law Library https://vlib.org/Law

http://www/law.indiana.edu/law/v-Iib/lawindex.htmi

https://indianavirtuallaw.com/law-library/

http://www.law.house.gov

http://www.gsulaw.gsu.edu/metaindex/

http://www.yahoo.com/law/

https://guides.loc.gov/contract-law/drafting-guides

Other Websites

For additional information about contract law, including up-to-the-minute updates, researchers may want to review online resources, such as:

I hope you’ve enjoyed this first session about contracts. It’s very important that you get your own contract attorney that can represent you in court in case you have a problem with a buyer or a seller or a tenant.

In each course we go over contracts whether it is a lease with option or subject to or any other subject.

Remember you need to have your own attorney and get your own legal advice.

See our Courses here.