As a real estate investor, every deal we purchase involves a contract since you can’t buy a house with just a handshake. Real estate contracts may seem intimidating, but familiarizing yourself with the terminology is worth the effort. It’s essential to fully understand contracts or have a trusted advisor review them before you enter into any agreements. This knowledge will boost your confidence and help you make wise choices as you navigate the sale of your home. Understanding the different purposes of real estate contracts will be very beneficial in the long run. Here is our guide to real estate contracts in KC Metro.
Contract Assignments
Real estate contracts are often assigned to another buyer, a common practice among real estate investors. Here’s how it works:
The Investor Buyer contracts with you, the Home Seller, to purchase your house on a specific date at a certain price and with specific terms. The Investor Buyer then finds a Cash Buyer who is willing to buy the contract you created with the Investor Buyer. The Cash Buyer pays the Investor Buyer a fee and takes over the contract, completing the transaction.
This is advantageous for Cash Buyers who lack the time, knowledge, or expertise to find properties themselves. It benefits the Investor Buyer by allowing them to earn a profit from the transaction. It can also be great for you as it ensures your home is sold. However, problems can arise when the Investor Buyer is inexperienced, overpromises, or cannot find a Cash Buyer willing to take over. In such cases, the Investor Buyer may either leave you hanging or renegotiate the terms.
A good question to ask your Investor Buyer is whether they will close on the property or assign their interest. If they are assigning the contract, inquire about their experience with such deals and what happens if an end Cash Buyer can’t be found.
“Subject To” Sales
Selling property “subject to” an existing loan is another way KC real estate contracts may be written. This clause allows a distressed seller to sell their property to a new owner who will take over making the mortgage payments. Ownership transfers to the Subject To Buyer, who makes the payments, but the mortgage remains in your name.
The Subject To Buyer is not obligated to the lender, so if they fail to make payments, the property could end up in foreclosure, affecting your credit. However, this option can be beneficial for sellers with credit issues who might otherwise lose their home to foreclosure. Over time, as the buyer makes payments and potentially sells the house, your credit score could improve.
Purchase and Sale Agreements
A Purchase and Sale Agreement, or simply a Purchase Agreement, is the most common type of real estate contract. It outlines a straightforward sale between the seller and buyer and contains all elements of a legally binding contract. If you’re working with an agent, the contract will likely be a state or association standard. For direct sales between seller and buyer, a general purchase agreement is typically used. This agreement might also be part of assignment contracts or “subject to” contracts.
What to Look for in a Purchase or Sale Agreement:
- Inspection Period: This clause addresses what the buyer may inspect and the timeframe for doing so. In Kansas City, the standard real estate contract defaults to a 10-day inspection period.
- Closing Costs: In Kansas City, buyers typically pay costs associated with their side of the closing, and sellers pay costs on their side, including the title policy for the buyer. Some Investor Buyers may offer to pay all closing costs, but at kcmoHomeBuyer, we usually don’t pay these costs. We can negotiate if necessary, but only after understanding the specific costs involved.
There are many components to a real estate contract, but these two areas often come up in negotiations. We advise our sellers to read the contract thoroughly and, if desired, consult a trusted friend or attorney.
Lease Agreements
A lease agreement involves renting out your property, which some investor buyers might want to do before eventually purchasing it. Types of lease agreements include:
- Lease with Purchase: Renting with an agreement to buy at a set price in the future.
- Lease with Option to Purchase: Renting with the option to buy or not buy in the future.
- Lease with Sub Lease Clause: Renting with the ability to sublease to someone else.
Lease agreements are crucial if you sell a rental property. Your buyer must honor the current lease with your renter and assume your interest in the rental agreement.
Power of Attorney
While not commonly thought of, a power of attorney can be very useful in real estate contracts. It allows you to convey your rights to conduct business to someone you trust, such as a financial advisor, attorney, or agent. This can be essential when the owner is unavailable, incapacitated, or in declining health.
Scenarios Where Power of Attorney Comes into Play:
- Inherited Property: When multiple heirs inherit a property, they might elect one person to represent everyone, granting them power of attorney.
- Failing Health: Elderly individuals in nursing homes or hospitals might grant a child power of attorney over their affairs. Note that this power becomes invalid if the person passes away.
- Foreclosure Property: Homeowners in financial distress might grant a power of attorney to a buyer to complete negotiations and sell the house while they are away.
Before granting power of attorney, always consult a lawyer.
Lease to Own
In a lease-to-own agreement, the seller collects monthly rent along with additional payments. This allows the buyer to try the house for a specified period. There are two types of contracts:
- Agreement to Buy: The buyer must purchase the home at the end of the agreement period.
- Option to Buy: The buyer can choose whether or not to purchase the home. If they can’t qualify for a mortgage, they can walk away at the end of the agreement.
Seller’s Disclosure
When selling your home in Kansas City or anywhere in the US, you must disclose problems that could affect the property’s value or desirability. It is illegal to conceal major physical defects. Realtors typically ask sellers to fill out a written disclosure form detailing known issues. While not legally required, it’s wise to disclose everything you know about the property to your buyer.
If you have written inspections or repair bids, these should also be disclosed.
Don’t Get Intimidated
Don’t let intimidating contracts stop you from selling your property. Consult a local title company or attorney for assistance.
At kcmoHomeBuyer, we’re happy to help you figure things out and review everything with your attorney. We’ll listen to your dreams, help you make plans, and update those plans as your life and goals change. When you’re ready to sell your home or investment property, we can help you get it done. Contact us through our site or give us a call.
