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Writing Good Real Estate Contracts

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A well-written contract has much more value when sold than one with loose conditions or one which is so strict as practically to guarantee default. But writing good contracts is as much art as it is science, and in this section we present some tips which make contracts more valuable. If you are writing contracts with an eye toward selling them later, here are some points to keep in mind.

Down Payment

Generally "the bigger, the better". But the buyer usually wants a small down payment. What is reasonable depends on the buyer's credit rating, the type and condition of the property, how badly the seller want to sell, and the general market conditions, to name a few issues.

Let's say that a property is a "fixer-upper" and it is for sale "as is" (which, by the way, is not generally recommended). The seller will take a smaller down payment than if the property is in excellent condition. If the property is vacant land then the down payment will be smaller than if it is a highly improved property.

If the buyer has a credit score of 525, a larger down payment is required than for someone with A+ credit. Usually a large down payment (say 20% or more) eliminates the really high risk buyers. But it also can eliminate some good candidates as well. Generally, a 10% down payment is recommended.

In addition, a buyer may have only a small down payment available now, but can add to it significantly within the next several months. A seller may want to write the contract with a "deferred down payment" clause.


"The sooner the better" is the rule when we're talking about getting paid. Shorter terms are desirable. But the buyer usually wants the opposite: a very long term and must have motivation for accepting a shorter term.

You can offer a slight reduction in interest for a shorter term. For example, say the buyer wants a 15 year term, and you've already agreed on an interest rate of 10%. You can offer to take 9.5% if the buyer will go for a 10 year term. This will save the buyer a considerable amount of interest over the total term, and you can sell the contract for a higher price.

Another technique is the "balloon payment". Often times houses are sold on 20 or even 30 year amortizations, with a five year "call", or balloon payment. If you want to sell the contract, having the balloon payment clause increases the value of the contract. (Remember, "the sooner the better".) However, the balloon payment has to make sense. Is it feasible to expect the buyer will be able to meet the balloon? If we're talking about a hard to finance property, the balloon probably won't be paid. But if the buyer just needs some time to solve some other problem, then it is likely the balloon can be met.

Step Increases

What if the buyer just won't agree to a balloon payment, or if the property is a type not likely to meet institutional financing requirements? Perhaps "step increases" in the payments are the answer.

For example, say we have a mobile home with land package selling for $50,000, with $5000 down, 10% interest, and monthly principal and interest payments of $450 per month. If you set the payments up for $450 for the first two years, then a $25 increase to $475 for the next two years, followed by one final "bump" to $500 after the end of the first four years, this shortens the term significantly, saves the Buyer a lot of interest over the new, shorter term. This can be an excellent selling point to the buyer for step increases. And it adds to the cash value of the contrtact.

Late Fee Clauses

People have come to expect "grace periods", but a long grace period with a small late fee seems to encourage tardiness. You will do much better to have a reasonable grace period (seven days, for example) and a significant late fee, such as 10% of the payment. This will encourage timely payments and help compensate the payee for those times the payments are significantly late.

Other Good Practices

There are some other points to keep in mind when writing a real estate contract:

Financing Policies
Writing Good Real Estate Contracts
Go!Why Use Seller Financing?
Ten Common Mistakes in Real Estate Contracts
Real Estate Contracts vs. Notes and Mortgages