By: Cody THOMAS
A new investor entering the real estate investing market can be very intimidated. That’s why he is tempted to add contingencies to his purchase contracts that allow him to escape from an offer unharmed. Nothing wrong with this line of thinking. Protection is good and necessary. The mistake is found in the use, or should I say “abuse,” of these contingencies when the buyer uses false contingencies to secure his or her protection at the expense of the seller.
For those of you unfamiliar with the concept, weasel clauses say things like, “This offer is subject to the approval of buyer’s partner,” when the buyer doesn’t really have a partner. Lots of books on the subject show the use for this contingency. The real reason for these contingencies is to provide the buyer with a bogus reason to back out of a deal by later claiming that their “partner” didn’t approve of the purchase. The problem with these contingencies is that the buyer is deceiving the seller and, even worse, if the buyer exercises a weasel clause, other events in the seller’s life may be significantly delayed when the settlement doesn’t occur as expected.
Just the description of “weasel” never sat well with me. My unique condition was that I had to be able to obtain sufficient funds in order to settle. Such funds would either come from lenders, my own bank account, or a combination of the two. My standard contingency (certainly nothing new or magical) read as follows:
“This offer is contingent upon the buyer obtaining financing from ABC Lenders.”
The difference between this financing contingency and a “weasel clause” is that it discloses truthfully to the seller upfront that I am dependent upon my hard money lender to provide me with enough money to purchase their property. I’m not hiding anything or creating an escape hatch.
But I also use the inspection clause. An inspection is probably the best investment you can do buying a property. This contingency read as follows:
"This offer is contingent upon the inspection being acceptable by buyer."
I personally want to make sure there is no major problem with the property. Problems that can reduce my profit if it is a structural problem for instance. Should you tell your lender about bad structural problems, some lender won't get back from their promises to lend you the money. So in this case, if you had the only financing contingency, you'll have to close the deal. On the other hand, if you have the green light from your seller at the price you wrote on your offer and no major repair problem, you'll be happy with your contract and you'll feel comfortable at the closing table.
You don't want to destroy your reputation on weasel clauses. Be fair dealing and keep in mind that you are there to help people facing hard time in a foreclosure situation. The deal is to construct a win-win situation. Double satisfaction will erect as making some money and feeling good helping people, using true contingencies.
