Introduction

In today's post, we're going to discuss step eight of the multifamily acquisition process - negotiating the contract.

Last time, we talked about submitting your LOI. Once the seller accepts your LOI, a countdown timer begins and you need to move quickly to submit your contract or send back redline amendments to negotiate its terms.

Who should actually create the contract?

Generally speaking, it's the seller's responsibility to create the contract. However, as a buyer, I would prefer to use our contract if the seller is open to it. That way, we know what's in the contract.

It's important to always use a seasoned real estate attorney licensed in the state where the deal is located when creating a contract. Don't ever try to save money by doing it yourself or having somebody you know to do it. You need an attorney that specializes in real estate and understands litigation.

What goes into the contract?

Well, everything from the LOI should get moved into the contract, but that doesn't always happen. Sometimes, a seller agrees to something in the letter of intent, and then in the contract, they try to change it. You have to be really careful about that.

We mentioned in the previous post that LOI language should be moved over into the contract. Additionally, you want language in the contract that holds the seller responsible for any costs they incur if they back out of the deal. Typically, sellers try to penalize buyers for backing out, but that's not really fair.

You also want assignment language in the contract. Usually, when you're creating your contract, you don't have your LLC set up for the new property yet. So, you might create your contract under an LLC you already have, or what it might be. However, you want to be able to assign it.

Many contracts are written by sellers to say that you can't assign them. Typically, this is done to avoid wholesalers. Wholesaling is when someone gets a contract locked up and then sells it to somebody else on the day they close. This is more common in single-family flipping and wholesaling business.

To avoid this, sellers try to include language that says you can't assign the contract. However, we include language that says we can assign it to an entity we own. We create a new entity down the road so we can assign the contract to it.

There's also language in the contract about city inspections. The seller has to address any city issues or violations that may come up during the inspection. Last year we were under contract on a deal in Amarillo, TX that had more than 20 city violations, the seller had to account for those and fix all the issues before moving ahead and we ended up terminating the contract. The seller did not disclose the issues so after our attorney pointed out all of the contract violations that had occurred, we eventually ended up getting our “Non-Refundable” Earnest Money Deposit (EMD) returned to us.

To find out when city inspections for the subject property happened and what the findings were, you can go to the city and request this information.

Conclusion

Negotiating the contract is a crucial step in the multifamily acquisition process. We recommend using an attorney who specializes in real estate law, ensuring that all agreements from the LOI are included in the contract, and adding language around the seller's ability to back out, assignment language, and city inspections. Join us next time for step nine, due diligence.

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