Purchase Agreement Clauses That Can Save Your Butt

The real estate purchase agreement is more than just a casual offer. The moment you and the seller sign it, it is a legally binding contract.  Since you can put what you want in your offer, why not include some of the clauses that smart buyers use to protect themselves and save money?  Some suggestions follow.

Seven Critical Purchase Agreement Clauses

1. A better earnest money clause.

You can put a small earnest money deposit down and still be taken seriously, if you include a clause like this: “$100 earnest money deposit, to be increased to $2,000 upon acceptance of this offer.” You could also have it increased “when all contingencies are met.” This way, if there’s an argument about you backing out because the inspector found foundation damage, for example, you won’t have your money tied up while this is being resolved.  Also, as the buyer, your preference is, “to be held in escrow by escrow agent or title company of buyer’s choice.” NEVER let the seller hold the escrow himself.

2. Inspection contingencies.

Ask an agent/broker about the wording, but basically you want something like this in the purchase agreement: “Contingent upon a property inspection and buyer’s approval of the results;  inspection to be done at buyer’s expense within ten days.”  Now you have the right to have an inspection done, and if anything negative is found, you can refuse to “approve” of the results, and get your deposit back, or you could re-negotiate a lower price.

3. Assignation.

If buying with a partner who isn’t there to sign the offer, or if you want to “flip” the deal to another investor, or if you may need to involve a partner for purposes of funding the deal, be sure that the purchase offer gives you that right.  Putting “and/or assigns” after your name on the offer is usually sufficient, but ask the real estate agent what the local custom or language is. This lets you add another buyer to the deal, or assign the whole contract to another.

4. Let the seller pay.

Specify that the seller pays for the closing fee, the title insurance, the recording fees, and even the points on your loan.  Sellers often just want the sale at a given price, and don’t care about the details.  What if they do care?  You have given yourself some negotiating points.  Get something for dropping each of the costs you included, like maybe a reduced interest rate if the seller is financing part of your purchase.

5. Basic financing contingencies.

Suppose the loan doesn’t come through, and you can’t buy the property. You’ll lose your deposit, unless you have something like this in the agreement:  “Subject to buyer obtaining a firm commitment for suitable financing within ten days.”  If the seller balks at the vague language, you can specify what “suitable” means in terms of interest rate and such.

6. Closing.

As the buyer, insist on the right to choose the title or escrow company so that you remain in control.  Also, you want the ability to have as much time as necessary to close.  Most contracts call for a date certain for closing.  If the buyer is not ready to close, the seller can hold him in default.  Here are some tips for buying time:

• Make the closing date “on or about”June 1st. What does “on or about” mean? I’m not sure, but it certainly means LATER than June 1st!
• Have the right to extend the closing date if it is not your fault: “Said date may be extended an additional fifteen (15) days if lender requires additional documentation, paperwork or actions from the buyer and said delay is not due to the fault of the buyer.”
• Have the right to extend for thirty days by paying the seller the equivalent of one month’s mortgage payment.
• Have right to choose the title company. A friendly title company (friendly to you, that is) can create an “unexpected” scheduling conflict if you need it.

7. Spouse’s approval clause.

This could be as simple as “Subject to a walk through inspection and approval of home by wife (or partner – state their name) within two days.”  Now, if your wife says no within two days, you can back out of the deal and get your deposit back.  If you want the seller to agree to this one keep the time frame as short as you can.

The above clauses are often called “weasel clauses,” because they give you ways to back out, or “weasel out” of a real estate agreement.  Don’t worry about the label.  A seller has the right to say no to your offer in any case.  You, on the other hand, have the right to use these purchase agreement clauses to protect your interests.

Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter and podcast for seniors and retirees that teaches the art of real estate investing.  His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years.  Prior to that, Bill and his family lived in Haiti as missionaries serving orphaned, abandoned and at risk children for Child Hope International.