If you are a new real estate investor just starting a real estate investing strategy and considering the purchase of investment property, you need to know about the inclusion of contingencies in any offer to purchase intended to protect you.

Keep in mind, once you write an offer to purchase a property that seller accepts, you become legally bound to the contract and expected to abide by its terms and conditions or face possible legal action.

It is so important, therefore, when writing an offer that you include a couple of escape clauses referred to as contingencies and normally prefaced by the phrase, “Subject to…” in the selling agreement.

We will focus on four contingencies more intrinsic to real estate investing and necessary for investors of real estate investment properties and ignore other contingencies like loan approval, title, and pest and dry rot and other inspections (typical in most offers to purchase real estate).

• Interior Inspection of All Units- Because income property sellers commonly prevent buyers from entering the units without a signed, acceptable offer, you must be sure that your offer is contingent upon your satisfaction and approval of the interiors of all units.
• Approval of Rental Agreements, Books and Records- You must satisfy yourself that the income and expenses you were presented for the property is credible, and the numbers substantiate the seller’s claims.
• Approval of the Seller’s Schedule E Tax Form- You must see what income and expenses the seller has been reporting to the IRS about the property over the past several years. You might discover that the rents were recently boasted to market the property at a higher price, or uncover a recurring operating expense maybe not clearly apparent in the property’s proforma income statement.
• Seller Cooperation in a 1031 Tax Exchange- If you are purchasing the property as part of 1031 Tax Deferred Exchange, include a clause asking for both, the seller’s acknowledgement that you are in an exchange, and his or her willingness to fully cooperate with you in that exchange. This has little impact on the seller other than paperwork, and does not involve a fee or additional cost to the seller.

If you are working with a real estate investment or commercial real estate professional, or real estate attorney, these and other clauses essential to your investment property purchase will undoubtedly be recommended and included in the contract without having to request it.

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