The Sales Contract and Residential Investment Due Diligence

Understanding the pitfalls and opportunities of the sales contract are critical residential investing skills.

Often buyers take the sales contact for granted assuming that all parties are acting in good faith.  This can be an extremely costly choice.  Instead, investor security requires viewing and acting on the negotiation, development, acceptance, and execution of the sales closing as a critical financial decision.

What does this imply?

First, while negotiating the contractor there are many critical warranties and representations that the  buyer should insist be included.  A list of my favorite are:

• That the current residents meet the seller’s quality requirements including:
  • Rent as a % of income,
  • Credit scores,
  • Criminal background check, or
  • Community policy standards;
  • That all leases and applications signed between the beginning of due diligence and closing meet normal resident qualifications for credit, background, employment references, and rental reference;
  • That the seller provides an inventory of all items conveying with the sale of the property and all items not conveying with the property;
  • The seller’s  inventory should include a statement of the condition, make, and model of each item above $50 each;
  • That the seller warrants that the property will be maintained in the condition existing at the completion of due diligence with such repairs being made as required under the contract;
  • That the seller will maintain the property at consistent rents and occupancy without losing more than 5% until closing;
  • That the buyer will maintain retain all financing contingencies through due diligence, until:
    • lending is approved,
    • until property condition reports are complete,
    • until environmental phase I and if required environmental phase II are complete,
    • until survey’s are complete,
    • until the buyer verifies deposit account amounts,
    • until the buyer verifies rent and other income deposits,
    • until the buyer verifies expense and other cost checks,
    • until the  title search is complete, until liabilities and liens are established as not existing, and
    • until the appraisal is complete with any  deposits held in escrow until that point in time;
    • That the seller shall warrant that the income  and expenses for the property are true and  complete and that no  other properties or businesses owned by the seller have absorbed the costs falsely  altering the revenue, expense, or capital costs of the property;

A number of other items should be included in the sales contract.  Further, the buyer must specifically verify each of these items during the leasing process.  Verification includes checking and documenting the results of that verification.

In general, the buyer can expect that issues are likely to crop up during the period between due diligence and closing.  The buyer should seek recompense of some sort for all material amounts either prior to or at closing viewing each instance as an opportunity  to potentially materially improve the deal.

Blake Ratcliff

The  Residential Real Estate Guy

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