November 12, 2013 by Dymphna 4 Comments

Get “Your Foot On The Deal” With The Right Contract

contract

Sometimes, the simplest aspects of the buying process are also the ones that are most overlooked.

This is especially true when you’re making a deal that is just a bit out of the ordinary…

That is, when you’re seeking to add one, two or even three strategies on top of one another in one deal. Of course, those are the deals that get you the biggest potential passive income and chunks of profit…

The thing is, when you’re involved in a straightforward purchase of a PPR or a duplex or whatever, and you’re not going to change the property in any way, the contract is usually pretty simple…

You agree to buy the property for a certain price under certain conditions, such as an appraisal of the property’s value, property inspection, settlement date, and other typical conditions.

Put ‘your foot on the deal’

Now don’t get me wrong…

You should never assume everything is perfect in any deal contract until you have your attorney go through it…  but it’s the multi-strategy deals that really require an extra level of scrutiny and care.

When you find a property that has the potential you’ve been looking for and you’ve negotiated a discounted price, you want to nail down the seller into a selling contract with you on that property as soon as you can…

For instance, say you’re putting on offer on a PPR sitting on a large plot of land. You want to subdivide the property, build a duplex on the second piece and add a granny flat onto the original structure.

You’re now piling one manufactured growth strategy on top of another, on top of another…

They’re perfectly legitimate and smart strategies, but there is quite a bit more involved in the buying process…

To do all of those things, you will likely have to get council approvals for the subdivision and added sewer connections, construction permits and possibly zoning approvals to build the duplex and the granny flat.

You will also want consult with contractors and local real estate agents and appraisers for costs, rental rates, new property valuations and all the rest.

All of this is part of the due diligence process you will need to get into before you agree to put money on the table towards a deal. But at the same time, you want to secure the deal for yourself!

Therefore, you will want to make any contract on the property in question A CONDITIONAL CONTRACT.

A conditional contract protects you in two ways!

A conditional contract is a key part of your buying strategy that protects you in at least two ways…

That is, on the one hand, you want to put your foot on the deal with a contract that puts you in a protected position.

You don’t want to put out considerable effort in making a deal with the seller and not protect your position.

Nor do you want to be making your plans for the property and then have the seller turn around and sell it to someone else or try to put you in a bidding situation!

When that happens, you’re likely to lose quite a bit, if not all of your profit margin!

To avoid that unfortunate situation, you need to protect your position as the buyer.

You need a contract that allows only you to buy the property and no one else for a certain period of time and under very specific conditions…

You will want to add very specific clauses in the contract that give you the flexibility to get out of the deal if you need to…

For example, you will want a SUBJECT TO FINANCE clause that will let you walk away from the deal if you can’t secure financing for the deal. You don’t want to be on the hook to buy the property without financing in place!

If you’re combing several strategies that involve building, subdividing, and so forth, you will need a SUBJECT TO COUNCIL APPROVAL clause in the contract. Again, make sure that you can actually go forward with the strategies before you buy the property!

ENSURE THAT YOU HAVE ENOUGH OTHER CONTRACT ISSUES, such as a satisfactory site inspection or perusal of the contract by your attorney, or any other reasonable conditional clause that will protect you in the deal…

Provided that the seller will agree to the conditions on the contract. You may not get every condition you ask for, so be sure you prioritize the most important ones and be ready to bend on others.

The New South Wales exception

The one exception is New South Wales, where they have different contract laws…

You can get a seller to sign a contract but still have absolutely no security that the seller will sell that property to you!

I’m not a fan of this system, but that’s the way it’s done there…

In NSW, you’ve got to get all of your due diligence done ahead of time, before you enter into the contract and do what they call “an exchange of contracts.”

This is where the seller signs a contract to sell and the buyer signs a contract to buy, and they exchange the two. It’s quite a big deal because once you exchange contracts, the deal must go forward! You are committed to the deal no matter what once the contract exchange between the seller and the buyer has taken place!

Therefore, you have all your financing in place, all your local council approvals, appraisals, feasibility studies and all the rest, before you can nail down the seller in a deal!

So it’s quite a different process in NSW. Everywhere else, you should try to get a conditional contract in place on the property you’re interested in buying. But in NSW, all of your due diligence must be done in advance…

If nothing else, it forces you to really know the deal backwards and forwards…which you should in any case, shouldn’t you?