What Every Selling Agent Must Put In The Contract
Many of you have handled a transaction involving an investment property. And as you know there are a number of contract issues that you must address that are not involved with the closing of a primary residence. I wanted to use this post to put all of those issues into one article. Now every deal is different, but the issues below are fairly common for any occupied investment property.
You should include a requirement in the contract that the seller will provide a full copy of the lease within three days of the Binding Agreement Date. Why is this so important? Your client needs to make sure he or she is comfortable with the terms of the lease (i.e., rental rate, lease term, etc.). At closing the lease will be assigned from the seller to the buyer effectively making the buyer the new landlord. If the lease terms are not favorable based on your client’s investment goals you will want to make this determination during due diligence so your client can terminate the contract.
Conditions In The Property Differ From The Lease
Make sure that after your client reviews the lease and inspects the home that he or she addresses any inconsistencies. For example, the lease states that two people rent the property. But clearly based on the inspection of the home there are four people residing in it. The lease prohibits pets, but seven cats are roaming the home. Issues like these should be dealt with during due diligence if your client is not happy with the situation.
Make Sure The Seller Cannot Modify The Lease
Include a provision in the offer that prohibits the seller from modifying the lease without the buyer’s prior written consent. I’ve actually seen a lease that expired during the contract period and was renewed by the seller with a lower rental rate than was included in the initial lease the buyer reviewed during due diligence.
You will want to include a provision that the seller will provide a credit at closing to the buyer for the pro-rated rent for the month the transaction occurs. In addition, provide a statement that the seller has not collected any pre-paid (i.e., 6 months of rent up front). If the seller does indicate he or she is holding pre-paid rent then that will also need to be pro-rated at closing.
Assuming the seller required a security deposit, you will want to include a provision in the contract that requires the seller to credit the buyer at closing for the security deposit. The buyer will then hold that same sum in an appropriate account after the closing. If the lease states that there was a security deposit but the seller says it was never collected, require the seller to provide a letter signed by the tenant stating as such. If there is a management company currently managing the property, your client will need to decide whether he or she will continue to use that management company, select a different one or manage the property him or herself. This decision will determine whether a credit is provided by the seller to the buyer at closing for the security deposit.
The Seller’s Disclosure
The last thing your client wants is trouble when the tenant moves out. You want to make sure that everything checked on the seller’s disclosure that will be staying in the property is in fact owned by the seller. I had a situation where the seller stated that the refrigerator was part of the contract. The problem was when the tenant moved out he took the refrigerator. Why? Because it was the tenant’s, not the prior sellers.
I hope this information was helpful and will provide additional guidance when drafting your next investment property contract.
As always, if you need help with anything at all, please do not hesitate to contact me anytime at (912) 484-1996 (even nights and weekends) or email me at email@example.com.