4 Contingencies Your Offer to Purchase Rental Property Should Include

In this article I would like to suggest four contingency – or "Subject to" – clauses that brokers, realtors and real estate investors should include into every offer they write when it comes to purchasing rental income property.

For any offer to purchase real estate is a legal contract that binds that buyer to abide by its terms and conditions. And not unlike any legal contract, once the seller accepts the offer, than the buyer could face legal action if he or she defaults on any of those terms or conditions that he or she included in the offer.

Most realtors, of course, understand this. That's why in most offers to purchase, real estate brokers typically include contingency clauses that protect the buyer. Such as "Subject to –" loan qualification, property appraisal, property inspections like pest and dry rot and so forth.

The objective, of course, is straightforward. The contact is clearly stating to the seller that the buyer is willing to purchase the property, but only if his or her desired loan and property conditions are completely satisfactory.

Fair enough.

But in addition to those types of contingencies there are others common to commercial and residential income property that should also be included in the offer to protect the investor. These aren't quite as obvious to those less experienced with rental income property, so it seemed like a good idea to list my top four.

1. Interior Inspection of All Units

Rental property owners commonly do not allow buyers to enter the units until he or she has a signed, acceptable offer. Therefore, you will have to make your offer contingent upon your satisfaction and approval of the interiors of all units.

It's smart to make this interior inspection your first priority before time or money is expended doing other inspections just in case you don't like what you see and want to back out.

During one such inspection, for example, my "mom and pop" buyers were appalled to discover that one of the tenants kept three stacks of tires in the living room alongside a pitched tent. It shouldn't have been a deal breaker, but it was enough to sour the buyers and they walked.

2. Approval of Rental Agreements, Books and Records

You must satisfy yourself that the income and expenses you were presented before you wrote your offer is credible. Ask to see all the rental agreements and income and expense statements for the property. Be sure the numbers add up to what you were expecting otherwise rethink your offer.

For instance, upon examination of the income and expense statement associated with one particular offer, we discovered that the expenses only included the cost of materials because the owner was doing all the repairs himself. Since this wasn't an option for my buyer, we had to rerun the numbers based upon a higher repairs and maintenance cost and renegotiated the price.

3. Approval of the Seller's Schedule E Tax Form

Confirm what the seller has been reporting to the IRS about the rental property's income and expenses for the past several years. You could discover a recent boast in rents were made just to sell the rental property at a higher price, or perhaps there's some recurring operating expense not clearly apparent in the rental property's proforma income statement.

It's always smart to compare what the seller has been reporting to the IRS and what has been presented in a marketing package just to be sure that the numbers line up. Sellers, after all, have been known to skew numbers in their zeal to sell their property.

4. Seller Cooperation in a 1031 Tax Exchange

If the buyer is purchasing the rental property in order to complete an IRC 1031 Tax Deferred Exchange, start the paper trail in the offer. Make it clear that the rental property is being purchased as part of an exchange and require the seller to acknowledge that he or she will cooperate.

You can obtain the correct verbiage from the buyer's 1031 accommodator just to be sure that it's worded correctly on the offer. You don't want to inadvertently mess up a buyer's exchange because of faulty or inadequate wording.