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4 Escape Clauses When Buying Rental Property
Any offer you write to purchase a rental property that is signed by the owner legally binds you to the contract and you will be expected to abide by its terms and conditions or face possible legal action.
It is crucial, therefore, when writing an offer to purchase rental property that you include a couple of escape clauses referred to as contingencies and normally prefaced as "Subject to..." in the selling agreement.
Let's look at four such escape clauses, but our purposes, ignore contingencies like pest and dry rot and other inspections typical to most property purchases. We want to focus on four contingencies more intrinsic to real estate investing and rental property.
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. Make this 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.
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 rental agreements for the rental property, as well as income and expense statements. Be sure the numbers add up to what your were expecting.
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 some recurring operating expense not clearly apparent in the rental property's proforma income statement.
Seller Cooperation in a 1031 Tax Exchange- If you are purchasing the rental property in order to complete an IRC 1031 Tax Deferred Exchange, be sure to start the paper trail in the offer. Make it clear that you are purchasing the rental property as part of an exchange and ask the seller to acknowledge that he or she will cooperate.
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