The most important thing as a real estate investor is including an inspection contingency on every contract. This is how you protect yourself and are able to invest with as little risk as possible! Be smart - use the inspection contingency. Check out the video above if you're interested in:
Here is a transcription of the video if you enjoy reading:
Hey, everyone, it's Alex Martinez, and today, we're going over the most important thing as a real estate investor.
When a lot of people look at real estate investing, and look at entrepreneurship, they look at it as something that's a little risky.
What we do, as real estate investors and entrepreneurs is, is mitigate and lower our risk as much as possible, and then, make calculated decisions after that.
The most important thing, as a real estate investor, when flipping houses, when wholesaling houses, the most important thing you can do, is protect yourself using something called an inspection contingency. So let me write it out real quick.
Never forget this. This is one of the most important things I teach all of my clients & students, everyone I work with. It is one of the golden rules: inspection contingency.
Now what is an inspection contingency? Basically, what this is, is, whenever you offer a price on a certain property that you want to buy, that you want to fix and flip, that you want to wholesale, this protects yourself. This allows you to back out of the contract if the property does not pass your inspection.
All right? I want you to realize how important that is. Because I've had many people come to me, reach out to me and say, "Alex, I need some help. I'm in some trouble, because I try to buy this house, and I say, 'Hey, let me look at the contract,' and there's no inspection contingency on that contract that says, 'Hey, they can back out of this deal, if it doesn't pass their inspection.'"
Okay? This is a clause on the contract that you put on there, that says, "If the property does not pass my personal inspections, if it does not pass my team's inspections, then we have the ability to back out of the contract."
All right? Usually, every state's contract, they all have this inspection contingency in there. So I want you to check that contract, if you have it. If you make your own contract, or you have an attorney write up a contract for you, have them put inspection contingency in there, okay?
Once again, what's an inspection contingency? Allows you to back out of a deal if it doesn't work out for you, all right? You can look at it as, as what? An escape clause, basically, for this deal, all right? Because who would want to buy a house if there is something wrong with it, that you didn't see from the initial inspection? That you didn't see from just the computer.
See, a lot of deals that I've bought, or have got under contract, I've just found them on something called the MLS, the Multiple Listing Service, on the computer. Now what that means is, I'm analyzing a property from Photos, from talking with an agent, and I don't know every single thing about the property. But, to stay ahead of the competition, I need to get this property under contract.
I'm going to do my best ability, from all the information I have, from the listing sheet on the MLS, and from talking with this listing agent, to get this property under contract, right? So, now, if something ever came up on the property, that I didn't know, from talking with the listing agent, from seeing the listing sheet, let's say the foundation was cracked, and no one knew about it.
But then, I went there, I did my inspections, found there's a cracked slab that needed $20,000 worth more of repair, than I initially analyzed? Well, now, I can either back out of the contract, and I'm not liable to buy this property whatsoever, because I got the inspection contingency. Or, since I still have this inspection contingency, I can ask for a reduction on the property.
If that repair's going to cost $20,000, I may ask for a $20,000 reduction. Maybe $25-30,000, to hedge for the additional costs. So it's so important, right? The most important thing you do as a real estate investor is include inspection contingency on every single contract. That is how you're not going to be liable to buy these properties when they don't pass your inspection.
This is how you can send out multiple offers, without being liable to buy the property. I mean, just think about it. If you bought anything in life that was not a high dollar figure, and you just looked at it, at face value, and you said, "Hey, I'll buy it," and then you have to buy it automatically, no matter what? That would stink. That's not how this works.
So how do you protect yourself? Inspection contingency on every single deal. Never forget this. I don't want you to reach out to me, two months from now, say, "Alex, I need some help, the seller is mad with this property. I wrote a contract that said I was gonna buy it, and now, they're coming after me." Then I'll say, "You know what? Did you include an inspection contingency there? Because, if not, then we're going to have you watch this video again."
But, on top of that, guys, this inspection contingency? Once again, I'm going to keep going over it. It's your escape clause. It's how you back out of every single deal. If you've seen my other videos, and you don't take away anything, but one thing, take away this, please. The inspection contingency allows you to submit as many offers as you want on properties, and allows you to back out of the deal, if you need to, if it doesn't pass your personal inspections.
Now, to give you some more information on here? There's other contingencies, usually, when you're buying a piece of real estate, that are on there. A normal property, there's mortgage contingencies, saying, "Hey, if this homeowner doesn't get a mortgage approved for the price of this house," then they're able to back out, things like that.
But when you're a real estate investor, and when you're fixing and flipping houses, and wholesaling houses, we typically buy the property all cash. So we don't have things like a mortgage contingency on there. That's why it's so important to have an inspection contingency. You only need one contingency, pretty much. On all the offers I submit, just one contingency. It's the inspection contingency. We don't have a mortgage contingency on there.
What's this do? It makes your offers extremely clean when a homeowner sees, "Hey, this person only has one type of contingency on the contract. It's only an inspection contingency." There's no mortgage contingencies, there's no partner contingencies, there's no other types of contingencies for them to back out of this deal. Just one reason, okay?
So, the typical amount, when a homeowner is buying a piece of real estate? The typical days amount of inspection contingency, because there's a timeline on the inspection contingency, is from the day you get under contract, a typical amount for a homeowner, it's about 14 to 17 days. Okay? This says, "Hey, this homeowner has about 14 to 17 days to inspect this property, to do all their inspections, and if," let's just say it was a 14-day inspection. If they don't do their inspection in 14 days?
Then they can be held liable to buy that property, or at least lose their deposit, at the very least, on a property, okay? Now, as an investor, you make your offer more desirable by changing your terms. And also, price, too. But one way to change your terms, a common amount for a type of investor, for a fix and flipper to buy property, is going to be one to seven days for your inspection contingency, okay?
So this says, "Hey, I have one to seven days to do my inspection contingency." Now, let's just say all things were equal. There's Real Estate Investor A and Real Estate Investor B, so we'll say Investor A says, "Hey, you know what? I wanna buy this property at $500,000, and I just have a three-day inspection." Just three days, okay? Three-day inspection contingency on there, all things else equal.
Inspector B says, "I'll buy it at $500,000, but on a seven-day inspection contingency," right? So, now, I'm showing you how, just the terms, from changing the amount of days on your inspection contingency, can have you have a more desirable offer, right? This three-day inspection contingency is going to be much more desirable than a seven-day, because this investor, A, only has 72 hours to say, "Hey, are they going to buy this property, or not?"
Homeowners, listing agents, people in real estate, they don't like to be dragged along. They don't like their chains to be yanked, and so, the lower amount of your inspection contingency, generally, the more desirable your offer will be on a property. A lot of times, this is true for residential, commercial, different types of real estate.
So, keep that in mind, how do you protect yourself? The most important thing, once again, as a real estate investor is the inspection contingency, all right? The normal amount for a homeowner's inspection contingency is about 14 to 17 days. What about an investor? We're talking a residential property, one to seven days, a house you want to fix and flip.
This inspection contingency is your escape clause, so, if it doesn't pass your inspections, if the grass, hey, it needs more work than I thought, the floors need more work than I thought ... just, whatever your personal inspection is, if it doesn't pass it, you're able to legally back out of that contract, okay? You're not liable to buy that property, and you can keep your deposit, whatever deposit you put on the property. All right?
So, never forget that. Hope you guys enjoyed this video. If you have any questions, if you want me to make another video, please put any questions, comments below, and then, also, hit the Subscribe button down below. I'll have some more content coming out.
Hope you guys enjoyed it. Have a great day. Talk to you soon.
If you want to learn more about finding & flipping your first house in 45 days or less, then check out the latest free workshop here.
Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared.