Common Real Estate Investment Contract Clauses to Look Out For

Investing in real estate is exciting because you are dealing with tangible stuff; house, an apartment building, a commercial building, maybe even a shopping mall or something else. What makes investing in real estate more difficult then, say, investing in the stock market is the fact that you have to actually sit down and sign a contract in order to purchase a property.

Chances are, of course, you’ll have either your attorney with you or at least your real estate broker at the closing to help you sign all the papers and answer any questions you might have. Of course the more complicated the real estate deal is the more intricate the contract will be and in those cases you’ll almost certainly have an attorney with you.

But for simpler contracts that deal with simpler transactions such as a regular rental property house or small apartment building, you may not have an attorney present and you may not want to look like an idiot by constantly asking your broker “what’s this mean, what’s this mean” over and over again; so I thought I’d write a quick little article today and discuss some common clauses that you’ll find in a normal real estate contract so that you will be a little more familiar with the terminology and the language going in and know what to expect.

The first clause I want to talk about is the risk of loss clause. Many times you will sign a contract prior to the actual closing and when you signed the contract the building was perfectly sound. But between then and the time of the closing something might have happened to break something in the building. Under certain circumstances the seller may be obligated to cover those costs and that will be spelled out in the risk of loss clause of your contract.

Guarantee clause. Many times a seller will want you to prove that you can afford to buy their property and they do that by getting your financial institution, be it a bank or a mortgage company or a group of investors to sign a statement guaranteeing that you will have the funds available to pay when the time comes. This sort of thing will be spelled out in the guarantee clause of your contract.

Assignment clause. Assignment is a legal concept that I’m not going to discuss in great detail but it basically means that you can assign the contract to another party. Usually you as the buyer will want this done and if so you will have spelled it out in the assignment clause of the contract.

Encumbrances clause. A title report will show whether the property has any encumbrances like a mortgage or lease or an easement or any kind of restriction on use. These things obviously will affect the value of the property and how they are dealt with will be spelled out in the encumbrances clause of your contract.

So there you have four normal clauses that you can expect to find in a real estate contract. Obviously there could be up to hundreds of other clauses but unfortunately we don’t have the time to discuss any more today but hopefully these will give you a heads up and start you down the right path.

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