Yesterday I was in court representing an inexperienced landlord who had rented a property to a problem tenant. The challenge we ran into in court was that the husband and wife landlords had used online legal resources to put together a combination real estate lease with option to buy. Because of the way they packaged it all in one document and the various clauses they inserted in it, the judge took a recess so he could spend time reading the entire lengthy document. When he returned to the bench, he said he didn’t know if the document was a lease, an option, or a land installment contract based upon how it was prepared.
I would like to tell you that because of my brilliant lawyering, I saved the day; but it was actually statements made by the tenant-defendant prior to the judge digging into the intricacies of the lease agreement that caused him to suggest that an agreed-upon moveout date be entered into.
Several important lessons can be learned from what happened in this case that will help you develop your real estate investing playbook:
- You need to have an accurate and authoritative source from where you can obtain important legal documents. Going online to look for some free or cheap form and then trying to figure it out for yourself is a recipe for disaster. The client in this case used to run a local garage. I reminded him of the Fram oil filter commercial: “You can pay me now, or you can pay me later.” I suggested he contact me when he is ready to rent the property again so that I can prepare the correct agreements.
- Never combine more than one transaction into one agreement. Make the lease be the lease, and make the option to buy be a separate document. Yes, the option to buy should reference the lease and indicate that all the lease payments need to be made on time and the lease cannot be breached in order for the option to remain valid, but don’t intertwine the two of them into just one document. It will lead to problems.
If you are a consistent reader of my posts, you will note that I’m an advocate of finding your niche or lane and staying in it by doing cookie-cutter deals. Once you get solid, well-written paperwork in place, the cost of keeping it updated and using it again in a new deal is minimal. After using the documents several times and spreading the initial cost over 3 or 4 transactions, the cost looks far more reasonable.
Remember, one of the things we’ve covered about your real estate investing playbook is to plan for the long haul, so get your paperwork set up accordingly.