Friday, June 03, 2005

The Best Darn Document on the Planet (CYA) by Joe Kaiser

I spent a dozen years in the real estate business before I ever really took a good long moment to just sit still and think about what I was doing.

A couple words of advise...start sooner.

Had I invested the time I should have really thinking things through, my life as a bona fide investor would have started a whole lot sooner, and sooner is definitely better than later.

I didn't think things through because I was too interested in the latest wild goose chase and my energies were always aimed at something other than work. Trust me, it's work to spend time thinking things through. But it turns out it's one of the most important things you should be doing early on in your real estate career.

Just as a life unexamined is not worth living, an investment strategy unexamined is not worth executing.

The problem is, when you're new, you don't have a clue about what to think about. Sure, you're considering trying to pull something off and have a general idea regarding what it'll take to make it fly, but you really don't have anything more than that. Frankly a general idea isn't much of an idea at all.
All the ways it could go wrong
Try this . . .

Think about all the ways it could go wrong. Seriously examine the weak spots and look to see where problems are likely to make their presence known. Make up your list of horribles that can affect your strategy, and then figure out a way to make sure those things are handled so they can't happen. If that's not possible, make sure you've figured out your position should those things actually come true.

There's a house I'm looking to buy from an owner facing foreclosure. She wants to stay in the house and rent it back from me and maybe buy it at a later day for significantly more than I'm paying her.

Good strategy, but do you see any problems? Years ago I would have just signed her up and been happy with it. In fact, I did a bunch of these kinds of deals with distressed sellers and never gave a second thought to the likely outcomes. Since I was only focused on doing another deal, I never stopped to just think things through. Had I done so, I could have saved myself countless hours of frustration along with the thousands of dollars lost when things ultimately went sideways.

I had one deal like this where the lady filed bankruptcy shortly after we closed. I hadn't planned for that and didn't have a clue what to do about it. That should have been an obvious likely outcome.

One guy sued me on a similar deal when I later refused to sell the property back to him. His checks had bounced a number of times, and his right to purchase the property was supposed to end when that happens. While that was my understanding, it wasn't his attorney's.

That, too, was easily predictable.

One gal claimed that I hadn't really bought the property from her at all. She said I'd agreed to make her a loan and all that other stuff she didn't understand.

One guy later told me he'd been on drugs when he signed the paperwork and now wanted out. Another had his attorney advise me that his hearing aids weren't working when I explained the terms of our deal to him and now he wanted the property back.
You need a good plan
Had I been smart, I would have had a plan in place for all these kinds of events. Remember, we're not talking about remote possibilities here. The problems that surfaced are obvious to anyone who spends more than a moment or two thinking about what could go wrong with this kind of deal, and you're advised to take that time and really think things through.

Unfortunately, when you're new, you really don't have enough of a background to hit all the likely outcomes. If that's the case, get together with someone who does, and the two of you brainstorm the deal out. Having an experienced person along for the ride is a tremendous asset and should not be overlooked.

No real estate friends?

Go hire one - that's why they make attorneys. Real estate attorneys who've been in business for any length of time have seen things you and I can't begin to dream about, and running your plan past them with an eye on anticipating and avoiding potential problems is money well spent. Don't overlook the benefits of having someone looking over your shoulder.

And don't just think about worst-case scenarios . . . figure out your exit strategy. you'll want to know with a high degree of certainty how things will end up and, most importantly, how you'll get paid when things do. With proper planning you really can predict outcomes and, if you're paying attention, and you fine tune along the way, the outcome you design into the plan can in fact be the outcome you end up with. Or at least be something that sort of resembles it. What you don't want is something entirely unanticipated entering into the picture and putting the crimps on your profit.
Final answer: The Seller Disclosure Statement
For years we've made sellers sign a disclosure statement that makes it difficult for them to later change their story and attempt to "unwind" our deal. When you're dealing with distressed sellers, it's mandatory to have something like this in the file, because you can be certain that once the problems are solved and the pressure is off, that friendly seller of yours is going to change his tune and decide you took advantage of him.

Here it is:
Seller's Acknowledgements

I ,_________________________________________________________ (Seller), on this ____ day of ______________________, 20_____, have agreed in writing to sell the property commonly known as ______________________________________________, (The Property) to ________________________________________ (Buyer) and or assigns, according to the terms and conditions contained in the Purchase and Sale Agreement (The Agreement) of even date, a copy of which is attached hereto. I further state as follows:

________ 1. OWNERSHIP OF THE PROPERTY: I am the owner of The Property (or I have an equitable interest in The Property) and am able to contract for its sale.

________ 2. ACCEPTANCE: I have reviewed the terms and conditions contained in The Agreement and have accepted Buyer's offer to purchase The Property.

________ 3. GOOD AND VALUABLE CONSIDERATION: I have received good and valuable consideration in signing The Agreement, and I acknowledge both the receipt and the sufficiency of the consideration.

________ 4. IN MY BEST INTEREST: I am satisfied with The Agreement and have agreed to sell The Property because it is in my best interest to do so.

________ 5. FULLY INFORMED AND NOT CONFUSED: I have signed The Agreement being fully informed and with sufficient understanding of all terms and conditions contained therein. I am not confused about any aspect of The Agreement.

________ 6. SATISFIED WITH THE SALES PRICE: I understand I may be selling The Property for less than market value but have chosen to do so because circumstances dictate that an immediate sale, even at a discounted price, is in my best interest. I am satisfied with the sales price I have negotiated.

________ 7. SALE IS FINAL: I understand by signing The Agreement, I have agreed to sell The Property to Buyer and am now bound by the terms and conditions described in The Agreement. I further understand that I cannot change my mind or cancel the contract at some later date, nor can I continue to market The Property to any other buyer.

________ 8. CONTINGENCIES MAY EXIST: I understand the sale may be contingent upon Buyer's inspection and approval of certain items described in The Agreement. I further understand that if Buyer does not approve of these items, Buyer may cancel The Agreement and if cancelled, I must return Buyer's earnest money in full.

________ 9. NOT A LOAN: I understand The Agreement I have signed is for the outright sale of The Property and is not intended to be a loan of any kind.

________ 10. AGREEMENT MAY BE ASSIGNED: I understand Buyer may assign The Agreement to another party and I may be closing the sale with someone other than Buyer.

________ 11. NO ESCROW: I understand Buyer may choose to close this transaction without the use of an escrow company and may record the conveyance documents himself.

________ 12. CLOSING DOCUMENTS: I understand there will be additional closing documents to sign and upon receipt, agree to sign and deliver the closing documents either into Escrow or directly to Buyer, as Buyer may direct, in a timely manner.

________ 13. COPIES OF THE PAPERWORK: I understand that copies of the paperwork I've signed will be provided to me in a timely manner and I acknowledge that circumstances dictate that copies may not be immediately made available to me.

________ 14. BUYER ENTITLED TO MAKE A PROFIT: I understand Buyer may resell The Property and may realize a profit in doing so. I agree Buyer is entitled to any profit that may ultimately result from the subsequent resale of The Property.

________ 15. LEGAL COUNSEL ADVISED: I acknowledge Buyer has advised me to seek independent legal counsel to review The Agreement.

________ 16. FINANCIAL REVIEW ADVISED: I acknowledge Buyer has advised me to seek an independent financial advisor to review The Agreement.

________ 17. FAIRLY NEGOTIATED: I understand Buyer has negotiated on his own behalf and likewise, I have negotiated on mine. I acknowledge The Agreement has been negotiated fairly and Buyer has not taken advantage of me or my current situation.

________ 18. NO PRECLUDING AILMENTS: I have no physical, mental or emotional ailments that preclude me from signing The Agreement.

________ 19. NOT UNDER THE INFLUENCE: I am not now under the influence of alcohol or any other mind-altering substance, nor am I taking medication that would cloud my judgment or make me unable to think clearly.

________ 20. NO OTHER PROMISES: I have not been promised anything other than what is described in The Agreement. There are no unresolved issues, no ¡°side agreements,¡± nor are there other terms not disclosed in The Agreement.

________ 21. NOT UNDER DURESS: I am not under duress and have signed The Agreement of my own free will, without any undue financial pressure. Buyer has in no way pressured me into signing The Agreement.

________ 22. FULLY SATISFIED WITH AGREEMENT: I am fully satisfied with all terms and conditions contained in The Agreement.

Dated this _____ day of ___________________, 20____.

___________________________ Seller (Signature)

___________________________ Seller (Signature)
Use THE BEST DARN DOCUMENT ON THE PLANET to put the finishing touches on your latest deal. There's no better feeling than knowing you've got that little beauty tucked safely away in the file.

Reprinted with permission by Joe Kaiser (

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