5 Special Clauses You Need To Know Before Signing A Real Estate Purchase Contract
A special clause in a real estate purchase contract can save you tens of thousands of dollars.
… Or, it can take tens of thousands of dollars out of your pocket.
How can you know if the special clauses contained in the real estate purchase contracts you receive will be the source of increased profits or the source of major profit loss?
How can you learn to use special clauses to benefit both yourself and the seller of that great piece of property – the one that you just can’t miss out on?
A special clause included in a purchase contract can save you hard-earned cash in ways you may not even be aware of.
It can be your ticket out of a tough deal, or it can smooth potential roadblocks to a profitable project.
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And the wrong type of special clause can rip a deal right out from under your feet.
A quick note about this post:
This information has been prepared based on a presentation Russell Sparke gave at one of our Property Networking Group meetups.
Russell manages his own property and commercial law firm and has been a lawyer for over 20 years. His experience includes joint ventures, property options, vendor finance and other standard property transactions.
You can find his contact details at the end of the post.
Now, back to today’s subject:
One of the most important keys to negotiating a profitable deal is to always keep in view the exit strategy and the end goal of what you expect to accomplish in terms of the completed deal.
An important factor when building your knowledge around submitting formal offers is learning to understand the special clauses available for use in a real estate purchase contract, and what each one means.
Now, onto special clauses and how they can help you increase profits on the deals you make.
The Real Estate Purchase Contract: Understanding The Special Clauses
The first exercise in learning to understand special clauses is to educate yourself regarding the relevant standard contract in your state.
As a property investor, it’s vital to your business’s success to understand the contract completely.
Study the purchase contract over and over until you are entirely familiar with it. Thorough knowledge of the contract will assist you in understanding deviations from the standard terms of a real estate purchase contract.
It will also help ensure that you are fully aware of the terms to which you are agreeing.
The Secret About the And/Or Nominee Clause
In a real estate purchase contract with an And/Or Nominee clause, the buyer can, on occasion, state which entity they will declare as the purchaser after the sale is complete.
For instance, in some cases, you as a buyer may be undecided about whether you’d like the property in your name as an individual or in the name of an entity.
Or, you may wish to have the option to name a third-party buyer after the contract settlement is complete.
Although it seems as if the And/Or Nominee could be a profitable clause to add to a purchase contract, it’s important to understand that in reality there is a process required for using this type of clause.
There’s a practice direction that needs to be filed with the Office of State Revenue and an approval process that must be completed before you use the And/Or Nominee clause in a real estate purchase contract.
The process also requires that in most cases you know in advance the entity you want to use before you sign a contract containing an And/Or Nominee clause.
To a certain extent, this legal process defeats the purpose of the clause. Therefore it’s important to understand your purpose for wanting to use an And/Or Nominee clause.
It’s also vital to have all proper forms in place with the Office of State Revenue before choosing to add an And/Or Nominee clause to a contract.
Can a Deeds of Rescission Clause Get Me Out of a Deal?
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There are cases when you may want to place a Deed of Rescission clause into your contract.
It may be that you’ve entered into the contract under your own name and you’d like to change the buyer to a business entity. In a case such as this, you’ll likely want to add a Deed of Rescission clause to the contract.
Deeds of Rescission are written at the discretion of the seller, and in the case in which a Deed of Rescission is written along with the replacement of a new contract, it cannot be used for the purpose of increasing profit.
Special Conditions – the “Catch-all” Special Clause
It’s profitable to structure certain clauses so that you’re not paying any hard-earned money out of your pocket until certain events have been achieved.
One way to achieve this is to add a Special Condition clause to the contract.
For instance, a Special Condition clause might indicate that deposit monies are not due until 1 or 2 days after the completion of standard conditions such as the Pest and Building, Due Diligence and Finance approval.
This type of Special Condition clause provides protection if any extensions need to be added in those areas, as your deposit date moves along with the extensions.
If you link the conditions together to precede the deposit date, you’re saving yourself money at the end of the day.
You’ll avoid paying additional lawyer fees to make addendums to the real estate purchase contract because the contract is structured correctly upfront.
Other Special Conditions clauses might include:
- Owner’s Consent
- Access e.g., soil tests, signs
- Right to Extend
- Settlement
- Caveat
- Copyright, Licenses and consultant fees
- Due Diligence
A Due Diligence clause is a powerful Special Conditions clause that gives you carte blanche to cancel the contract for reasons of your choice.
With a standard land contract, you have an obligation to be reasonable. The other side can challenge you on items such as Pest and Building, Finance etc., insisting on being shown proof of completion of these items.
If the proof is not shown in a reasonable time frame the seller can declare that you’re being unreasonable and can force you to purchase the property.
A Due Diligence clause can also make a contract look cleaner. Because it negates the need for other clauses such as Pest and Building, a Due Diligence clause covers nearly every potential problem.
This protects you as an investor in case any unforeseen issues arise with the property.
Development Approval Clauses
Any time frame from 30 days to 12 months is acceptable with a Development Approval clause. Development Approval clauses must be entirely satisfactory to the buyer.
It’s also important to be aware of the expiry of appeal periods within the development approval timeframe.
Options Clauses
Options clauses can be used very effectively to defer taxes and duties in situations where you might not know the entities upfront.
As is evident, there is a myriad of special clauses available for use in purchase contracts that can assist you in structuring the contract to make the deal more beneficial to both parties.
For that reason, it’s important to practice continuing education where special clauses are concerned.
Need More Help?
This information has been prepared from the presentation of Russell Sparke.
Russel is an avid sponsor, member, speaker and attendee of the Brisbane Property Networking Group and continues to support active property investors in Qld and across the country.
An experienced and seasoned property investor himself, Russell has a practical, cost-effective and solution-orientated approach that continues to assist many hundreds of property investors with their projects.
For further information, please contact Russell:
Russell Sparke Lawyer
0410 627 088
[email protected]
http://sparkelegal.com.au
(And if you enjoyed this post… please leave a comment and let him know!)
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Hi Russell, I found this article very informative and helpful. Thank you.