Real estate investors encounter a large number of contracts as part of the business. These include purchase contracts, contractor agreements, leases, development agreements, joint venture agreements, assignment agreements, loan documents, and so many more. These contracts form the legal relationship between the parties and can help ensure that the deal works as the contractor expects.
With that being said, very few investors have their contracts reviewed by an attorney. This is often the result of concern about paying too much to the lawyer or a belief that a the form provided by a “guru” is fine because the guru had it reviewed by his or her lawyer. The problem however is that rarely are these “gurus” located in the same state as the investor and the laws in Indiana are not the same in Kansas. This is especially true in real estate.
I am not going to lie and say it is cheap to hire a lawyer to review your contracts. On the other hand, if you have to go to court, you will quickly realize it is worth the expense. Litigation can cost $20,000 or more, just on attorney fees. Moreover, a lost deal can be thousands of dollars and may have been avoided if a lawyer had reviewed the contract early on in the process. Investors regularly invest in their businesses by attending training sessions or joining groups with other real estate investor. This is no different. Having a lawyer review your contracts is an investment into the future of your investing business.
The vast majority of real estate transactions that take place in the Kansas City area and that involve real estate agents utilize the standard Kansas City Regional Association of Realtors (KCRAR) standard forms. These forms are available to all Realtor members of the organization and reviewed by KCRAR attorneys. As such, they are great forms for standard real estate transactions.
With that being said, it is important to understand that these forms are developed for the standard retail real estate transaction. In other words, they are developed for one individual to sell to another individual on the MLS. They were not developed for real estate investors.
This does not mean that the KCRAR forms can not be used by real estate investors. There are many times that these forms can be right, especially when a flipper sells a property to an end buyer. The forms may not be the best, however, when the deal is unique or involves creative terms. This is because any standard form must — by design — be created for a standard or typical transaction. It is impossible for KCRAR or its lawyers to design forms to cover all of the unique deals that are created by real estate investors.
In order to address unique transactions, agents will often create addendums or add additional terms to the form contracts. There are two major concerns, however, when agents do this. First, the forms themselves have very limited space for adding additional language. As such, the agent will often use short hand or very general terms to describe the unique terms of the transaction. This is dangerous.
Where I see this a lot is in the resolution of unacceptable terms. For example, if an inspection report notes some evidence of water infiltration in the basement, an agent might write on the amendment “fix water infiltration” or “fix water infiltration in basement.” The parties to the transaction know what this means (or at least they think they do), but a court later may not if the judge is asked to intepete the contractor. Moreover, the term “fix” is ambiguous. What the buyer thinks is an appropriate fix for a defect, might not be the same as what the seller thinks. Therefore, this could create dispute later down the road when water again starts entering the basement.
The other issue with agent amendments to contracts is the fact that most agents are not lawyers. This doesn’t mean that some agents could not draft contract language as well as attorneys, but there are many that can not. Attorneys — at a minimum — take two full semesters of training that relates to drafting contract amendments — property law and contracts. In contrast, real estate agents take a one week course that touch on these topics, but along with many others such as real estate license laws, real estate marketing, and other aspects of being a real estate agent. Moreover, many attorneys have the advantage of seeing contract terms be litigated so as to understand who courts generally interpret contracts. As such, whenever there are unique terms to a contract, it is highly recommended you have an attorney review the contract and addenda.
Because contracts that utilize the KCRAR forms are very standard and we have reviewed hundreds of those contracts before, we can focus our review on just the additional language added by the agent. Therefore, we offer review of standard KCRAR forms for low flat rate.