Episode 128: Wholesale Real Estate Contracts

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Show Notes

In this episode David and Mike talk about the most important tool in wholesaling, which is the “CONTRACT.” Contracts are the beginning of the negotiation. Check this out!

They discuss the important parts of a (1) one-page contract:

  •  DATE
  •  BUYER’S NAME AND MAILING ADDRESS
  • SELLERS NAME AND MAILING ADDRESS
  • PROPERTY ADDRESS TO BE PURCHASE
  • AMOUNT OF THE PROPERTY TO BE SOLD
  • CONSIDERATION
  • ACCEPTANCE PERIOD
  • INSPECTION PERIOD
  • CLOSING DATE AND LOCATION
  • CONTINGENCY CLAUSES

Check it out for yourself to know more!

Services Mentioned:

Welcome back to the Discount Property Investor podcast. Our mission is to share what we have learned from our experience and the experience of others to help you make more money investing like a pro. We want to teach you how to create wealth by investing in real estate, the discount property investor way. To jumpstart your real estate investing career, visit freewholesalecourse.com, the most complete free course on wholesaling real estate ever. Thanks for tuning in.

Mike: Back to the discount property investor podcast. Thank you for joining us today. your host Mike Slane joined with co-host, David Dodge. David, how are you this morning?

David: Hey guys! I’m good, man. I’m doing real good. Got a property, got a contract today.

Mike: You did? 

David: Yeah, feels good man.

Mike: Alright brother, alright. That’s exciting. How did that go man?

David: It went good.

Mike: Yeah?

David: Yeah, it was one that we worked- originally contacted him via cold texting probably about a month ago, and I made him an offer. He didn’t like my offer and we just followed up, followed up, followed up.

Mike: Follow up, follow up, follow up – the name of the game.

David: And you know in our last episode that we talked about how you got to have a little wiggle room for your negotiation. My original offer was 92 thousand and he wanted 110 and I came up to 95 so I came up a little, he came down a lot. It’s still a win-win.

Mike: That’s great.

David: Isn’t that great? We talked about that in the last episode.

Mike: Yeah, no we absolutely did, and I think that’s uh yeah, you built in a little bit of wiggle room but uhm you know, 

David: I mean I could have gone higher, but I didn’t want to.

Mike: And honestly, why? Why if you can get for a lower price, and you know they’re motivated. Why go up? Again, your job is to get a great deal.

David: That’s right.

Mike: So, I mean, there’s no reason to.

David: That’s right.

Mike: Again, we’re not in this business to lose. We’re in it to win it baby.

David: In it to win it, that’s right

Mike: Yeah, that’s cool. So, let’s talk about how you got it under contract Dave. So, one of the most important tools in wholesaling tool belt is your contract, right?

David: I love my contract. Yup, it’s very simple.

Mike: Alright, which contract did you use today?

David: We use the same contract that we provide in the free wholesale course.

Mike: Awesome 

David: Simple one-pager. Very simple

Mike: Check that out freewholesalecourse.com. We’re always plugging that for you guys, but it’s because we put so much content out there for you. So, what goes into the contract? I guess let’s talk about contracts today since we’re kind of on that topic. Contracts are, in my brain, the beginning of the negotiation. So, Dave you said you initially offered 92, right?

David: I did.

Mike: Did you offer 92 verbally? Or did you then follow it up with a written offer at 92?

David: Yeah, that is a great question that I can answer for you.

Mike: You’re gonna look it up?

David: Yeah, let’s find out. I’m gonna pull up my CRM here and I’m going to take a look.

Mike: I have worked with Dave for long enough, I am confident that he put it in writing because we almost always put it in writing.

David: Yeah, I’m almost positive I did. We always do.

Mike: So, why do we put it in writing? A lot of reasons: one, the contracts, like I said is the beginning of the negotiation and that way that seller has something tangible and knows that you’re serious about buying their property. So, putting it in writing makes it real for that seller. They know that you are a real buyer.

David: That’s right, I sent him the offer for 92 one month ago, two days ago, so basically a month ago. And then I went back and forth, back, and forth, and a lot of this was done via text message. The seller worked a lot and wasn’t able to really talk on the phone and he preferred texting which is actually my preferred method of communication.

Mike: Yeah, it’s so much more to the point.

David: So, it was like great and we just kind of went back and forth. And at one point, I had to basically say: hey, you know, I just- I can’t pay anymore for it. And then there was about a week and a half period of silence between the two. Then I reached out and said: hey, I haven’t forgot about you. I had a task in my CRM to call him and I said: haven’t forgot about you, have you given any more thought to my offer and he just said: you know, we’re not that far apart, but I got to get a little bit more in. And the reason I think he did that is I think his payoff was basically right at where I had made my offer at and he was afraid that after the prorations or the taxes or the closing costs that he’d have to bring money to the table. 95,000 on this particular deal gave him enough wiggle room to at least break even at a very minimum, if not walk with a thousand or $2,000.

Mike: Awesome, so what’s the sellers story Dave? Why is he motivated to sell? I mean what is going on behind the scenes that he wanted to sell it to you at a great discount?

David: That’s a great question, so he lives about a hundred miles away. He bought the house 20 years ago and he lived in it for the last- well, he lived in it for 17 of the last 20 years.

Mike: Wow

David: He moved to a hundred miles north for a job. He lives out in the country. I don’t know what he does for work. He told me at one point, but I just forgot and since he moved three years ago. He’s just been renting it to a friend and he’s not really making any money on the property because he is renting it to him and covering utilities. And the rate wasn’t that great.

Mike: So, you’ve got a couple of motivated seller keywords that kinda just go ding ding ding in my head. The first one was absentee owner. So, you said that he moved a hundred miles away. This automatically is going to be on one of your lists you’re searching for, it’s going to come up as an absentee owned property because his mailing address is going to be different than the property location. So again, that’s one kind of key thing. The other thing that triggers that motivation is the job. So, you said that he had a job move. So again, he basically left the property, and it sounds like he was just having his buddy come and help him make sure he can cover the mortgage payment.

David: And I think the reason that he didn’t sell it. I don’t know this for a fact but I’m speculating here. I think the reason that he didn’t sell it three years ago is because after he paid agent commissions, he probably would have had to brought money to the table. I’m thinking that he doesn’t have that much equity in the property. I could be wrong but essentially when we reached out to him and we basically tried calling him. He didn’t answer and he texted us back. So, this was just a cold call and then from there we just started playing text tag, you know: Hey, what’s going on? I want to see this property. He let me get into the property and view it and take pictures and that’s when I made my offer to him verbally via text message, which is in writing but not really and then I sent him a real offer in writing and I got his email and that’s kind of where we left off and then you know, a couple weeks goes by of silence / negotiating and finally I reached out to him last week. You were in the office with me and I said: hey, you know, we need some deals right now, we’re deal light. So, I started reaching out to some people that were in my follow-up list and boom he said: all right, you come up a little bit, I’ll come down a lot. Let’s try to make this a win-win.

Mike: So, it sounds like yeah, he’s just been dealing with the fact that he probably wasn’t going to make money on this property for several years now. And it sounds like he probably refinances equity out if he’s owned it for 20 some odd years.

David: Right

Mike: So, he realized he wasn’t going to make money when he sold it. It was just kind of coming to that point now and saying: okay, I’m ready to do it, ready to put it behind me, which is great. So again, he’s gonna be a rid of this property that’s been a headache for him, having his friend live there, basically help manage it and help him cover the the mortgage for him. And he’s be able to put that behind him, which is great.

David: Which is great.

Mike: So, one other thing I wanna kinda hit on was what Dave said earlier, was that he sent the offer via text and that’s kind of an offer in writing and kind of not.

David: Hahaha, I don’t consider it in writing. 

Mike: I don’t either

David: Cuz I like to have one that’s signed. That’s what I consider ‘in writing’. Something that’s actually signed by me. It’s delivered to them, whatever way you want to deliver it: fax, mail, email, in-person, whatever. But when it’s signed, that’s what I consider in writing cuz then the ball’s in their court.

Mike: I love it and I think that’s a very good point to make, is that although it is technically in a written form of communication. It’s not a written offer unless it is, like Dave said.

David: It’s hard to print a text message and take it to a title company. 

Mike: Right

David: Exactly. So yeah, love it man.

Mike: Yeah, so get them in writing. I love it. I mean, that’s very very important and what we want to talk about is our contract. Dave let’s kinda dive in a little bit more into the parts of the contract that are important to include and the parts of the contract that are- that we don’t have in our contract cuz they aren’t important.

David: I love that idea.

Mike: Hahaha, our contract is one-page guys. There’s not a lot of fluff in it so most of its pretty important. You just want to get it. 

David: But there’s not a- there’s no reason to have a lot of fluff. 

Mike: There isn’t. 

David: And that’s the beautiful thing and I think a lot of people when they’re getting started, they’re confused with contracts. They’re worried about sending contracts. They don’t know if they’re doing it right, but really the contract part of this business, in my opinion, is like the easiest part especially if you use the one that we give away for free in the free wholesale course.

Mike: Yeah, the contract part, I think, is a fear thing. I think most people are very afraid of-

David: What happens if they accept? Oh man.

Mike: Exactly, then I have to buy a house.

David: It’s almost scarier when they accept than it is when they say no, or they don’t respond.

Mike: And that’s what you’ve got to just blow past because it’s not important. 

David: It’s not.

Mike: That is the only way, and we’ve talked about this we’re going to get off topic again. The only way to make money in this business is to have a property under contract.

David: You gotta have inventory.

Mike: If you’re wholesaling, you have to have a property under contract.

David: It’d be nice if these were a little shorter.

Mike: These are too tall, our microphones guys. We got the little stands here.

David: Maybe I’ll buy us some new ones that are shorter. That’s alright.

Mike: We might need shorter one’s. Anyways, let’s get back to the important pieces of the contract. Okay let’s look at uh- you got it pulled up here for us.

David: Yeah, so there’s really only a couple things that you have to have on a contract to make it legal. Number one, I would start with today’s date. You want to put the date of the contract, now that’s important for several reasons. Number one is because you’re going to put- you’re going to want them to know and the title company when the contract took effect. Reason being is if you have multiple contracts on a property, which has happened to us several times, the one that was signed and dated first is the one that matters. 

Mike: Which is crazy, but it does happen. 

David: It does happen. 

Mike: People try to sell their property to multiple people.

David: I’ve had a guy; he went out and just signed like five or six contracts with everybody in town.

Mike: Some people don’t know.

David: He just didn’t know and then we’re like: What the hell is going on here man? Well, I just figured the first guy who’d bring me cash would get it. It’s like, it doesn’t work that way man, it doesn’t work that way. So yeah, number one: today’s date. Always start with the today’s date. Number two: the buyer’s name and mailing address. Now, the mailing address isn’t necessarily required but I like to add it because it helps the title company later send the proper documents to that to the buyer which in most cases is us. Next would be the seller’s name and mailing address. Same scenario, you want to put the mailing address on there, especially if the property address and the mailing address are different. That way the title company can send them the packet in the mail if so requested. Next would be the property address that is going to be purchased. And that’s the main thing, right? Like you want to have the the property address to parcel whatever it might be to- on the contract of the property that’s being sold.

Mike: And guys, that is almost all you really need to take to a title company. I mean that’s about it. Again, if you had that you could probably get the property closed.

David: Well, you might need the amount.

Mike: Ehh. Amount and a closing date are gonna help, for sure.

David: So, the next thing that we had is the amount, what are you willing to pay for the property? And then we have the consideration, which is also known as ‘the earnest money’. All right. Now, we only have a couple more things that we need to add guys. We’re like halfway done, all right. Next would be the acceptance period. Mike, what’s the acceptance period?

Mike: An acceptance period is a timeline that you’re giving the seller to accept your offer. So basically, when you’re writing a contract, you’re saying: I will buy this for $100,000. Well, most of the time, most people don’t want contracts sitting out there forever.

David: I know I don’t. 

Mike: Because they don’t always have $100,000 or aren’t able to perform on that contract six years from now or whatever the case maybe.

David: Here’s a perfect example: If I send out five offers every day, which I try to do. Don’t always get them out every day, but I try to send a lot of offers. And let’s say that I don’t put acceptance periods on any of these contracts and I don’t get any contract signed and returned for a month. But then all of a sudden on a random Tuesday, I get 27 contracts back. Well that’s going to make it very difficult for me a) to manage all those, b) to lineup closing, funding, wholesale buyers, whatever it might be, so you always want to put a duration but I think even more importantly than that problem, is you want to make sure that your seller is aware that this offer is an offer that is good until next Friday or this following Sunday and that they need act fast if they want this offer.

Mike: That’s great. So, it puts moti- it puts them in the hot seat too.

David: Right

Mike: Just reminds them: hey, this isn’t a forever thing. Like I want to buy your house, but I wanted to do it this week.

David: Yeah, next week, guess what? I might have three more projects on my belt, and I can’t buy this one or if I do buy it, it’s going to be 10K less. So, if you want this amount, this is what it’s going to be, and I need to know within 48 hours or a week or whatever that might be. So, don’t overthink the acceptance period guys, it’s just a period that basically says the seller has until this time or this day to sign and return it. If they do it after that period, the contract essentially is void. Next, we have the inspection period. This is nothing more than just a simple amount of time that you used to inspect and to do what we like to call due diligence. Mike, give me an example of the due diligence or explain what in the hell due diligence is.

Mike: Due diligence, just in general, would be your figuring out if that property is really worth what you believe it to be worth.

David: That’s it guys, as simple as that. Keep it simple.

Mike: One example of that would be doing a full-blown inspection. So, having a home inspector go out and inspect the property and that’s pretty typical in retail transactions so when you’re just buying or selling a home, there’s usually a full-blown inspection that happens with a certified inspector who comes out and you know, looks at every possible thing that they can with the house. So, in the investment world, it’s much less common to have an inspector come out and give you a formal inspection report on a property. So, then another due diligence example, and this is one that we do, and we do it on almost every property we buy, and a lot of them that we wholesale is the ‘sewer lateral inspection’. So, Dave, why we do sewer lateral inspections and what is it?

David: I did two sewer lateral inspections today. Speaking of sewer laterals-

Mike: So again, it’s basically a colonoscopy for your house.

David: That’s exactly what it is. It’s kind of gross but it is very very necessary and here is the reason: Mike and I can go and walk around a property, we can walk in a property, we can get a pretty good understanding or idea of all the things that are wrong. Now, of course, not every little thing but we can see the big things. Is the kitchen in good shape or does it need to be redone? I mean that is super obvious, we can walk around, and we can see the obvious things. The sewer lateral is the one thing in a property that we cannot see no matter what, you can’t get down there. Often times the sewer lateral is anywhere from 7 to 15 sometimes even 18 ft. deep. Okay, so s-h-i-t runs downhill, you’ve heard that saying right? And the sewer lateral does the same thing, whenever it comes out of the house, it’s deep but it’s actually the shallowest that it’s going to be and then as it runs towards the sewer it gets deeper and deeper. Why am I getting into some detail about this? Because they’re expensive as hell to fix. You got to dig up anywhere between 8 and sometimes down 20 feet to even get to them. So, you can have a company come out and they can put a scope in there, which is basically just a camera on a stick, a really really long stick that’s flexible and they can put that all the way in the sewer line and they can tell you if it’s in good working order, if it has some repairs needed, or if it is completely trashed and that you have to go in. So, we always do the sewer inspections. The sewer inspections are typically under a hundred bucks, depending on where you live, there may be a little bit more but they’re very very inexpensive in terms of the cost of fixing it later if you didn’t know about it, I mean, we’re talkin 510 sometimes as much as 20 grand to fix a sewer lateral and if you just spend a hundred bucks in the beginning to have it scoped, you can know, you know.

Mike: Due diligence guys. So again, because we can’t see it, that’s one of the reasons why we really really want to get somebody down there. Moving on with the other items on our contracts. What else do we need on there Dave?

David: Closing date and location

Mike: Perfect

David: And that’s very- to the point. Like, when would you like to close? and where? Mike and I like to add in- on or before we put our closing date in. That’s a pro tip for you guys. So, let’s say that, let’s just say that today’s the first of the month and we have a closing date scheduled for the 25th. Well, we’re going to put on or before, reason is if we can get it closed on the 15th or the 18th, we don’t need to go back and get amendment signed. We can just call the title company up and just say: hey, we’re ready to close sooner, can you do this next Tuesday? As long as the seller agrees, typically they’re okay with that.

Mike: And here’s why that helps us. Dave said it’s because- then we don’t need to amend the contracts.

David: Yeah, less is more.

Mike: Well, think about what you’re doing. So again, we are trying to first buy a property and then sell a property and we’re trying to line that all up on the same day. So, you’ve got multiple parties to coordinate. So, once you negotiate that purchase price and you say: okay, mister seller, can we do the- by the 25th? like Dave said, the 25th of this month? and they say: okay that’ll be great. And you said: okay, if we can close sooner, we will definitely try to do that. Then you sell the property, and you talk to your buyer, and your buyer says: okay, yeah, I’m ready to close in a week. I’m cashed. You know, I’m good to go whenever you guys want to close it.

David: Yeah, why wait to get paid? 

Mike: Why wait until the 25th if that buyers ready to go, and if the title company has everything lined up?

David: And you have to have the the title work done, that’s very important. But if it’s done and yeah, like you said, if the buyer’s ready, why wait to get paid?

Mike: Why wait to get paid and why do you want to then have to go out and get an amendment to the contract that then states: ok, we’re no longer closing on April 25th, we’re going to close it on the 20th. Again, it’s just one of those things where you’re saving yourself a little bit of time by being forward thinking. We actually include that little phrase in our freewholesalecourse.com in the contract that’s out there for you guys so check that out.

David: That’s it. So, guys, there’s only one more thing that we have to have in a contract to make it valid, right, and really you could probably go without some of these items, but we always use all these items because it alleviates all the questions that a title company may come back and ask, or that the seller may come back in and ask. Last but not least, is a contingency clause, which is really part of your- it doesn’t have to be part of your inspection period, but it can okay? But your contingency clauses are basically CYA clauses. That’s the same thing and that stands for ‘cover your ass’ okay?

Mike: Exactly and what David said is that it doesn’t have to be, but it can be. The reason that we’re on that is they’re very very linked. The inspection period and your contingency clauses, you really want those to be linked. You want to do your due diligence and exercise your contingencies within that inspection period. Again, you want to play fair, you want to play by the rules.

David: Yeah, you don’t want to be back and out on the day of closing. That’s not really fair to the seller.

Mike: You’re trying to help these people out too. Again, most the time we’re dealing with motivated sellers for a reason.

David: Shoot for a win-win

Mike: So, guys, we’re here to help them. So, you want to play by the rules and get those contingency clauses in. Dave, what kind of contingencies would we put in?

David: There’s so many of them. But like my favorite one would be partners approval, cuz you know, it’s just very very broad. Your partner could be your business partner, it could be your spouse. I’ve heard- I think Joe McCall says that his partners is dog or his cat, which is just hilarious but it’s not wrong, you know, like-

Mike: Before Dave and I were partners, like actual business partners. I, in my brain, rationalize subject to partners approval as my buyer, as my end buyer. That was my partner on this deal. Like again, I’m partnering with that person. I’m going write down a contract and be partners with that person on that deal. And that’s really how I rationalized including that in the contract. Now, luckily I didn’t have to exercise that often because again, you try to get good deals, you try to get them sold. That’s the whole name of the game.

David: That’s the whole name of the game, that’s right

Mike: But again, that’s a real good one, I like that one. 

David: So, let’s just talk about a couple more, let’s not get into too much detail but there’s subject to appraisal if that’s something that you want to do. We don’t typically do that in our market because we have a good understanding of our ARVs, but in other markets, it may be all over the place and you may need an appraisal. You can have subject to an inspection by a licensed inspector. Again, we don’t do that, we do our own inspections but that’s a great due diligence clause or a contingency clause that you can add. Subject to valuation of the buyers is also one of my favorites, another way to word that would be contract contingent on verifying taxes, title, and value. So why is that such a good clause? Well, you can easily verify the amount of taxes that are owed, you can pretty easily, not us, but the title company can pretty easily verify if a title is clean or not but that last word okay, lets read it again, contract contingent on verifying taxes, title, and value. Value is all determined by each individual right? Everyone is going to have their own opinion of value. So basically, that gives you an out. At any time, just say: well, I just don’t see the value in the property, or the value of my ARV was maybe too low or too high, or the value of my repairs are maybe too low or too high and regardless, it’s going to throw off your entire equation.

Mike: That’s great. Yeah and value is something so fun to- I’m a little bit more involve in the rental side nowadays and I get a lot of appraisals on properties, and it’s kind of fun to see what appraisal- how the appraisals come in and what prices they come in at. We had one recently had an appraisal on it and it came in off the [inaudible], I think the other value came in at 156 thousand and we didn’t like that. So, we said: okay, we can’t close this, so we had another appraiser come back out and the value came in at 189. Almost $30,000 different and that- those are two licensed appraisers. So, they both are very good at determining the value of properties but again, it’s just that it’s a very subjective thing so it’s very good to include in that contract.

David: Last one would be maybe just do a final walk-through or a final inspection of the property by the buyer. And the reason that that one could be valuable is let’s say that you don’t close for a month or two and there’s tenants in there, well you wanna go back and make sure that the tenants are still there.

Mike: Still there and that the-

David: The condition is the same as when you saw it.

Mike: All the appliances are still there and the walls and the doors.

David: Yeah cuz somebody could go in and they could rip all that stuff out and the sell you the property and yeah, absolutely.

Mike: The air conditioner.

David: So, the final walk-through, typically day of or even the day prior to closing

Mike: And you guys want to do that on your properties anyways, especially with one you’re closing on.

David: I recommended it.

Mike: You’re end buyers going to want to get in it that day of closing. So again, that’s great to have in there.

David: I just had a guy reach out today on one that Brad, and I are selling and uh.

Mike: He wanted to get in?

David: He wanted to get in and we’re like oh, come on man, you were just there last week.

Mike: Was it tenant occupied?

David: Its tenant occupied

Mike: Yeah see that makes it even more challenging but it’s understandable.

David: But it is what it is. So, we’re going to meet him on Friday and we’re going to let him in, but you know, it’s a little bit frustrating on our end but at the same time he wants to verify that the appliances are still there, and the tenant hasn’t left, and everything is the same from when he saw it maybe two, two and a half weeks ago. I get it. I was a little frustrated with it, but I am more than happy to meet him there to you know, to walk him through that. So, I think the name of the game though guys is don’t let contracts you know, worry you. It’s not that difficult. If you’re looking for a contract, go to freewholesalecourse.com. We have a standard contract that we use. We probably use this 50% of the time, sometimes people want a little bit more meat in the contract, but I prefer to keep it simple and the one that we have for you guys is literally a one-page agreement and it’s super super simple. There’s probably not anything in here that anybody would not understand and the great thing about it is, you know, you can modify this to kind of meet your own needs if needed. So, get those offers out, use contracts to purchase property. That’s how you get inventory and we said it in the beginning, if you don’t have inventory, you can’t wholesale. You can’t sell anything. Mike, anything you want to add to wrap us up on this episode?

Mike: You guys, get in the game, start making offers, start using the contract to lock up deals and let’s get paid.

David: Let’s get paid! Signing off. 

Thanks for listening to the discount property investor podcast. If you enjoyed this episode, please like, share, and subscribe to help us reach a wider audience to jump-start your real estate investing career, visit freewholesalecourse.com- the most complete free course on wholesaling real estate ever. We would also appreciate it if you left us a review on iTunes or Stitcher. Thank you in advance for your support and remember you make your money when you buy, you get paid when you sell. Now let’s go build some wealth.

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