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Understanding Contract
Condition Clauses For Your Protection!
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Tax Lien and Tax Deed Investing:
The Fundamental Approach™
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By Darius M.
Barazandeh, Attorney at Law / M.B.A.
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Darius
You
may hear conditions clauses being called ‘weasel clauses, or
contract contingencies.
Conditions clauses allow the buyer or the seller to end
the contract upon the happening or non-happening of an event.
Your purchase contract (and the one we provide in this
program) has several key conditions clauses.
This is because in wholesale transactions you will want
the right to end the contract or re-negotiate purchase price if
the property turns out to be less attractive than you thought.
For
example, you may discover that there are additional liens on the
title report that the seller did not know about.
Your retail flipper may inspect the property with you
(after you have a contract with the seller) and may discover
that the foundation is slightly cracked.
A conditions clause allows you to re-negotiate the
contract or cancel the contract upon a certain condition being
found.
We
keep our conditions clauses very broad.
For example, one of our clauses allows you to end the
contract or re-negotiate if you find out that the property is
not worth what you originally thought.
For example, assume that you do some preliminary market
research and believe the property is worth $150,000 and then
sign a purchase contract with the seller.
Later you discover the property is really only worth
about $120,000 and that your comparable sales were skewed.
The right conditions clause would allow you to
re-negotiate or simply end the contract.
Conditions clauses are common, but not required for a contract
to be valid.
Nevertheless, they are a very good idea.
Here are some common examples:
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Financing Contingency:
Contracts may be contingent upon the buyer obtaining
financing.
For example, the following contingency is in place
(just in case) a new loan is required but cannot be
obtained:
“If
a new loan shall be required for Buyer’s purchase of said
property, then this agreement is subject to Buyer’s obtaining a
new loan for the amount of $____________________ with an
interest rate NOT higher than _____________% and an amortization
period NOT less than
____________ months.”
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Subject to Inspection:
Here is an example from our contracts:
Contract and terms are subject to:
[Buyers] “…review
the properties’ marketability, value and/or condition with
Buyer’s agents, business partners, and associates.
If this is not satisfactory, Buyer may end this agreement
without default or adjust the price and terms of this agreement.”
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Title Contingency:
Here is an example of contingency that allows for
re-negotiation or an end of the agreement if there are title
issues.
This example was taken from our contracts:
[This agreement is subject to]
“…a title review of said
property.
If title clouds, liens, undisclosed issues, defects
affecting title, property surveys, ownership disputes or clouds,
zoning issues, debts, levies, or restrictions of use of any
kind, are found then the Buyer has sole discretion to end this
agreement without default.
In the alternative the Buyer may adjust the price and
terms of this agreement without prejudice or default.”
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Approval by Buyer’s Partner:
This is the notorious conditions clause that everyone
talks about.
It simply reads:
“This agreement is subject to approval by buyer’s partner.”
This
clause basically allows the buyer to get out of the contract for
nearly any reason, because typically the buyer’s business
partner may be their friend, spouse, etc.
However, before you get too carried away with conditions
clauses, understand that exercising a conditions clause unfairly
or at the last minute and thereby causing loss to the seller,
will make you liable for violating your implied duty of ‘good
faith’ and ‘fair dealing’.
Moreover, you only need one or two good conditions
clauses in a contract to be sure you are protected.
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The author, Darius M.
Barazandeh, Esq. is a licensed attorney in the state of Texas. In
addition to his legal knowledge he has a Masters Degree (M.B.A.) in
Business Finance and brings experience from numerous fields
including tax sale investing, real estate construction, corporate
finance, and business consulting. Frustrated by the lack of
realistic information regarding tax foreclosure sales and other
investments, he is "unlocking the secrets" to many of these creative
investment methods with his unique 'clear cut' writing style,
attention to detail, and legal knowledge.
Current Membership Includes:
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Real Estate, Probate, and Trust Law Division of the Texas Bar Association
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Business Law Division of the Texas Bar Association
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Taxation Division of the Texas Bar Association
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Environmental and Natural Resources Division of the Texas Bar Association
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Alternative Dispute Resolution Division of the Texas Bar Association
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Consumer Law Division of the Texas Bar Association
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