Thursday, August 08, 2013

Good To Know: Exit Clauses

I've been getting a kick out of the real estate reality shows on HGTV but their are definitely a few investing mistake they seem to be doing. On "Income Property" they go around viewing a few different rental potential and pick the one they like the best and renovate the income suite. If they were educated investors, they wouldn't pick they favourite and then place an offer, they would place an offer on all three and take into consideration the price they where able to negotiate.

Sometimes on "Property Brothers" they negotiate their purchase with a lot of emotion. They almost always go above asking price and I've seen them remove all condition to ensure they get the property they have their heart set on.

Having exit clauses makes it that in the first scenario you would be able to place an offer on all three properties even when you only intend to purchasing one. An exit clause is like the exit signs, it's your way out should you need it. It is your safety net should something happen that the property you are trying to purchase is no longer a deal. So in the second scenario, I don't agree with taking away the safety net.

You can put in as many exit clause as you would like, but at the end of the day you only need the one. Your exit clause should indicate that it needs to meet your approval and the realtor will make sure that there is a date associated with it. I like to stagger the dates of my exit clause, for example: inspection at a certain date, insurance a week later, and financing a week after that. Those are the three condition I normally use for my exit clause. You could also add partner's approval, or lawyer's approval, and so on.

I also add a few terms, the right to assign and depending on the type of investment (lease option for example), the right to show. Be sure not to waive your last clause until all your ducks are in a row and you are ready to move forward.