How to Structure a Purchase Contract for your Next Fix & Flip
So… you found a property to flip!
That’s the hardest part, so well done!
But, you’re not out of the woods yet. After finding a property, the next big hurdle my students run into is how to structure the contract properly.
In fact, I’ve seen entire deals fall through or get delayed significantly because a few crucial parts weren’t done properly on the contract.
I’m not going to cover the entire contract from beginning to end, but I’ll cover some of the more commonly missed aspects.
Structuring Your Contracts Correctly
- Option #1: Your name or company name with “and or assigns” (i.e. “Ryan Wright and or assigns”).
- Option #2: Add an addendum, such as “buyer has right to create new entity for property.”
- Option #3: Purchase the property in the name of your company.
Most hard money lenders (The Investor's Edge included) only loan money to business entities. This helps avoid some residential regulations and also protects the borrower and the lender from increased liability.
By using those options above, you can use your name and then later assign it to your business entity, if you don’t have one yet. I’ve had students sign their own name to the contracts, only to find out later that they can’t complete the deal because they can’t reassign the contract to their business entity!
In general, flexibility in the purchase name can save you a lot of pain later.
- Don’t write the offer as cash
When you mark your offer as cash, you’re stating that you have all the cash for the deal. For some reason, most real estate coaches will tell you to do this, but it doesn’t make sense to me. Instead, say you’re using private financing or hard money.
- Appraisal deadline: 5-10 business days from acceptance
- Inspection deadline: 10-15 business days from acceptance
- Loan denial: 10-20 business days from acceptance
- Purchase deadline: 10-20 business days from acceptance
There isn’t much to say here other than these numbers have served me well over the past 20 years of completing fix & flips.
When it comes to writing or signing contracts, be extra careful with regard to earnest money stipulations. This is money you do not want to lose! Sellers have an incentive to put stipulations in their contracts that increase their chances of keeping your earnest money. For them, that’s free money they take from you before selling the house to someone else!
Be cautious of these motivations and try to barter for better earnest money terms. Those days may go faster than you think! Some sellers might make a deadline of 10 days, with the knowledge that it may take more than 10 days to close on the house. These would be very dangerous contracts to sign. Deals we work with tend to take around 14 business days just to close. Also, keep in mind that business days are only Monday through Friday, so your available time is even more limited here. You may have to shoot for better terms, like a 20+ day deadline, just to be on the safe side. Sellers may be hesitant to give you these terms, but a lost deal is oftentimes better than lost earnest money. Trust us.
In addition, don’t put up any money that would destroy you financially if you were by chance to lose it. Yet again, sellers are incentivized to jack up the rate of their earnest money to fill up their own pockets if you miss the deadline. Know when it is too much. We’ve seen people put up $5000 in earnest money and sweat as the deadline approached.
Don’t Stop Making Offers!
And one last note – most new real estate investors hesitate to put together offers and write contracts on multiple properties at the same time. But you shouldn’t be! You can back out for any reason. Instead of making one offer and waiting to see if it pans out, make 10 offers, and one for sure will work out. Then you can back out of the others or even wholesale them!
Anyway, contract writing isn’t a part of the process that you should have to worry about… it’s certainly not what budding fix & flippers dream about when imagining their smooth road to a 7-figure empire!
That’s why my students always get access to ALL of my contract templates – not just the purchase contract.
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