When should you sign a purchase or sale contract?

Website design By BotEap.comIf you are a seller, the usual inclination is to sign a contact as soon as possible with a buyer. This will ensure the sale of the property and you will get a deposit in your hands that may or may not be refundable under the terms of the contract.

Website design By BotEap.comHowever, what if your buyer wants a 5-10 day inspection period and also wants conventional financing instead of paying cash or using a hard money lender? The problem is that by signing a contract, you have locked up a buyer who may or may not be a buyer.

Website design By BotEap.comThe inspection report will likely include things that need to be fixed and the prospective buyer will try to renegotiate the offer price. This renegotiation can be expected and should be done yourself if you are an investor trying to get the best possible price. If the inspection is for 5 days, your property will essentially be off the market during this time and you may or may not have a deposit in the closing agent’s escrow account.

Website design By BotEap.comYou can accept backup offers, but investors are reluctant to back up, especially when they discover that another investor refused to take the property. Backup contracts work, but they are a distant second option when selling a property.

Website design By BotEap.comAt the end of the inspection period, the buyer decides not to buy the property and gets his deposit back, if he did. Next, you will face the problem of canceling the buyer’s contract. You still have a contract that you may believe is invalid for various reasons, but you must get a cancellation of the contract to prevent the former buyer from returning after signing a second contract.

Website design By BotEap.comIf you think this cannot happen, it means that you have not been in business long enough. Typically, the cancellation is signed when the escrow money is returned to the buyer, again, if the buyer deposits the escrow. Some investors will be slow to put the security deposit because they don’t have it and are trying to resell the property and use the end buyer’s deposit to cover their deposit. This is standard operating procedure for most wholesalers, so be prepared for it.

Website design By BotEap.comDue to this subversion, I have adopted a different tact when getting a buyer to sign a contract. I ask the buyer to do their inspection before signing a contract and when they complete their inspection and renegotiate they sign a zero-day inspection contract. Your escrow check should come with the contract signed or transferred to the closing agent. The security deposit is now non-refundable and you have a “reasonably” legitimate buyer.

Website design By BotEap.comThe buyer may not close yet, but will receive compensation for their work. The buyer may have resold the property to another investor who decided not to close. Your buyer will lose their deposit and so will the ultimate buyer. The end buyer’s deposit is held by the investor and must be double their deposit for the investor to earn money even if they don’t close.

Website design By BotEap.comThese tactics are not unscrupulous, just good business practices among investors. If you are on the receiving end of not closing, you may become frustrated because you have ongoing maintenance costs and you have to start marketing your property again. My solution of not signing a contract until I am comfortable that the inspection period is “over” and I have money in the escrow account does not guarantee that the buyer will close, but it is a great path to a solution.

Website design By BotEap.comThe other potentially huge benefit is that it is common for a new buyer to arrive with a stronger offer (higher price and larger escrow). In this situation, you have the opportunity to renegotiate with the original buyer or simply accept the strongest offer. The first buyer will complain that they had to pay for an inspection, but would have had to do it anyway whether or not they accepted their contract.

Website design By BotEap.comProfessional investors rarely hire an inspector because they have the experience to do it themselves. If you receive a higher offer and you are not under contract, don’t be intimidated because you shouldn’t sell it for more; this is a business and should be handled professionally.

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