As a real estate investor preparing to buy or sell your first investment property, understanding the paperwork involved is crucial.
This provides an overview of the essential documents and contracts you’ll encounter throughout the transaction process.
From the contract to buy and sell real estate to closing documents and various supporting paperwork, we’ll explore the key elements that form the backbone of real estate transactions.
By familiarizing yourself with these documents, you’ll be better equipped to navigate the complexities of property transactions and protect your interests as an investor.
Getting Contracts
When you’re buying or selling your first investment property, knowing where to get the right contracts and paperwork is key.
- State Real Estate Commissions – In many states, there’s a state real estate commission that provides standardized contracts and disclosures. These documents are approved for use and help ensure consistency and legal compliance in real estate transactions.
- Local Real Estate Associations and Brokerages – In some markets, contracts and disclosures are provided by local real estate associations, brokerages, or legal counsel. These documents often align with state-approved forms but may include small adjustments to accommodate local customs. Typically, these changes are minor and are made to better reflect the specific needs of the area.
- Real Estate Agent/Broker – Your real estate agent or broker will provide or direct you to the appropriate paperwork for buying and selling properties in your local market. Agents are trained to use state-approved contracts correctly, but remember, they are not authorized to give legal advice unless they are also attorneys.
- Custom Contracts for Off-Market Deals – When buying properties outside the Multiple Listing Service (MLS)—especially creative financing transactions—many investors have their own contracts created by an attorney. It’s often cheaper to modify a standard contract or one from a course you purchase than to create one from scratch. Be cautious of poorly drafted contracts, as they can lead to costly disputes down the line. Spending a little more upfront on a solid contract can save you from significant financial issues later.
- Different Contracts for Buying and Selling – Some investors use different contracts depending on whether they are buying or selling. These contracts typically include default terms that favor the buyer or seller, based on the role the investor is playing in the transaction.
Review Paperwork
When you’re buying or selling your first investment property, reviewing the paperwork is one of the most important steps. Here’s why and how to do it:
- Review All Paperwork Before Looking at Properties – Don’t wait until you find a property to start understanding the paperwork. You should be familiar with the contract and other forms before you make an offer. This helps you avoid surprises later.
- Mark It Up with Questions – Take a copy of the contract, read through it carefully, and make notes with a pen. Highlight sections you don’t understand and write down any questions for your attorney, CPA, and real estate agent. It’s better to ask questions upfront than miss something that could cause problems later.
- Ask Your Real Estate Agent About the Process – In most markets, your real estate agent should be able to guide you through the buying and selling process. They can answer basic questions about the paperwork and help explain how things work.
- Consult the Right Professionals for Legal and Tax Questions – While your real estate agent can be a great resource, they aren’t trained in law or taxes. For legal questions, consult your attorney. For tax questions, talk to your accountant or CPA. This ensures you get accurate advice for your situation.
Other Common Documents
Throughout a real estate transaction, you’ll encounter several key documents that outline critical details, protect your interests, and ensure both parties are clear on their responsibilities.
Below are some of the most important documents you’ll need to understand as a real estate investor.
- Contract to Buy and Sell Real Estate – This is the foundational agreement between the buyer and seller, outlining the terms of the real estate transaction, including the purchase price, financing, deadlines, and contingencies. It’s the most important document in a real estate deal as it governs the transaction from start to finish. As an investor, this is the document you’ll need to understand thoroughly. We’ll go over the details of this next.
- Seller’s Property Disclosure – The seller uses this document to disclose known issues or defects with the property. It’s important for buyers because it provides insight into the condition of the property. As an investor, you’ll want to review this carefully to assess potential repair costs or issues that might impact your investment. This document is typically provided early in the transaction.
- Lead-Based Paint Disclosure – For properties built before 1978, federal law requires sellers to disclose any known presence of lead-based paint. This is crucial because lead exposure can cause serious health risks. As an investor, it’s important to be aware of this, especially when purchasing older properties. You’ll typically see this document as part of the initial disclosures.
- Natural Hazard Disclosure – This document informs buyers if the property is located in areas prone to natural hazards, such as flood zones or earthquake fault lines. As an investor, this helps you assess risk, insurance needs, and potential costs associated with owning the property. You’ll receive this document early in the process, often alongside other disclosures.
- Occupancy Limits Disclosure – This document outlines any restrictions on how many people can legally occupy the property, often determined by local ordinances. For investors, this is important when purchasing rental properties, as it impacts how many tenants can live in the home. You’ll typically review this during your due diligence phase.
- Source of Water Disclosure – This document details where the property gets its water from, such as a municipal supply, well, or other source. As an investor, you need to ensure the water source is reliable and adequate, especially for rental properties. This is another disclosure you’ll see early in the transaction.
- Square Footage Disclosure – This form confirms the property’s square footage, which impacts value, rent potential, and taxes. As an investor, it’s important to verify the accuracy of this information to avoid overpaying or miscalculating potential income. You’ll review this document at the beginning of the deal.
- Wire Fraud Disclosure – This is a warning to buyers and sellers about the increasing risk of wire fraud during real estate transactions. As an investor, understanding this risk and following the guidelines in this document is essential to protect your funds. You’ll usually sign this form before sending any money.
- Earnest Money Receipt – This document serves as a receipt for the earnest money deposit, which shows your commitment to purchasing the property. As an investor, keeping this receipt is important because it outlines the terms for the earnest money and what happens to it if the deal falls through. You’ll receive this shortly after submitting your deposit.
- Inspection Objection/Resolution – After a property inspection, this document is used to formally object to any issues found and negotiate resolutions with the seller. As an investor, this is your opportunity to address repairs or negotiate price reductions. You’ll complete this after the inspection, typically midway through the transaction.
- Bill of Sale – This document transfers ownership of any personal property included in the sale, such as appliances or furniture. As an investor, it’s important to have this document to ensure you receive all agreed-upon items. You’ll typically sign this at closing or as part of the final paperwork.
Major Contract Sections
When you’re buying or selling real estate, the contract to buy and sell will contain many important sections that define the terms of the deal. Most contracts will include a lot of the same sections, but keep in mind that not every market is the same. Some areas may omit certain sections, while others might have additional clauses that are unique to their local practices.
It’s important to understand these common sections so you can follow the transaction process and know where to focus your attention. This knowledge helps ensure you’re protected and making informed decisions.
We’ll walk through the most typical sections, explain what they cover, and highlight why they matter for real estate investors like you.
Contract to Buy and Sell
The contract to buy and sell real estate is a detailed document that outlines all the terms of the transaction between the buyer and seller.
As a real estate investor, understanding each section is essential to protecting your interests and ensuring a smooth deal.
Below are the key sections you’ll encounter in most contracts and why they matter.
- Agreement – This section states that the buyer agrees to buy, and the seller agrees to sell, the property under the terms and conditions outlined in the contract. It’s the basic foundation of the transaction and sets the expectations for both parties.
- Parties and Property – This identifies who the buyer and seller are and includes details about the property being sold, such as the address and legal description. It ensures both parties are clear on what property is involved in the transaction.
- Assignability – This section determines whether the buyer can assign their rights to purchase the property to another party. It’s particularly important for investors who may want to transfer their purchase rights to another investor before closing.
- Inclusions – This specifies what items, such as appliances or fixtures, are included in the sale of the property. It ensures that both the buyer and seller are on the same page about what stays with the property after the sale.
- Exclusions – This lists items that are explicitly not included in the sale. As an investor, it’s important to review this to avoid misunderstandings about what you’re getting with the property.
- Parking/Storage – If there are parking spaces or storage areas included in the sale, this section will outline those details. This is important when dealing with properties like condos or multi-family units.
- Water/Well Rights – This section covers whether water or well rights are included with the property. In some areas, water rights can be valuable, so understanding what is included is crucial for investors.
- Dates and Deadlines – This section lists all the important dates and deadlines in the contract, such as when the inspection period ends or when earnest money is due. It’s essential to keep track of these to ensure the deal stays on track.
- Purchase Price/Terms – This outlines the agreed-upon purchase price, how it will be paid (e.g., cash, loans), and other financial terms. As an investor, you’ll want to make sure all financial terms are clear and favorable.
- Seller Concessions – This details any contributions the seller will make toward the buyer’s closing costs. As an investor, this can be a way to reduce your upfront costs.
- Earnest Money – This section explains how much earnest money is required, who holds it, and the conditions for its return. Investors should understand this section as earnest money can be lost if certain contract terms are not met.
- Good Funds – This defines what types of payments are acceptable at closing, such as certified checks or wire transfers. As an investor, you’ll need to ensure you have the appropriate funds available.
- Time of Payment – This section covers when payments are due and the consequences of failing to pay on time. This is critical for investors to avoid defaulting on the contract.
- Available Funds – This confirms whether the buyer has the necessary funds to close the deal. As an investor, it’s important to have your financing or cash ready to avoid delays or termination.
- New Loan – This covers the details of any new loan the buyer is securing to purchase the property, including the type of loan and deadlines. For investors, understanding the loan terms is key to ensuring a profitable deal.
- Loan Assumption – If the buyer is assuming an existing loan from the seller, this section outlines the details. Loan assumptions can be a strategy for investors to take advantage of favorable loan terms.
- Seller or Private Financing – This section details any financing provided by the seller or through private loans. For investors, this can offer flexible financing options, but terms should be reviewed carefully.
- Financing Conditions and Obligations – This details the buyer’s obligations in securing financing and the conditions under which they can terminate the contract if financing falls through. As an investor, it’s critical to understand your rights and responsibilities in this area.
- Appraisal Provisions – This explains the process for appraising the property and what happens if the appraisal comes in below the purchase price. It’s especially important for investors using loans, as the appraisal impacts financing.
- Homeowner’s Association – If the property is part of an HOA, this section outlines the details, including the buyer’s right to review HOA documents. For investors, understanding HOA rules is important, especially if renting out the property.
- Title Insurance – This covers who selects and pays for title insurance and related details. Investors need to ensure they have clear title to the property to avoid future legal issues.
- Record and Off-Record Title Matters – This section details the buyer’s right to review title records and address any issues before closing. Investors should carefully review title work to ensure no hidden liens or claims exist on the property.
- Special Taxing and Metro Districts – If the property is in a special taxing district, this section provides details. It’s important for investors to understand any additional taxes that may affect the property’s profitability.
- Tax Certificate – This document outlines the property’s tax status, including any unpaid taxes. As an investor, understanding the tax situation is key to evaluating ongoing costs.
- Third Party Right to Purchase/Approve – This section covers any third-party rights to purchase or approve the sale, which could affect the transaction. Investors should be aware of these rights to avoid surprises.
- Right To Object/Resolutions to Title – This section provides the buyer’s right to object to title issues and the process for resolving those objections. Investors need to ensure that title issues are cleared before closing.
- Title Advisory – This section advises the buyer of the importance of title-related matters. Investors should take this seriously, as title issues can cause major legal headaches later.
- Surveys and ILCs – This covers the buyer’s right to obtain surveys or Improvement Location Certificates (ILCs) to confirm property boundaries and other matters. As an investor, it’s important to ensure the property’s physical layout matches the title.
- Seller’s Property Disclosure – This section details the seller’s obligation to disclose any known issues with the property. Investors should review this carefully to avoid hidden repair costs or other problems.
- Inspection – This covers the buyer’s right to inspect the property and the process for addressing any issues found. Investors should use inspections to identify potential deal-breakers or negotiate repairs or price reductions.
- Damage, Liens, and Indemnity – This section outlines the buyer’s obligations regarding property condition, liens, and indemnity. As an investor, this ensures you understand your responsibilities in the event of damages or legal claims.
- Insurability – This section gives the buyer the right to object if they cannot obtain property insurance on acceptable terms. For investors, securing insurance is crucial to protecting the investment.
- Due Diligence – This covers the documents and other due diligence items the buyer has the right to review. Investors should perform thorough due diligence to avoid surprises after closing.
- Source of Water – This section details the property’s water source, which is important to review, especially in rural areas. Investors should ensure the water supply is reliable and sufficient for the property’s needs.
- Existing Leases and Tenant Estoppel Statements – This section covers any existing leases on the property and provides for the review of those leases. Investors should carefully review leases to understand tenant obligations and rights.
- Lead-Based Paint – This section details the federal requirement for disclosing lead-based paint hazards in properties built before 1978. Investors should be aware of the risks and legal obligations associated with lead-based paint.
- Carbon Monoxide – This section ensures compliance with state laws regarding carbon monoxide detectors. As an investor, making sure the property meets these safety standards is critical.
- Meth Disclosure – This covers the requirement to disclose any past methamphetamine contamination on the property. Investors should be aware of the costs and liabilities associated with meth contamination.
- Radon Disclosure – This section details the presence of radon gas and the buyer’s right to test for it. Investors should assess the need for radon mitigation, especially in areas where radon is common.
- Closing and Closing Docs – This section outlines the process for closing the sale and what documents will be needed. Investors should be prepared to provide or sign all required documents at closing.
- Transfer of Title – This details how and when the property’s title will transfer to the buyer. Investors need to ensure a smooth transfer to avoid ownership issues after closing.
- Payment of Liens and Encumbrances – This outlines the seller’s obligation to pay off any liens or encumbrances before closing. Investors should confirm this to avoid taking on unexpected debt.
- Closing Costs – This section specifies which party is responsible for different closing costs. For investors, negotiating closing costs can help reduce out-of-pocket expenses.
- Prorations – This section covers how items like taxes and rents will be prorated at closing. Investors should review this to ensure fair calculations, especially for rental properties.
- Possession – This section outlines when the buyer will take possession of the property. Investors need to plan for possession dates, especially when dealing with tenants.
- Damage to Property While Under Contract – This covers what happens if the property is damaged between the time the contract is signed and closing. Investors should understand their rights and options in case of damage.
- Right to Walk-Through Property – This section gives the buyer the right to walk through the property before closing. Investors should always perform a final walk-through to ensure the property is in the agreed-upon condition.
- Home Warranty – This section notifies the buyer that home warranties are available and whether one is being provided. Investors should consider the value of a home warranty for future repairs.
- Legal and Tax Counsel – This section advises both parties to consult legal or tax counsel before signing the contract. For investors, professional advice is essential to avoid costly legal or tax mistakes.
- Time of Essence – This section emphasizes the importance of meeting deadlines and what happens if they’re missed. Investors should be vigilant about dates to avoid losing earnest money or defaulting on the contract.
- Default and Remedies – This section outlines what happens if either the buyer or seller defaults on the contract. Investors should understand the consequences of default and how to remedy any issues.
- Legal Fees, Costs, and Expenses – This covers how legal fees and other costs will be handled if there’s a dispute. Investors should be aware of this in case of a disagreement or legal action related to the contract.
- Mediation – This section requires the parties to mediate any disputes before taking legal action. Investors should be prepared to resolve issues through mediation before heading to court.
- Earnest Money Disputes – This covers what happens if there’s a dispute over the return of earnest money. Investors need to understand how disputes will be resolved to protect their earnest money deposit.
- Termination – This section explains who can terminate the contract and under what conditions. Investors should know their rights to terminate the contract, especially during the inspection and financing periods.
- Entire Agreement, Modification, Survival; Successors – This section states that the written contract is the entire agreement and outlines how modifications can be made. Investors should ensure any changes are in writing to avoid future disputes.
- Notice, Delivery, and Choice of Law – This section explains how notice and delivery of documents should be handled and what laws apply. Investors should ensure proper communication and understand which state’s laws will govern the contract.
- Notice of Acceptance – This section covers the time frame in which the contract must be accepted to be valid. Investors should act quickly to ensure the deal is locked in.
- Counterparts – This section allows the contract to be signed in multiple parts, with each part holding the same legal effect as if everyone signed the same document. This is a common practice in real estate transactions.
- Good Faith – This section emphasizes that both parties are expected to act in good faith throughout the transaction. Investors should keep this in mind when negotiating and fulfilling contract terms.
- Additional Provisions – This section allows for any additional provisions that weren’t covered elsewhere in the contract. Investors may use this space for any special conditions or terms they want to include.
- Other Documents – This section lists any additional documents that need to be included as part of the contract. As an investor, make sure all necessary documents are attached and included.
- Signatures – This is where the buyer and seller sign the contract, making it legally binding. Investors need to ensure all signatures are completed for the contract to be enforceable.
- Agent/Broker Acknowledgements – This section is where real estate agents or brokers acknowledge their involvement and often outlines how they’ll be compensated. Investors working with agents should review this to understand how their agent is being paid.
Whenever you’re unsure about how something works or what you or the other party are responsible for, always refer back to the contract.
It’s the final word on the terms of the deal, and understanding it thoroughly will help you avoid confusion or disputes.
Conclusion
Your paperwork will inevitably vary based on your location and specific deal.
It’s important to review your documents with your local real estate agent first, ideally before you start looking at properties. As you go through the paperwork, make notes of any questions for your attorney, CPA, or other professionals on your dream team.
Once you’ve reviewed everything, meet with these professionals to get your questions answered.
This way, when you find a property and are ready to make an offer, you can focus on the deal itself, confident that you already understand the paperwork and have addressed any concerns.