Jan. 29, 2020

How Do I Back Out of This Purchase Contract?


Your financing terms end up terrible; the repairs end up being way more than feasible for this project; you discover they're building 12 new construction freestanding condos right next door; you discover something unsettling about the property history; and, you think to yourself, how do I back out of this purchase contract?!

In this episode, you'll learn:

  • The contingencies in a standard contract
  • How wholesalers' contracts and documents may vary
  • The typical outs to a contract that you can use as an investor or retail buyer
  • The potential consequences of backing out 
  • The potential consequences of NOT backing out

...and I'm sure there's much more. Tune in!

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Transcript

Intro  00:01
You're listening to the flip houses like a girl podcast where we educate, empower and celebrate everyday women who are facing their fears, juggling family and business, embracing their awesomeness and wholeheartedly chasing their dream of flipping houses. Each episode delivers honest to goodness tools, tips and strategies you can implement today to get closer to your first or next successful house flip. Here's your spiky haired breakfast taco loving host house flipping coach, Debbie DeBerry?

Debbie DeBerry  00:38
What's up you guys, I hope that you're having an easy day. And thank you so much for hanging out with me for a little bit. In case you haven't seen in the Facebook group or read in your email inbox. We are hard at work planning, the only women's real estate investing retreat where woo woo and house flipping collide. All right, it's called flip your heart out. And it's going to be in September, in beautiful Austin, Texas. And what I promise you is that it is not just another good old boys real estate investing event. All right, get yourself on the waitlist ladies go to flip your heart out.com for all the details, and to put your name on the waitlist because I promise you, this bad boy is going to sell out quickly. And you know me, I keep things small and intimate. So this isn't 100 plus people get to come. It is a smaller group of awesome women. All right. So flip your heart out.com. Get yourself on the waitlist. And I promise it's going to be awesome. All right. So I wanted to do this episode on backing out of a deal. Okay, so let's say you go under contract on a property and you discover some things about it that either totally blow up your numbers and make it not a deal anymore. Or maybe you learn something about the history of the property that doesn't sit right with you. Or maybe your financing terms aren't as great as what you expected, or maybe not as great, but they're just not what you anticipated. They're not what you used when you were analyzing your deal. Maybe you're just getting cold feet about this purchase. And you want to know, man, can I get out of this thing? Or am I stuck or what? So there are a few ways there are contingencies in the contract, there could be potentially, if there's an HOA involved, you could potentially get out early. And you can also potentially just back out and forfeit your earnest money. But we're going to get into some things to consider and some ways to get out of a contract and make you more aware of potential exits. Okay, so that when you're going into a contract, you're very aware of your outs, okay, we all want to have outs, and it's really important that we do have out to a contract. Because it is extremely rare that we have 100% full knowledge of a property's history and condition and repairs needed when we go under contract. And that's especially the case if we're getting properties through a wholesaler. We only know what they know. And they don't always have all the information. And sometimes they haven't had maybe it's very obvious that the foundation is off. And they haven't had that estimated yet. And then you know what if you're messing with the foundation, oh, man, you've got some drain lines to consider. Right? So there are these things that may not be 100% known at the time you go into contract, because you've got to be really quick, right? This is not a slow business. This is a quick decision making business, which is okay. But you got to know how to protect yourself so that when things do get out of hand, you can back out of the contract. All right, so let's talk about those things. And just for the record, this isn't to scare you. It's to inform you and make you A smarter investor. All right. Look, there is not a single investment strategy that is risk free. Not a single one. Okay. But there are ways to minimize your risk. That's this game, we are here to minimize our risk as much as possible. All right, we're not trying to potentially lose it all, or be willing to risk it all. No, I'm way too old for that. No. So let's learn how to protect ourselves and be smart. That's it.

All right. Now, the first thing you need to do is you need to download your state specific purchase agreement. Okay, so whatever that is called in your state. And the way to find that is, for example, I'm in Texas. So if I go to the Texas real estate Commission website, they have forms and documents on there that the public can download. One of those is the standard one to four family contract. And that's what we use to buy and sell houses here. So you need to figure out what that document is in your state. And some states have to documents, it is your responsibility to figure out what those documents are in your state. Use Google, it's your friend, okay? So you're just going to do a search of your state, and maybe real estate commission or real estate, governing body, whatever, and find that document or those documents you'll be using when you're buying houses. Okay? In addition to that, if you work with a wholesaler, on a purchase, they are going to have their own documents that you're going to have to sign you better read those thoroughly. Again, it is your responsibility to know what you're signing, do not just sign things blindly. This is a business and it's your livelihood. take it seriously. Okay. read everything thoroughly. Even better, if you can run it by your attorney. Okay. All right. So get very familiar with your state contracts. And then any documents that you're wholesale wholesalers require you to sign you better know what those say, Okay. Look, sometimes it's easy to back out of an offer, right? Let's say you've signed on your end with the seller or the wholesaler, whoever's on the other end hasn't signed yet. Well, guess what? There's, there's absolutely no problem with you're backing out of a deal before everyone signed the contract. Okay, everyone, meaning all parties to the contract by your side and seller side. Now, if the wholesaler hasn't signed their wholesale. Now, if the wholesaler hasn't signed all of their documents on on the wholesaling end of things, guess what, you are not under contract yet. So you can absolutely back out no problem. All right. Now, be careful be. Now in some states, your original offer takes the form of a contract that you sign when you decide to buy. So be careful, it becomes binding as soon as the seller signs it, okay. In other states, it's usual, for the buyer to make a written offer, that's not a contract. The seller responds with a draft purchase agreement, also known as a sales contract, and then you'll only be bound once you sign that second document. Okay, so again, that's why it is critical that you understand your state specific purchase contracts, whatever you guys call them, for your real estate transactions, you've got to know those. Now, if you want to know how to get out of a real estate contract, you've got to understand contingencies. Now. contingencies are clauses, okay, they're part of the contract, and they describe different situations in which the buyer has a right to withdraw from the contract without any penalty. Some examples of these clauses that are often included in purchase agreements include the right for a buyer to withdraw if, let's say the following things occur, okay, let's say your financing falls through or the Home Inspection reveals significant issues, or the appraisal falls short or your own home fails to sell within a certain period. If you've got that as a contingency. Or perhaps there's an undisclosed easement. Maybe your title search Reveal someone else has rights to use party your property, or there's a problem with the title. Or insurers refuse to cover the property because it's in a high risk place for floods, or earthquakes or mould or pass or hurricanes or whatever it may be.

Now, those are typical contingencies when you're working directly with a seller, not necessarily a wholesaler, okay, so if you're under contract with the legitimate property owner, not a third party who is flipping the contract, if you're under contract with the property owner, it's likely you're going to have more contingencies that you'll get to use. So a lot of wholesalers will try to minimize if not eliminate all of the contingencies. So they may say, you know what, the downpayment is $5,000, and you forfeit that $5,000 if you do not purchase the property. So if you pull out at any time, you forfeit that $5,000. Now, when you're working directly with a seller, it is different than working with a wholesaler. So let's talk about that. Again, when you're working directly with the seller, you're likely going to have more contingencies. Sometimes you can include a financing contingency. Now, that said, if you're working with distressed properties, and you've got other investors who are bidding on those same properties, a financing contingency is not going to get you the deal. So it's not common to have a financing contingency on a flip property that you're trying to buy. It happens sometimes, again, it varies, but it's just not common. It depends on the competition. It depends, basically, supply and demand. Right. Okay, so other contingencies, our inspection contingency or option period in Texas, we have an option period, during which time we get inspections, and we do more due diligence on the property. Again, a lot of offers that become contracts with sellers, who are distressed sellers, and have multiple offers from various investors, it's going to be difficult to have an option period or inspection period. With those contracts. Again, it's supply and demand. So you may not have an inspection or option period, you may not have a financing contingency, but it is highly unlikely that they can waive your objections to title. Okay, so let's say something comes up on the title, you don't like it, you usually have a couple of days to put in writing that you object in either it gets rectified before closing or you back out and you still get your earnest money back. Okay. Another contingency is maybe you're selling another property first, again, not common. When we're dealing with investment properties, flip properties, in particular, when we're under contract to buy a flip, it's, I've never seen somebody have a contingency that they have to sell their own home first, not common. However, in traditional real estate, obviously, you do see that so you should know that it exists. Another contingency is the completion of repairs. So let's say the seller has agreed to make certain repairs Before closing, and those repairs are not completed. Guess what? You have an out. All right. So those are some of the outs that you have. Now, when you're dealing with a wholesaler, again, it's going to vary and you need to read their contracts. All right, read their contracts, hey, I have worked with tons of wholesalers over the years, they are a top source of deals for me. So just know their contracts. All right. It's a great way to find deals. Just know what you're signing. Okay? 

Another potential contingency or out is if the property is in an HOA, then you have a certain number of days, read your contract that you can object to the HOA rules and bylaws. So they have to give you this huge packet of all the HOA information. And if you object to it, or you just don't agree to it, whatever. Guess what you can back out of the deal. Okay. Now this next one is really common. Really, really common when dealing with distressed properties. And it's one that I see all the time with wholesalers in particular, I have probably had, of the many, many properties that I've purchased through wholesalers, maybe 10% of them have actually closed on time, that original contracted closing date, maybe 10% of the time. Well, that's out of 100 properties. Okay. So here's the thing. And it actually just recently happened. If you're under contract on a property with a wholesaler, right? There's a closing date. If that closing date is approaching, or you're on that closing date, and they need to extend it, if you do not sign the amendment, extending the closing date, there is no contract. Basically, they're in breach of contract, because they have not closed on the property when they said they would, you can get out of the contract. Now, some wholesalers are gonna be total jerks about it, they just are not that wholesalers in general are jerks. They are not going to want to lose the contract with you. And they may threaten you know what, then I'm going to keep the whatever earnest money $5,000 downpayment, they call it, I'm going to keep the down payment. Well, yeah, I would fight that pretty hard. That's a pretty bad reputation as a wholesaler to have that you keep people's down payments when you don't perform per the contract. Okay, so if you are getting cold feet, or I don't even want to say that, if you're getting cold feet, that's a whole other conversation we need to have, if the originally agreed upon closing date is not going to happen. And you have discovered things about the property, either. Whatever it needs significantly more repairs than you originally accounted for, and your numbers are blown, or the terms of the financing you're getting aren't in alignment with what you had expected. And so the numbers there are getting blown up. Or maybe something happened on the property that you found out about. if something like that happens, and the closing date is going to be extended, don't sign the closing date, extension. And back out of the contract. Technically, you are not in breach, all right. But again, read your contracts and get your attorney to read over any contracts that wholesalers give you to sign. All right, you've got to know what you're signing. But the closing date delay is really common. Look, we're dealing with properties that are in distressed situations. Okay. Typically there probate with multiple heirs involved. And sometimes it's hard to find those errors, or to get all of those heirs to agree on things. 

All right. So those are the main contingencies that you're going to see in a contract. Now, whether or not those contingencies apply to you, and that specific transaction depends upon your specific contracts and related documents signed, okay. So please, please, please understand what you're signing and understand your outs. You always want to know what your outs are. Okay. One more thing I want to touch on. regarding this topic is, man, sometimes I hear from women in particular, who they really should be backing out of a specific contract, okay. And they aren't doing so or they're hemming and hawing. Or they're just hesitating.

What I want you to do is approach this as a business decision. Now you may be thinking, hey, Debbie, you're always talking about how this is such a relationship business. It is a relationship business. Okay. Well, if it's a relationship business, Debbie and I back out of the contract, isn't that gonna make the wholesaler mad? Or make the seller mad, or the selling agent mad? Look, if it does, that's on them. You are not in control of how anybody else feels. You are not the source of other people's feelings. And, hey, that goes for you as well. People cannot make you feel something they do not have the power to make you feel something.

So just a little awareness there. You choose how you feel about something, you choose how you react to something and you choose how you respond to something. Same goes for the wholesaler seller or seller's agent. Now please hear me I am not saying to back out of contracts all willy nilly, okay. And to use these outs in a way that really is like trying to game the system? No, I'm talking about legitimate reasons. And legitimately using these outs to a contract. Okay? Again, having cold feet is a different conversation. That is fear. All right. So please, be careful not to get into people pleasing mode, and worry about what are they going to think about me? If I cancel this? What are other people going to think about me? Does it mean I'm not an action taker? Is it going to upset people? Am I going to look silly? Are people not going to take me seriously? All of those things? Let me tell you something. I am 99% certain men do not think about they think about this as a business decision. And we need to do the same thing. We need to be better at making business decisions that we know are best for our business, while also not operating from a place of fear. Fear of taking the step fear of taking action, fear of following through, okay? All right, you guys. So learn your specific state contracts, understand any contracts, or documents that wholesalers Have you sign and understand your outs to a deal. And you better have some sort of out. Okay?

And if it means losing your down payment, guess what? Sometimes, that's a lot better than potentially losing a lot more. All right. Okay, you guys, I hope that you're getting a ton of value out of these episodes. And if you are, would you please do me a huge favor because it will help me reach more like minded women like you? Would you please leave a rating and review, especially if you listen on iTunes, because apparently, Apple controls the world. And iTunes ranking is really important. And helps our little podcast be seen by more people like you. I'm super grateful for the reviews that we've gotten. And thank you so much for taking the time. Okay, you guys. Until next time, go out there. flip houses like a girl. Leave people in places better than you find them and make it a great day!