GB Ep 73

Bonnie Galam25min

Bonnie Galam

00:07

Welcome back to the good bones real estate investing podcast. I'm your host, Bonnie Galam. And Dang, it feels really good to be back in this space called good bones. If you missed the big news last week, the cliffnotes is that I've dropped the House of Horrors name for the podcast and I'm going back to good bones, which was my podcast name just about a year ago. And so what can you expect moving forward? There's gonna be monthly legal tips like this episode I'm going to be bringing you today. There's also going to be monthly q&a episodes where I answer listeners questions, you can leave your questions for me super easily. At my podcast voicemail on my website at Bonnie galam.com forward slash podcast, please don't be shy. Let's make this a really fun space. And next I will be bringing you monthly real estate news and market roundups. And finally, yes, horror stories, they are not going away, they're just not going to be the main content anymore. And so if you have one of those you would like to share again, you can just go to the voicemail, drop your horror story, and it could get featured on the show. So that is the cliffnotes version. If you want to hear like all the details, just go back to last week's episode. And I really kind of just put it out on the line. And in part, it was due to kind of missing making episodes like this, it didn't really feel like there was a creative space for me to do it under the House of Horrors umbrella. And it was just, you know, I just wanted to get straight to the legal tip sometimes. And if you know me, you know that, you know, sadly, few things give me more joy than a well drafted contract. And as much as I love breaking out the blue pen, because yes, I still edit and review my contracts by printing them out and marking them up. And then going back into Word and doing track changes there. Don't ask is how my brain works Killing Tree killing process. Over the years, I've noticed some common contract mistakes. Most often I will met made by non attorneys, because while attorneys like we will labor back and forth a million times over over terms, it's almost always over the substance of those terms, not like the absence of them. And so I've you know, I've often joked that investors seem to be in this like race to create the shortest contracts ever. I've seen one pagers to purchase real estate, if that was one of you guys who sent it to me. There's no there's a little bit of shame in that game, but we fixed it and we moved along. And because you came to me to fix that, that is all that matters, you knew that it wasn't, you know, good enough to stand. But I'll admit, a lot of times when I get crappy investor contracts, it's not from the investor themselves. It's from a seller who is like what the heck is and what I'm talking about these one pagers, I'm talking literally, double spaced, 12 point font with a signature block, all on one single page. And I'm pretty convinced that these are, you know, these investors are doing this because they want to keep their contracts super simple and bare bones because they think they're more likely to get like an unsophisticated off market seller to sign the dang thing which may or may be true. But I've seen these one pagers and just these kind of shoddy investor contracts blow up. And largely, it's because they're about as useful as their wording, which is not at all. And so I've come to realize that a lot of these contracts that I'm seeing these poorly drafted really watered down ones nine times out of 10 Are these stripped down versions of like Legal Zoom purchase agreements, or ones given out by a guru and they've kind of gone like whisper down the lane. And it's like perverse matter where it just keeps getting little down and little down and whittled down to essentially, literally property address the price. And as is clause and BY clause, I mean sentence. And like the closing date, and you know, the signature block at the bottom. That's it. That's a whole contract. I know, I realized the flip side of this is you know, investors thinking that attorneys get paid by the word, and that, you know, we get our kicks by overcomplicating everything. And I wish I could tell you, either of these things were true, because if I got paid by the word, y'all know, I'd have a lot more real estate. And as much as I think all of our you know, extra terms like this legalese fluff or, you know, the words that we add to existing terms. We do this because we've seen enough things go over I we've seen deals gone south, and we've learned from other attorneys about how to kind of navigate these certain types of situations and we're doing it in your own best interest not due to any sort of like self satisfying ego boosting drive to like add words to a contract to say we've like made our mark on it. And so I wanted to do this deep dive into a particular contract mistake running rampant in the investing community where this legal is this fine print is removed because the fine print really does matter. And I'm going to share with you a bit of what my contract review process looks like as an attorney and what key terms you should be having in your purchase contracts, whether you know you are a landlord, a wholesaler or flipper doing something creative in between this contract is really for you because property acquisition is at the cornerstone of our growth, the cornerstone, creating, you know, a portfolio that generates cash flow for us to kind of get where we want to be financially and perhaps even as a lifestyle. But before we dive in real quick, I wanted to share that I'm looking for 10 landlords who are looking to protect themselves and their cash flow in the next 90 days. If that sounds like you, DM me the word protect on Instagram at Bonnie Galam e Sq, if you don't already, follow me there. Again, DM me the word protect, and I will get you the info. Now, let's start off by putting on our attorney hat or maybe our attorney suit, whatever. And talk a little bit about how to actually review these form contracts, we perhaps have in our file for our own use in our business, or even you know, just to understand how to review the contracts were presented by others, whether it's a realtor, or someone who's wholesaling us a deal, whatever the case may be. Now, first things first, as I mentioned it here, I want you also to print it out, I'm sorry, environment like I recycle, I you know, do what I can I limit meat, but I'm going to print my dang contracts out, and I want you to as well. So get yourself a $30 cheapo printer, if you don't have one already, and print the bad boy out print your contracts out guys, you cannot absolutely cannot be looking at contracts on your phone. And I don't think most of us have the level of like editing focus. to even do this on a computer, I find it really hard to edit, using just like track changes. And I think there's something you know, really to kind of being able to spread a contract out also and like seeing what exactly is there. And so print the bad boy out, break out your blue, red, purple, whatever color pen isn't going to trigger you. And then go through this process. There's six steps I'm going to walk you through now, to review these contracts. And I do it like a layer of a review each step I talk about, I go through the whole document looking for that particular like ever gap or change. And so let's get into it. My process starts off with me or honestly, this is usually my paralegal in this case, confirming all of the details are correct to the transaction. You'd be surprised or perhaps not how often carryover language gets left in deals or just mistakes happen. It's not a judgment call. It just it happens. I've you know left old language in a contract before it happens. But you want to do your best to eliminate that review it check the names. And importantly, make sure that everyone that needs to sign the contract is included. And we talked about that a little bit in last week's episode with this probate situation that I had a conversation with with David dodge, if you haven't listened to that great episode, go back and listen to that final episode of The House of Horrors. But also the spelling and Yes, that sounds stupid and like not that important and like the grand scheme of legal things, but it can cause title search issues, they are searching for people's names. And if you got it wrong, you see this happen a lot with like women with maiden names are people who go by especially like first names, where perhaps they go by their middle name, but that's not actually their first name. But the middle name is what ends up on the contract. Those types of things can like cause like title delays and issues, they almost always get sorted out down the line. But it's really frustrating when you're like 10 days before closing in titles, like here's their search and you're like that's not me. And you have to kind of start that whole process over. And then just like the little details, making sure the property address is correct, especially things like Avenue Road, things like that there

Bonnie Galam

08:30

could be duplicates of those cross checking that with the lot and block number if you are County and I think most counties in the US do go by lot and block number in terms of tax organization and lot organization and also just the county, some towns have overlap into multiple counties. And I've seen this get screwed up often by realtors, it's I don't know why it happens. Especially when you've got you know, a post office in one location and the the property isn't technically there. And again, those calls title issues. Usually, unfortunately, a few weeks down the line, which is not when you want these kind of clerical type of issues to arise. Next, after we go through the first step of you know confirming all these just like general term details, is I go through the contract with the lens of like, what type of property is this? Like if it's a standalone structure? Do I have language around surveys and boundary lines and questions about like waste disposal? Like is it septic versus sewer? And then like if it's multifamily? Do I have questions about zoning status, existing tenancies utilities, split ups? On the other hand, like condos, Do we have questions about the bylaws and budgets and assessments and common utilities and so on. Like those types of concerns are unique to each one of these property types. And there's different types of due diligence that we need to do on all of them. And the reality is is a lot of due diligence has To be just outlined in the contract in order for it to be enforceable, or, importantly as a buyer like part of a contingency. And so getting a clearer understanding of all that stuff from the outside is really important. And thinking about what type of actual property are we dealing with here? And then because of that, what type of questions or terms do we need to add? Moving on to step number three, I look at the contingencies. These are usually under three buckets, there's financing and appraisal, property condition, and then title. And if there's tenants in the property, I like contingencies around them too. And there's some other less common contingencies that'll pop up. But those are the three big ones that I see happen, almost an almost every single transaction with the exception of like cash purchases. And these need to be really tightly drafted and appropriate to the situation. And of course, representative of the negotiation that you had with the other party, you don't, there's nothing worse than like springing on, like switcheroo, in the contract, when you talked about something else with, like telling someone is cash and then being like, surprised, I actually, you know, talked about that, and then they said, we'll be fine. And now I need to do an appraisal, and you think, you know, everything's gonna be fine, we're still gonna get to closing but the seller is like, what. So try to get that stuff, you know, lined up and communicated. I find it before the contract. And I'll talk a little bit more about that in a second. But also, like the tightness, and sometimes the broadness of a contingency is really important as well. Because if what you're trying to cancel, like, the reason why you're trying to cancel a contract isn't included in your contingency, then you can't cancel. And so really thinking about really looking at the language around the contract to make sure you know, especially around like as as clauses, and you know, people saying that inspections are for informational purposes only, like getting really clear on what that means. Because I can tell you, buyers and sellers usually have different interpretations of what those terms mean, and flushing that out. I've also noticed that in general contingencies are they're uncomfortable conversations, especially if you're coming in as a buyer, especially if you're coming in off market. And so they're not usually flushed out well, in initial negotiations. And it can be, you know, frustrating as a buyer, to have to go back to the seller to kind of talk about all the different ways that you can kill the deal once you like, actually sit down to draft a contract, or you have an attorney send over the contract, because that's what a contingency is, it's a way to kill the deal. And so I definitely suggest, like I said before, tell the seller that these things will be in the contract personally, you know, what I like to do is have a conversation about just generally how the sale is gonna go, like, Hey, I'm gonna be getting a mortgage. And that's usually not like a red flag to a seller unless like, the place is like a burned out shell. And, you know, that's gonna require an appraisal, if you tell that just kind of casually, I find that there's no kind of issue with that. And, you know, say things like, and then I'm going to inspect the property, make sure that there's like no type, you know, deal breaker type of issues. And, you know, maybe the conversation then leads into about whether you're going to expect them to make repairs or not, or we'll just, you know, call it quits, they're, no one's obligated to do anything. And then you'll have this language included in your contract as well. That way they don't feel like their feathers are all ruffled when it comes time to like sign the serious contract. Next, I review the contract for representations, warranties, and disclaimers. This is an important step for whether you're the buyer or the seller, because from the sellers perspective, it's like are you promising things particularly about like property condition that you can't really promise buyers will often try to be like, Hey, I don't you never knew of anything from ever. And it's like, well, if you didn't own the property forever, if there was a previous owner to the property, you can't really make that promise. But then on the buyer side, like are you promising things financially that aren't really in the bag, like I see contracts all the time, for example, it's basically in the formula or contract here in New Jersey, where I live, that the buyer promises they can afford to purchase the property. And that's separate from the mortgage contingency. And so that doesn't make a whole lot. And so looking at this language critically, about what am I really promising is really important. But on the flip side, there are things promises that we actually do need to hear from the other side, especially if like, God forbid, a breach happens, we want it to be like, well, you lied to me here. Not just like there wasn't good faith or something like that. And so for example, a really simple example of this is does the seller have authority to sell? The sounds obvious? It's not. And I can tell you this term has really blown up in seller spaces when there's like an estranged spouse who shows up on the title report, or like a child was added to the LLC. Dad perhaps had like 99% of the LLC didn't think it was a big deal. turns the operating agreement over to title titles like your kid needs to sign and he's like, I haven't talked to my kid in 20 years. ers and kids not on board kids just you know, wants to stick his dig his heels in. And all Gosh, this one because literally, these are all actual situations that I've dealt with in I'd say, last 18 months. And so there was a situation also where a guy put his kid like little eight year old child on title as like an estate planning tactic. By the way, side note, this is a horrific strategy, never do this. But he had to go to court and get a third party Guardian appointed for the kid to facilitate the sale, which then took months and months and months. And when you're a buyer, it's sometimes easy to kind of write this off and be like, Oh, I'm willing to wait, I'm willing to wait, it's not a big deal. Or I'm willing to just kind of eat the cost and walk away. But sometimes, like when you've paid, you know, 1500 bucks for an appraisal and $1,000 for a survey, and $1,000 for an inspection. Like, you don't really like getting the runaround, when finding out, you know, close to closing that you know someone wasted your time essentially wasted your time with your money they never had the authority to sell. So ask that question up front. And you'd be surprised sometimes it uncovers things but if it doesn't, at least it then puts that seller on the hook. Now, step number five, I like to review and add deal specific language at this point. Like, are you including any personal effects in the sale like furniture, which is a common situation in short term rental sales? Is there some sort of inventory that we need to include as like an addendum, or any sort of credits being included? Is there something excluded from inspections like the the pools falling in, everybody knows that we've kind of pre negotiated pools off the table, when it comes to inspections, we've negotiated that into the price already? Are there any like zoning or ancillary matters that need to be cleared up prior to closing probate still open? Or we need to get a variance because you as a buyer, for example, could make that a pre closing contingency? And so figuring out like, what did what else did you guys talk about? That's the question I always ask my clients like, what did you guys talk about? Is there anything else I need to know? Is there anything else that was promised? Putting that stuff in at the end and kind of making sure that that language is represented in the contract as well? And then finally, I just review and again, this is usually my paralegal, I realized you guys don't have paralegals. But it review the key contract terms to make this thing complete. You know, what is the choice of jurisdiction? If we need to sue each other? Can we get attorneys fees? If there's a lawsuit? Is this the entire contract? Are

Bonnie Galam

17:39

there any third party rights, like the legalese kind of terms that like, you just need to have in your contract to make it not just like an enforceable contract, but like a complete one, like all of the what I call the fine print that you guys like to remove, but it's really important, or else you can end up being sued and like, Texas, or something? And like, yes, if there's any lawyers listening to this, of course, there's, you know, personal jurisdiction and subject matter jurisdiction restrictions to this, but like, for example, in like a big state like Texas or something, you do really want to be like schlepping, you know, 10 hours to go to court somewhere? And the answer to that is almost always no. And the nice thing is, is you can almost always pre negotiate this stuff, and it's usually almost never negotiation, it's like who's got first you know, draw, and drafting the contract and just kind of put these terms in there. But they need to be in there, guys. It's just it will be legal malpractice as for an attorney, not to include these types of language in your contract, and so you as an investor need to make sure the legalese is included. And I do have a document inside of landlord law school that does provide like these sample terms that should be in every contract, kind of no matter what state you're operating in. Now, let's talk a little bit about wordsmith rain. Well just, you know, just as a quick recap, the six steps that I again go through when I'm reviewing a contract is one confirm like the high level details, names, property address, price, things like that. Then review based off of the type of property it is to make sure those terms are in there or appropriate. Third, we review the contingencies. Fourth, we go over representations warranties and disclaimers. Next, number five, we review and add any sort of deal specific language and his special terms, special situations going on with this particular sale. And then finally, review for that legally is make sure it's all in there. And you know what I'll include in like this legalese section. Make sure the numbering is right. It sounds silly we and it often gets missed. I would you know punt it to my paralegal because I literally don't have the eyeballs to be able to make sure numbering is correct. But it makes things a lot easier when you have to like go make an addendum or something later on in the transaction when like the numbers are actually racked, and there's not like three sixes. But let's talk about word smithing for a second, because contracts should not just be boilerplate. And that is what I see a lot in real estate investing spaces is that it's the same contract over and over again, no matter what the situation is, no matter what the property type is. And that's really kind of leaving a lot on the table. Boilerplate of if you're not familiar with that term, I mean, terms that are literally identically copied and pasted from contract to contract to contract. And so yes, a lot of language in contracts is simply wash, rinse, repeat it. And the important step with boilerplate is literally just make sure it's there, you've got to have it there. On the other hand, though, this word Smith really is a little bit more of an artist's, you know, kind of what makes lawyers lawyers in a sense, but it's combining this conversation that you're having with a seller or a buyer or even a tenant. And getting that meshed into like an actual written agreement. But then also taking it to the next level, which is going to require thinking of all of the ways that that situation or that term can go sideways, and then planning for it ideally, as concisely as possible because none of us are getting paid by the word here. And lengthy or lengthy or terms, lengthier sentences, often just lead to more confusion rather than less. But the best way to work that muscle have wordsmith Re and contract understanding and drafting is to critically read the contracts that you're dealing with. Repeatedly, I'm not saying read the same contract over and over again, although that probably wouldn't hurt. But like when you get contracts without fail, read them critically in the way that I outlined with those six steps. If it's not, you know, a purchase agreement, then I think you're you guys are smart enough to be able to say, Okay, well, it can least read for these terms, and make sure it's applicable. Make sure it's representative of what we had talked about. But you can't just depend particularly on an agent. And that's who I usually see investors get burned by, is depending on an agent to kind of tell them the ins and outs and opportunities and restrictions of a contract. And it's okay, if you feel out of your league, whether that is as an investor or an agent, just hire an attorney to do it for you. This is especially, you know, assuming you're not in to like a seven figure type of commercial deal. This is typically not a very expensive from a fee standpoint, type of engagement for an attorney to do for you in terms of the ROI of protection that it gives. Real estate law exists as a practice area, because this stuff just simply is not always obvious or intuitive. But I hope that this podcast gave you a framework as to how you can get a little bit better at this part of being a real estate investor. Because critically evaluating, evaluating, editing and templating your contracts is an incredible asset protection tool. And I know it may not feel like it until like something goes wrong or something happens to you. But transactions let me tell you, we're not always smooth ball and smooth sailing, with everyone being like understanding and giving each other the benefit of the doubt and acting with goodwill. Gosh, I wish I could tell you how many times people are like, well, you know, why do I even need an attorney? It's a simple, it's a simple transaction. And I'm like, well, they're always simple until they're not. Right. Nobody goes into a transaction with the intent of like suing someone else. That being said, people go into transactions, knowing that can be a little bit clunky, like perhaps knowing there's a title issue, or knowing that there's a non paying tenant. And you know, you're just like, Okay, no, this is gonna be something where I'm definitely going to want to have an attorney alongside me. But even simple transactions like blow up all the time, all the time. And I can tell you just anecdotally, as I'm recording this right now, in December of 2022, it's happening more and more, the market is shifting, and buyers and sellers are just out of alignment. They are not on the same page that they've been in like the last two and a half years or so. I mean, for better for worse. It wasn't great for buyers, but they kind of knew the game that they were playing with that it was a strong seller's market and they're gonna have to play ball with the seller to get a property that nobody is on the same page anymore guys, nobody is in the you know, all the third party people like realtors are desperate titles, companies are desperate lenders are desperate. And so you've got to really kind of step up your game right now in terms of looking out for number one. And so getting crystal clear on understanding what your contracts contain, but also need to have in place is really going to cover your butt even more than normal right now. And if you found this episode helpful, I would So appreciate it. If you shared it in a real estate investing Facebook group you're in. My mission is to help as many investors as possible, protect themselves and become their own best advocate. It's a team effort. And I so appreciate all of you who have done this in the past to help build a little bit of buzz around the podcast. That is it for this week. Make sure you're subscribed so you don't miss next week's episode all about the state of the market and kind of where I see things heading for 2023 It's gonna be a first and fun little news you can use episode and in the meantime, bring your questions. Bring your horror stories to me, go to Bonnie galam.com forward slash podcast and drop me a voicemail. I cannot wait to hear from you all bye for now.

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