Maui Millionaires

Mistake One: Letting the other side write up the deal.

I may just be one of the most "frugal" (read cheap) people I know. But there is one place I don't mind spending money--on having strong agreements and contracts in place that protect my interests.

What I've learned is that in any deal there are 10-20 things you talk through and agree on orally. But there are another 30-50 things that you never discussed but yet still need to be established in your agreements. Things like governing law, venue for disputes, consequences of non-performance, etc.

When you let the other side draft the contract, you have to go back and negotiate out all those things and each time you do it's psychologically as if you have asked for a concession with each change they make.

That's why it is world's better for you to be the drafting party. Over the past twelve months I've spent over $20,000 on attorney's fees to write up contracts for me, but it's been worth every penny.

Mistake Two: Using one set of agreements for all circumstances.

This is a HUGE mistake.

You need one complete set of documents for when you are the buyer. Another for when you are the seller. And another for when you are the landlord. And still another when you are the lender. And another for when you are the borrower. And... You get the idea.

It is impossible for a real estate contract to give you adequate protection if you use the same document for both sides of the transaction.

I've spent over a decade investing in single family houses and condos and during that time I created a complete set of documents to use when I was a buyer. These documents had strong protections in them to lower my risk and add in extra profit centers.

For example, I built my BUYER purchase contract to make it simple and easy to buy the property "subject to" the existing financing. Plus I built in the clauses to "CYS" (Cover YourSelf) and protect me in that specific type of transaction.

Is this more work? Sure it is. But it pays for itself! Good contracts always do.

For example in my purchase contract Paragraph 8 "Conveyance" it specifically states, "If the actual loan balance of the above loan(s) is less than stated herein, the purchase price shall be reduced to reflect the difference."

What this means that if you are buying a house subject to what you and the seller think is $450,000 mortgage, but it later turns out that the loan balance is actually $440,000, the purchase price is reduced by that $10,000!

Yep, you just made $10,000 extra by having in one extra little sentence in your contract.

The reverse is also in the contract... to protect you in case the loan balance is HIGHER than what the seller tells you up front.

The point I'm trying to make is that you need to make sure you use specialized documents that are designed to protect your interests depending which side of the table you are on.

In fact, one clause in my lease option agreement (which gives you the investor any loan pay down over the life of the deal) has made me tens of thousands of dollars--with no extra work, with no extra time. I simply made sure the deal was written up correctly from the start on a document that was designed to help me earn that extra profit center. Remember, good agreements always pay for themselves.

Which brings me to the final mistake...

Mistake Three: Thinking that you'll be able to get your agreements just right out of the gate.

The way you create bullet-proof contracts is by using them in your dealings and finding the holes and cracks and then carefully correcting your agreements to make your contracts better for the next time.

I've been involved in the purchase and sale and lease of thousands of single family houses over the past decade. My students have literally bought and sold over $2 BILLION of real estate, and yet it took me close to 10 years to get my residential real estate contracts to the place they are today.

10 years... and tens of thousands in attorney's fees... and millions of dollars in actual profits (or losses) to get them to where they are today.

My point is that getting great contracts is an iterative process. That means that you will be constantly honing and refining your contracts over time to make them better and better.

For example, I once lost a $250,000 profit in a 10-year lease option deal I had on a property in San Diego. The seller's attorney used a clever legal trick to dispute the contract two years into the deal! At the time there was one clause in my agreement that wasn't in bold (you better believe it IS in bold now!) That one mistake allowed the seller to get out of the deal after I'd been dealing with the property for two years and it had gone up in value close to $100,000!

Was that fair? Who knows. It doesn't pay to ask a question like that. I simply learned from it and improved my agreements to make sure that it wouldn't happen again.

That's the way you get your agreements just right--you keep tweaking and fine-tuning as you go.