I typically purchase homes as-is. I inform the seller that they won’t have to pay closing costs, complete any repairs, or pay for any inspections. However, I do retain the right to do my own inspection. If you see an issue with a property that you’re not familiar with, bring in an expert. Last month I was going to close on a home that was in a solid neighborhood, had good ARV, and would have offered a solid 30% ROI. But I saw some cracks in the basement that weren’t anything I’ve worked with before. I called in a foundation guy and it took him about 30 seconds to see the entire basement needed piers. The cost of the repairs (potentially up to $20,000) turned what was a stellar deal into a loser. Had I made my offer without an inspection contingency, I would have been left holding the bag.

Contingency: a provision for an unforeseen event or circumstance.

When buying real estate there are some deals that just don’t work out. It could be that the seller got cold feet, the home had an unknown defect, or the buyer wasn’t able to secure financing. What’s important is to know how to use contingencies to protect yourself from financial consequences in an ethical manner.

Hopefully this isn’t news to you, but when you enter into a purchase and sale agreement with a seller/buyer, you are signing a legally binding agreement. Your purchase and sale agreement should be your road map for overcoming hurdles, addressing issues, and ultimately closing the transaction.

If you default on a contract, the other party can sue you for:

Specific Performance: “The performance of a contractual duty, as ordered in cases where damages would not be adequate remedy.”

or

Damages: If you tied up a property for three months and in that time the economy crashed, they may sue for the “damages” your default caused. If the seller’s home was worth 150k pre crash and only 115k afterwards, you could be required to pay the difference.

*** While litigation is an expensive, costly, and time consuming process, if a seller/buyer is wealthy it is an option.

The most common illegitimate contingency:

One simple line in the contract – “This contract is contingent upon the buyer’s partner inspection and approval.”

Shady “wholesalers” (I use that term for them loosely) will use this as a way to terminate their contract at anytime for any reason. I had a conversation with a guy who used this often. He told me, “Seller’s don’t need to know who my partner is. My partner could be my cat. It just gives me an out.” If you’re ever taken to court, the judge will bludgeon you with this. How could you even enter into the contract without your partner’s approval? Etc.

***If you use this with an educated seller or investor, your credibility/reputation is shot. Check out my post on the grocery store model.

Legitimate contingencies:

Inspection: To use this legally/truthfully you want to have a day limit on this. Anywhere from 7-14 days is customary/acceptable. This gives you the time to conduct your necessary inspections and complete your due diligence.

Financing: Even if you are using a HML to “pay cash” you still need a financing contingency. The seller needs to know that the funds you’re using are not your own. If for some reason you are unable to secure financing, you won’t lose your earnest money deposit. Typically a financing contingency could exercised if the appraisal is low or the buyer doesn’t have adequate credit.

Clean title: The contract is contingent upon the seller’s ability to provide clean, clear, and marketable title. If the seller cannot provide clean title the buyer shall be released from this agreement and has no further responsibility or duties to the seller. Buyer is granted return of his earnest money.

A word of caution:

If a seller has two offers, they will often take the one that utilizes the fewest number of contingencies. I have seen offers that were lower in dollar amount accepted due to their lack of contingencies. As you increase your skill you may be able to cut out a few of them. As a new investor I would highly advise leaving them in place. Your proof of funds, your contract, and your plan for the property will often get the deal to close–even with legitimate contingencies.