So you are interested in buying a home and flipping it or making it a profitable rental property. You scour the real estate section of your local newspaper and discover some homes that might be right for your venture, but the seller is offering it “as is.” Should this be a red flag? Is there protection for you if you get involved with such a property?
Being new to the business of real estate investing, you may or may not know of some issues that can arise when working through a deal of this kind.
For example, the seller may expect you to pay cash or a large down payment. That could be a problem if you can’t get a bank, mortgage broker, or private lender to finance the transaction. There can be all sorts of reasons why a bank may decline involvement. You could have too big a debt; your 9-to-5 job makes you ineligible for the loan; a loan from a government agency like the Federal Housing Administration (FHA) requires oversight of the deal; and more.
You should note that the FHA may require an inspection of the home that could find structural problems that kills the deal because the property is being sold “as is.”
So, should you get involved in the deal?
Don’t fret. There are ways to ensure that those nightmares won’t become an issue. The process has protections known as contingency clauses. The clauses give you and the seller a way to walk away from a deal without any financial or legal obligations. A contingency clause can be written into a real estate contract. There are a number of contingency clauses that commonly appear in contracts. They include:
- Appraised Contingency. This clause guarantees that the property is valued at a minimum, specified amount. If an appraisal determines that the property is actually worth less than the stated amount, then the agreement to buy the home is ended and the earnest money deposit paid when the price was agreed to, is returned to the buyer.
- Financing Contingency. This clause, also known as a Mortgage Contingency, gives you time to obtain financing to purchase the home. If you, as the buyer, are unable to acquire a loan from a bank, mortgage broker, or private lender, then you can refuse to go on with the process and your deposit has to be returned within a specified number of days.
- Inspection Contingency. This clause is also known as a Due Diligence Contingency and provides the buyer the right to have the home inspected within a specified amount of time. That could be 5 to 7 days, 30 days, or whatever. The time period of the inspection is written into the contract along with this contingency. This assures that the property is examined by a professional home inspector, who then delivers a report to the buyer. The report must provide details of any problems found during the inspection. You can approve the report and go forward with the deal; disapprove the report, drop out of the deal, and receive your deposit back; request that a second inspection takes place; or request repairs. If you request repairs and the seller agree, the process moves forward. However, if the seller refuses to do repairs, you can back out of the deal and get your deposit returned.
- A Cost of Repair Contingency. This is occasionally included in a contract along with the Inspection Contingency and contains the cost of the repairs. If the inspection finds that the cost of repairs is more, than you can terminate the contract.
It is imperative that you partner with a real estate lawyer who can give advice as the process plays out. It is also very important to do your due diligence in finding a professional inspector to examine the house. Much of the contract, relies on the inspector to be correct with his or her assessment.