Help! How to best incorporate "walk away" clause into offers?

Question

I'm an avid listener of the Bigger Pockets podcast and reader of the various articles/blog entries. One of the things that I've heard many experienced investors suggest is to make sure your offer has a clause/contingency that allows you to walk away from the deal. I'm trying to incorporate that into my offers but my realtors tell me that they've never had _any_ investors have a clause. My realtors are suggesting that I use the inspection contingency.

The inspection contingency only let's me walk away from a deal for a safety issue or defect if the seller and I can't agree on what to fix.

What about for other factors though? Here are some examples:

1) After talking to the tenants I find out that they have a large dog and the nieghbors are constantly complaining and the current selllers haven't done anything about it.

2) Or maybe I find out they haven't paid their rent in 3 months and there are 8 months left on their lease. Sure, I could evict after I own the property, but maybe the cost of that makes the property no longer such a great deal. Or maybe I ask the sellers to evict before the property becomes mine (but technically nothing in my offer had such a clause so do I even have the right to ask for that without breaking my own legally accepted offer?)

3) Maybe I'm driving the neighborhood at night and find out its not a very good area and drastically different than daytime.

4) Or I'm talking to my contractor about some improvements I want to make and my estimates were much lower when I put in the offer and I find out something will be much more expensive than expected.

5) Another possibility is that after getting more access to the owner's books I find some surprising things that affect the NOI that I couldn't anticipate

There probably are countless other examples of things not covered by an inspection contingency...

How do other investors protect themselves in their offer letters? Instead of an inspection contingency, I'm thinking that make I just ask for a 10 day due diligence period where I can walk away for any reason (and get my earnest money back). I don't want to word it like that, so I'm hoping that others can share some examples of "walk away for any reason" clauses people include in their offers.

(I'm looking at property in Wisconsin if that matters and someone has specific knowledge of real estate rules there, but otherwise any examples from other investors would be _greatly_ appreciated!)

Rebecca Knox · Answer

Your realtor or attorney should be able to help you to write the proper language on your OTP to address your concerns.

One of the things I require if the property is rented, is a completed Estoppel signed by seller and tenant(s), previous year Schedule C/E and current P & L YTD to be approved by Buyer prior to closing or within X amount of days of offer, but there are other contingencies I may use to protect myself based on the property situation.  The Estoppel should cover things such as if the tenant is behind on payments, who owns what (appliances/lawn equipment), who pays what (utilities), outstanding tenant work order requests, etc. If I know prior to submitting offer, and I would know if the seller i truthful as this is part of my 'pre-diligence' system, that tenants aren't paying, then either I make sure the cost of evictions/extra hold time are considered in PP or that property must be delivered vacant at closing.

One thing to be mindful of is the more contingencies you have, the less attractive your offer is. If you are able to and serious about buying the property, it's better to do as many due diligence items as possible such as driving by the property at night PRIOR to submitting your offer.

Marcus Auerbach · Answer

Like Rebacca said, the more contingencies you put in your offer, the less attractive it will be to the seller. I usually have to write very clean offers, because more often than not we write on properties in areas that are hard to get into and if the numbers work for one investor, they work for many and then it get's competitive in a hurry. Some people get wired when you ask them about their taxes, just ask POTUS.

So, how do you protect yourself?

The home inspection contingency is pretty much a blanked escape clause for your due-dilligence, as long as it is combined with NO right to cure for the seller. This is important! If you give the right to cure, you can't unilaterally walk from the deal based on inspection and you are locked in.

Your offer should ask for a copy of the leases within a few days after AO, so you can review and approve. I prefer month to month or even vacant units. I always recommend to cycle tenants out asap for a number of reasons. First, the same circumstances that cause the property to be for sale typically also cause it to not be managed well - the owner might be getting too old, living out of State etc. Second, they will not respect the new owner as much, becasue they feel they have seniority. Especially if they have been living there for a really long time they will try to tell you jow things run here.

Addendum R should be part of your offer, especially on a 4 unit building. It defines a lot of the details about appliances, delinquent rent, what happens to an eviction after AO etc.. Your regular OTP has just 3 lines that deal with leased properties and there are no details whatsoever, Addendum R is designed to close this gap and provide clarity about the properties income condition.

Finally, good old experience and instinct to smell things that are not right. You don't need to have these skills as long as you have an agent, who is experience with rental properties, preferably owns a bunch him/herself. You just learn fater with your own money, right?

Charlie MacPherson · Answer

@Dieggo Goncalves When representing a buyer, I advise having the fewest contingencies that the buyer is comfortable with.

The strongest possible offer is all cash (not hard money, which is still appraisal-dependent) and no contingencies for inspection, sale of another property, etc.

The other thing about hard money is that there are a lot of HM sites where you can print off your own pre-approval.  That means that they're not worth the paper they're printed on.  As a seller's agent, I'd require that a large part of the deposit be non-refundable in this case.

Unless I'm representing someone with serious contracting skills, or the property is to be demolished, I never recommend waiving the home inspection.  I also don't recommend waiving the financing contingency unless there are extenuating circumstances.

In my opinion, managing risk is critical.  These two contingencies do exactly that and are quite routine.  It's when you start adding others like "this offer is contingent of the sale of the buyer's property at 123 Main St" that your offer is seriously weakened.

Charlie MacPherson · Answer

@Jason Bilbrey  If I'm representing a seller and a buyer has more than the standard inspection and financing contingencies, I will advise the seller not to accept the offer - unless of course, yours is the only one on the table and we've had a hard time selling it.

As others pointed out, the more contingencies you have, the weaker your offer is.

John Thedford · Answer

A 10 day inspection period should suffice. If you find issues that are too expensive, make a counter offer or walk. I always have an inspection period but usually don't have a financing contingency and write all cash offers.

Help! How to best incorporate "walk away" clause into offers?

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