Seasoned real estate investors recognize that occasionally their present (and future) best interests will be served by walking away from a deal before they become obligated to it. They also know there will come a time they will need to put an end a real estate transaction they had entered into with the best of intentions and expectations. Sometimes things unexpected just happen. You need to be prepared to move away from a deal that can do you harm even after a contract has been executed. It is always better to walk away from something unpalatable, unprofitable, and likely very costly. Limiting your exposure must always be a condition precedent to doing anything under contract. Savvy investors can be, need to be, both diligent and proactive to minimize their potential exposure to unforeseen and unexpected circumstances.
A real estate purchase agreement, a real estate contract, is a legally binding and enforceable document. Contracts between buyers and sellers do vary from circumstance to circumstance. They may also likely differ from one state jurisdiction to the next. However, it is commonly understood that neither side cannot simply change his or her mind and just walk away without some exposure, accountability, and most assuredly, some consequence. The key is to walk away from a real estate deal if you have to, unscathed and with your brand and credibility intact. This is accomplished with contingency clauses. But I prefer to characterize them as escape clauses.
Without having contingencies that offer outs, the party who seeks to get out of deal will stand in breach of contract. Taking this step as a buyer not only likely results in the forfeiture of the buyer’s earnest money deposit but additional possible exposure to a seller’s lawsuit upon accusations of bad faith and damages suffered. The investor buyer also loses money expended for appraisals, title and home inspection report costs. A seller’s exposure to his or her breach of contract can easily end up in Court where the buyer seeks general and compensatory damages and even specific performance.
Escape clauses allow you the option to not only back out of the deal but to recover the earnest money deposit advanced. Always offer a small earnest money deposit, so it hurts little if you do lose it.
There are literally hundreds of contingency clauses you may employ as an investor buyer. Some are clearly more obscure. Some are ridiculous. Keep in mind that it only takes one contingency clause to get you off the hook. The second thing to keep in mind is that you need to close the deal if it is a deal you want. Too many contingencies can ruin the deal and scare the seller off. Always keep things simple if you can.
In your back pocket, take the posture that with a small earnest money deposit, the less you need to rely upon an escape clause. There are two essential contingency clauses and only one of them needs to be relied upon if you do not seek financing. That is the inspection clause. For either the financing or the inspection clauses to be effective, the operative effect must remain in the investor buyer’s control, never in the seller’s. They need to be based upon opinion and never anything verifiable. This is particularly true of any offer contingent upon financing. Financing terms are specific and therefore verifiable. For this contingency, the investor buyer can set a cap in the written offer of the acceptable rate and terms.
By far, the best escape clause is the inspection contingency. This is particularly so if you are selling yourself as having the wherewithal to close with cash and quickly so no financing will be required and you still need to protect yourself. The inspection escape clause is your only ticket. It must be in every contract, every time. Inspection contingencies are reasonable, widely accepted and wholly reliant upon the investor buyer’s opinion if drafted properly. With this clause, you have an out and recover your earnest money within a day or an option to renegotiate on better terms if you wish.
When it comes to escape clauses, a seller may turn you down but you are making certain you are protected if you need to be. With real estate, knowledge is power. So is proper positioning.