Can Financing Contingency And Due Diligence End At Same Time Flipping Houses Ethics: Any Place for a Weasel?

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Flipping Houses Ethics: Any Place for a Weasel?

Ethics and real estate investing…like oil and water?

As a long-time real estate investor and educator, flipping houses in the Baltimore area since 1998, I do not believe this to be the case.

However I have seen in recent years an unnerving and unnecessary degradation in the overall moral fiber of many in our industry. This is evidenced by the disturbing number of people you hear about getting caught right in the action of defrauding sellers, buyers and mortgage companies – activities which the media flippantly misnames “house flipping schemes”.

I believe operating your real estate investing business with integrity is non-negotiable. I’ve written entire chapters about it in my own flipping homes continuing education materials, so my students know exactly how I feel about this.

But this troublesome trend has led me to write a series of articles on the topic of ethics in real estate investing – and particularly in the area of flipping real estate.

In a recent article I addressed the issue of your word, and why you should sign your name to each and every contract with honor and integrity. One topic I touched on briefly in this article, but would like to expand on now, is that of contract contingencies, or “weasel clauses”.

What is a “Weasel Clause” Anyway?

Weasel clauses are statements in a contract that say things like, “Contingent upon the inspection of my partner,” when you don’t have a partner or, “Contingent upon the inspection of my spouse,” when your spouse has already seen the property or truly couldn’t care less about your house flipping ventures.

Let me be clear in stating that I completely disagree with the common and quick use of these types of clauses. The way I hear many real estate investors use them is, I believe, unethical, dishonest and totally unnecessary.

If you’ve read my other articles, you’ve already heard me say it: Every single time you put your name on a contract to purchase a home, you should do so with the full intent of purchasing that home, even if all else fails.

Under no circumstances do I believe it’s acceptable to “tie up” someone else’s property with the intent of just walking away from the deal if you can’t wholesale it to someone else, unless your contract contains a clause that clearly and unmistakably makes the seller aware of your loose intentions.

Let me state this again to be sure it sinks in. If you don’t have the ability to close on a deal, and you absolutely must have a wholesale buyer to do the deal, ethics demand you must be sure your seller knows this in no uncertain terms. And most of the common “weasel clauses” just aren’t clear enough to do this in a fair and just manner.

When I say “clear” I’m talking about something like,

“Seller understands that if buyer is unable to locate a suitable partner in a reasonable amount of time, buyer will not be able to close and contract will be void.”

This may feel blatant and abrupt, but if it’s true, it should be as clear as day to the seller. I’d even have them specifically initial it.

Really, the better solution for the wholesaler flipping houses is to have a solid backup plan for financing and closing a house flip deal if you can’t find a wholesale buyer in time. Locate and pre-qualify for a hard money loan, private money or something similar.

The Only Contingency You Really Need

I would submit that in reality, there’s only one real, valid contingency you need to have – and it’s perfectly legitimate, ethical and legal.

Presuming that you’ve educated yourself to properly evaluate the “as-is” condition of a property, you don’t need protection from anything else but the possibility that you might not be able to arrange financing for your real estate investment.

“This agreement is contingent upon buyer’s ability to secure suitable financing.”

Such a situation may result from the condition, type or location of the property (if you’ve made your offer sight unseen) or from the fact that your purchase price is too high and you won’t be able to borrow enough money to purchase and renovate the property.

In either case, you can exercise your financing contingency, which is clearly disclosed upfront to the seller in your offer and, for the most part, I believe the only contingency that you’ll ever need.

I say “for the most part” because on occasion, there will be legitimate unknown factors which will require the insertion of a separate contingency because they can make or break a deal for you.

For instance, suppose you are looking at a “flip this house” type of deal that has a well as its water source. If the well is dry, you wouldn’t be able to provide water for your new buyers and therefore you should include a contingency which gives you the opportunity to have a professional check out the well and releases you from the contract if it’s dry.

Similarly, you may be making an offer on a home specifically because it has extra land which you think you can subdivide. However, you need to check with your county to see if subdivision is possible.

In such cases you can clearly identify the “risky unknowns” and legitimately insert a contingency giving yourself a chance to perform further due diligence before committing to purchase the property. And any reasonable seller should be able to understand.

Any Legitimate Weasels?

Be careful not to confuse a legitimate contingency such as the ones used in these examples with a “weasel clause.” The difference lies in the intent. A legitimate contingency intends to provide you with time needed to perform further due diligence on your house flip, often on a particular aspect of a property. A “weasel clause” really serves only to buy yourself time to market the property and provide an exit if you can’t wholesale it.

Furthermore, even though a contingency such as “subject to inspection by my partner” can be genuine, once you learn how to inspect “flip properties” and estimate repairs, you won’t need such clauses. In fact, as a savvy investor, you don’t want to include them. Why? Because in many cases you’ll be buying properties from banks and other institutions who will nearly always reject offers with weasel clauses, having been burned by them so often in the past.

With private sellers it’s true that you can often get away with such clauses. But even so, I say leave the weasel clauses out. If you’ve taken the time to educate yourself, they’re just not necessary. Instead, make stronger offers with as little “wiggle room” for yourself as possible, and you’ll have a better chance of doing more and better deals in the long run.

And in the rare time when you do need to exercise your “financing contingency” to exit a house flip deal, I recommend procuring a letter from the lender ASAP and requesting a release from your seller as early as possible in the process.

Don’t wait until the last minute. If you handle the situation properly, you may even be able to use the letter to negotiate a better deal with the seller and still settle on time, but for an even better price.

The Reason Sellers Get So Upset At You

The reason that sellers often get upset (and rightfully so) is that “weasely” buyers wait until the day before settlement to dump the bad news on them and exit the deal, and the seller is left in the lurch. So if you aren’t going to be able to close a deal, let the sellers know as soon as you do.

In summary, when I sign an agreement to purchase a property, it clearly says that Stephen Cook agrees to buy the property, and I make every effort to live up to my agreement every single time, whether I planned to wholesale the property or not.

And so should you. If you plan to flip a house to someone else but can’t, then buy it! Don’t let fear degrade your morals. You’ve got a lesson to learn, so embrace it. There are certainly worse things in the world than holding a property for a while or fixing and retailing a house for a profit.

Yes, I said profit. You’ve bought the property cheap, so if you choose to rehab the property, you will make money, in spite of your mistakes, and add another skill to your tool chest to boot.

Isn’t this a wonderful business?

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