"Looks like we found the right property," a real estate agent said after he and his client viewed a 32-unit apartment building. "You like the property, don't you?"
The buyer nodded her head in agreement.
The agent reached into his briefcase and pulled out the paperwork. "I've got the Purchase and Sale Agreement all done. All I need you to do is initial a few spots and sign the back page."
The buyer did, and in less than five minutes, the offer was signed.
That's usually how a Purchase and Sale Agreement (PSA) begins. You write an offer, the seller accepts or counters and eventually, hopefully, you have mutual acceptance. But signing the agreement prematurely is all too common.
At first glance the offer means little because if the seller has even a hint of common sense and negotiating skills, they'll counter it anyway. But what if they don't? What if they accept the offer as it's written? What if there's something about it that the seller or agent didn't want you to know? This is one of the most important documents you'll ever sign, yet most investors have no idea what it says or means.
Remember the good old days when a man's word was his bond? Remember when you could shake hands and know-that when it was all said and done-everyone would be happy? You probably don't and I don't either.
It just doesn't work like that anymore. The good old days are gone. Sad, but true. Times have changed. People have changed. And so has the law. That's why mama always said, "Read the fine print." You must take the time and energy to read and understand the PSA. If not, it could cost you tens, even hundreds of thousands of dollars.
Let's start with the most basic legal requirements that a PSA must have to be valid. They are:
Mutual acceptance
Written agreement
Names and signatures of the parties
Purchase price
Consideration
Property identification and/or legal description
Of course the agreement is likely to include many other clauses such as due diligence, financing, earnest money deposit, title and the like. What happens if you or the seller fails to perform as outlined in the agreement? Who is entitled to what? Who bears the expense? What if the building catches fire or floods? What personal property is included in the sale? These questions and a whole lot more should be answered in the PSA.
Savvy investors know how to position the negotiation by using other clauses in the agreement. I have five or six additional clauses I like to add to my offer. For example, my violation clause states that if I find and notify the seller of a property defect, which is regulated by a government agency or code, the seller must correct the issue prior to closing. I include utility company requirements as well. Most PSAs do not have a violation clause. In fact, many agents don't even know what it is. Most of them have never heard of it, especially commercial agents. A violation clause can save you an incredible amount of money, but if you're the seller and you don't read the agreement, you won't even know it's there.
In summary, you need to know what each paragraphs means. Take the time and effort to read it. Hire an attorney to review it if that makes you more comfortable. Whatever you do, heed mama's advice and read the fine print.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at www.SteveSteadele.com For more apartment buying tips visit www.MultifamilyStrategies.com
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