Escape Clauses in Real Estate Investing

Posted by admin on June 24, 2010 Leave a comment (0) Go to comments

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One of the more important pieces of property investment advice that can be offered is to always have a back up plan. There will be times when a deal falls through. There will also be times when sellers will try and leave you hanging. That is just the nature of the beast when it comes to investing in property. It is vital that you have a way out of any deal that you make to avoid any complications if the real estate deal goes south or if you need to get out quickly.

The “subject to” clause

I have discussed the “subject to” clause before. It is an important tool to have as an investor. This is a simple way to cover yourself in case a problem arises. There are several ways to word the “subject to” clause. You can have the clause say that the sale of purchase of a property is “subject to” the approval of your attorney or business partner. You could also say the deal is “subject to” requirements that need to be met by the other party. Things like cash from the other party or changes that were agreed to be made on the investment property are all things that can be included in the “subject to” clauses.

The “liquidated damages” clause

The liquidated damages clause basically states that if you back out of a deal you have a fixed amount of money that is the total settlement amount that you will be responsible for. Below is an example:
“Remedies Upon Default
If either party defaults in the performance of any obligation of this contract, the party claiming a default shall notify the other party in writing of the nature of the default and his/her election of remedy. The notifying party may, but is not required to, provide the defaulting party with a deadline for curing the default. damages and release buyer from the contract in lieu of making any claim in court, or may pursue any remedy at law or in equity. If seller accepts the earnest money, it shall be divided as follows: expenses of broker and seller in this transaction will be reimbursed, and balance to go equally between listing broker and selling broker in lieu of commission on this contract.

If the default is by seller, buyer may either release seller from liability upon seller’s release of the earnest money and reimbursement to buyer for all direct costs and expenses, as specified in buyer’s notice of default (in lieu of making any claim in court), or may pursue any remedy at law and in equity, including enforcement of sale. Buyer’s release of seller does not relieve seller of his liability to brokers under the listing contract.

In the event of litigation between the parties, the prevailing party shall recover, in addition to damages or equitable relief, the cost of litigation including reasonable attorney’s fees. This provision shall survive closing and delivery of seller’s deed to buyer.”

If the default is by buyer, seller may either accept the earnest money as liquidated”

It sounds complicated but it is essential in any real estate contract. Some investors don’t like this clause because it means they would have to give up a larger sum of money than they want to part with. If this is a concern to you, then you can use more creative real estate investing techniques to purchase investment properties with minimal amounts of money.

An investor friend of mine told me a while back that it is not a good idea to put a lot of “subject to” clauses in real estate purchase agreements because it gives the seller the impression that you are hesitant in wanting to actually buy the property. You never want to put a negative thought like that into the seller’s head like that. You don’t want to give them an excuse to back out on the deal that you negotiated.