More fines for wholesaling in Ohio

​JOHN FROLA, JR. AND MUNICIPAL SOLUTIONS, LLC, Uniontown, Ohio, was found by the Commission to have violated Revised Code 4735.02, unlicensed activity, and was assessed a civil penalty in the amount of $20,000.00. The Commission found that John Frola, Jr. and Municipal Solutions, LLC sold, exchanged, purchased, rented, or leased or negotiated the sale, exchange, purchase, rental, or lease of real estate; offered, attempted, or agreed to negotiate the sale, purchase, lease, or exchange of real estate; listed, or offered, attempted or agreed to list real estate for sale; bought or offered to buy, sold, or offered to sell or otherwise dealt in options on real estate; and furthermore, held themselves out as engaged in the business of selling, leasing, exchanging, or purchasing of real estate without first being licensed under Revised Code Chapter 4735.
http://www.com.ohio.gov/documents/Fall10REdiscipline.pdf

LYNETTE S. MALY, Twinsburg, Ohio, was found by the Commission to have violated Revised
Code 4735.02, unlicensed activity, and was accessed a civil penalty in the amount of $500.00,
when she held herself out as engaged in the business of real estate, while not licensed under
Revised Code Chapter 4735.

SHARI L. MORTER, Stow, Ohio, was found by the Commission to have violated Revised Code
4735.02, unlicensed activity, and was accessed a civil penalty in the amount of $500.00, when
she held herself out as engaged in the business of real estate, while not licensed under Revised
Code Chapter 4735.



MIKE ZUREN, Willoughby, Ohio, was found by the Commission to have violated Revised Code
4735.02, unlicensed activity, and was accessed a civil penalty in the amount of $1,000.00. The
Commission found that Mr. Zuren, when in expectation of collecting a fee, commission or other
valuable consideration, held itself out as engaged in the business of selling real estate in a
publication and offered or attempted to offer, listed or attempted to list 20 real estate properties
in the publication, without first being licensed under Revised Code Chapter 4735.

SHARI L. MORTER, Stow, Ohio, was found by the Commission to have violated Revised Code
4735.02, unlicensed activity, and was accessed a civil penalty in the amount of $500.00, when
she held herself out as engaged in the business of real estate, while not licensed under Revised
Code Chapter 4735.

GARY UNDERHILL, Wooster, Ohio, as the result of an investigation of the formal complaint,
was found by the Commission to have violated Revised Code 4735.02, unlicensed activity, and
was accessed a civil penalty in the amount of $2,500.00. The Commission found that Mr.
Underhill attempted to or assisted in the negotiation of the sale, exchange, purchase, rental or
leasing of real estate on 47 occasions without first being licensed under Revised Code Chapter
4735.


PAM BALINT, Ravenna, Ohio, was found by the Commission to have violated Revised Code 4735.02, unlicensed activity, and was assessed a civil penalty in the amount of $3,500.00. The Commission found that Ms. Balint acted as a real estate broker or real estate salesperson without being licensed under Chapter 4735. Ms. Balint’s conduct included accepting phone calls inquiring about the subject property and directing or assisting in the procuring of a prospective buyer to purchase the subject property. In addition, on five occasions Ms. Balint advertised or held herself out as engaged in the business of selling real estate. She placed signs with her phone number on it in the subject property’s yard. She ran an ad in a newspaper regarding real estate for sale with her phone number and name. She provided a flyer marketing the subject
property with her name and phone number on it. She marketed the property on the phone on two occasions.

EVIE KIDDER, Akron, Ohio, was found by the Commission to have violated Revised Code 4735.02, unlicensed activity, and was assessed a civil penalty in the amount of $21,000.00. The Commission found that she consistently took actions to list, negotiate the sale of, sell a property, and made several requests to collect a commission on the sale of a property. Ms. Kidder acted as a real estate broker or real estate salesperson without being licensed under Chapter 4735.

TONY HOFFMAN, Akron, Ohio, was found by the Commission to have violated Revised Code 4735.02, unlicensed activity, and was assessed a civil penalty in the amount of $21,000.00. The Commission found that he consistently took actions to list, negotiate the sale of, and sell a property and made several requests to collect a commission on the sale of a property. Mr. Hoffman acted as a real estate broker or real estate salesperson without being licensed under Chapter 4735.

DIANE SHELTROWN, Waynesville, Ohio, was found by the Commission to have violated R.C. 4735.02, unlicensed activity, but no penalty was imposed. Ms. Sheltrown, on 2 separate dates, directed and assisted in the procuring of prospects which was calculated to result in the sale of a property and she intended or expected to receive compensation or other valuable consideration for the conduct.

MUNNA AGARWAL, Euclid, Ohio, was found by the Commission to have violated ORC 4735.02, unlicensed activity, and was assessed a civil penalty in the amount of $1,000.00. The Commission found that Mr. Agarwal agreed to negotiate and negotiated a potential purchase of property, agreed to list and listed, agreed to offer and offered a property for sale, advertised and held himself out as engaged in the business of selling real estate, directed and assisted in the procuring of prospects and in the negotiation of a transaction which was calculated to result in the sale of a property and intended or expected to receive compensation or other valuable consideration for the above conduct, while not licensed under Chapter
4735.

ELYHUE E. DUFF, Akron, Ohio, was found by the Commission to have violated ORC 4735.02, unlicensed activity, and was assessed a civil penalty in the amount of $1,000.00. The Commission found that Mr. Duff assisted in the procuring of a prospect and negotiation of a transaction, which was calculated to result in the sale of a property, wrote a sales contract for the parties, and intended or expected to receive compensation or other valuable consideration for the above conduct, while not licensed under Chapter 4735.

Ohio Department of Commerce releases Spring '14 disciplinary report

The Department of Commerce, whose job it is to regulate licensure of real estate brokers, recently released the first-quarter 2014 disciplinary actions. We're beginning to see the consequences of the new crack-down attitude of the ODC against unlicensed real estate wholesaling, which I have discussed earlier in this article.

Chad Fields, a person not licensed under Ohio Revised Code 4735, Delaware, Ohio, was ordered to pay a civil penalty of $930,000.00 for committing between the dates of about November 14, 2010 through on or about May 31, 2013, 930 violations of 4735.02...

GOA Realty, LLC, Cleveland, Ohio, a company not licensed under Ohio Revised 4735 was ordered to pay a civil penalty of $1,499,000.00 for committing between the period of August 23, 2010 until on or about March 17, 2011, 149 violations of 4735.02...

Our Wives Are In Charge, LLC, Akron, Ohio, a company not licensed under Ohio Revised Code Chapter 4735 was ordered to pay $82,000.00 for committing 82 violations of RC 4735.02...

Paul Marcel-Rene, Akron, Ohio, a person not licensed under Ohio Revised Code 4735, Akron, Ohio was ordered to pay a civil penalty of $82,000.00 for committing 82 violations of RC 4735.02...

Delitha Gail Sparks, a person not licensed under Ohio Revised Code 4735, Cleveland, Ohio, was ordered to pay a civil penalty of $1,499,000.00 for committing between the period of August 23, 2010 until on or about March 17, 2011, 149 violations of 4735.02...

 Wow, $1.5 million dollars for advertising on Craigslist. Get a license, people.

 

Ohio and the charging order

Ohio law now limits a creditor's remedy to the charging order when trying to get money out of an LLC.

For a more extensive discussion on what a charging order is, see my earlier article here.

The Ohio Legislature finally got around to limiting creditors' remedies when trying to gain assets to a debtor's cash in an LLC. As of mid-2012, the relevant statute now reads:

O.R.C. 1705.19 

(A) If any judgment creditor of a member of a limited liability company applies to a court of common pleas to charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest, the court may so charge the membership interest. To the extent the membership interest is so charged, the judgment creditor has only the rights of an assignee of the membership interest as set forth in section 1705.18 of the Revised Code. Nothing in this chapter deprives a member of the member's statutory exemption.

(B) An order charging the membership interest of a member of a limited liability company is the sole and exclusive remedy that a judgment creditor may seek to satisfy a judgment against the membership interest of a member or a member's assignee.

(C) No creditor of a member of a limited liability company or a member's assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company. (Emphasis mine.)

This is great news for investors with Ohio LLCs. No longer can a creditor, in an effort to clean you out of your personal assets, go to court and petition for a firesale of your LLC assets. They can only gain access to the distributions you would normally be entitled to in normal business.

The charging order: a debtor-friendly LLC law

LLC gurus have often pushed novice investors to organize their LLCs in Nevada or Wyoming or some other faraway state. The charging order is usually the reason why WY or NV are considered "investor friendly."

Let's consider a brief scenario. You own an LLC that holds several rental properties worth over a million dollars. It's your only substantial asset besides some money in the bank and other personal property. One day, when you're backing out of your driveway, you accidentally run over and seriously injure a neurosurgeon who is walking to work. He's out of work for two months, and after he recovers, he sues you personally. The court finds you liable to the doctor for $1 million in lost wages, pain and suffering, etc. 

The neurosurgeon's lawyer realizes that your cash in the bank is not going to cover the judgment, so he tries to get the assets in your LLC. In many states, the doctor can ask the court to foreclose on your ownership shares of the LLC, thus permanently depriving you of ownership of that LLC and all its property. He can also ask for the court to force a sale of the LLC's assets and a distribution of all the cash proceeds to the doctor.

The reason why WY and NV are so favorable to debtors is because their states statutes only allow our doctor-creditor to do one thing to get his money back--he may only ask the court for a "charging order." Literally, a creditor asks for a court order to charge the debtor's membership interest, which means that the creditor gets whatever distributions the debtor would ordinarily be entitled to by the operating agreement. That is the only remedy available to that creditor.

The beauty of this protection is that one can write an LLC operating agreement in such a way that the LLC is never obligated to distribute any money, and thus that creditor will never get any money. What results is a sort of a standoff between creditor and debtor. While it may be true that the creditor can be more patient than the debtor, this also buys time for the debtor to make alternative arrangements to pay the debt without having a creditor force a firesale of all the LLC's assets at deep discounts.

Wholesaling - A Brief Legal Analysis

It's my opinion that wholesalers are fighting a losing battle with state real estate commissions.

Don't misunderstand my motivations here--I don't like licensing statutes (not even, as it were, state bar examinations and licenses). The ethics that these licenses are supposed to bring to their respective professions seem never to materialize in practice, and the licensing fees just keep going up every year. We've created a bureaucratic machine that doesn't have much incentive to police the profession. The bureaucrats and the diploma mills (who shouldn't be called "colleges" at all, as that's an insult to real institutions of higher learning) are the ones who are making money off the rest of us. Those people who need cheaper services or creative arrangements are denied service because they don't fit the mold of the real estate broker's business model.

Let's put aside the political diatribe for a minute and examine what's really going on here. Some time, many moons ago, Ohio passed a statute that requires real estate agents to obtain a license. The law says this:

(A) "Real estate broker" includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:
(1) Sells, exchanges, purchases, rents, or leases, or negotiates the sale, exchange, purchase, rental, or leasing of any real estate;
(2) Offers, attempts, or agrees to negotiate the sale, exchange, purchase, rental, or leasing of any real estate;
(3) Lists, or offers, attempts, or agrees to list, or auctions, or offers, attempts, or agrees to auction, any real estate;
(4) Buys or offers to buy, sells or offers to sell, or otherwise deals in options on real estate;
...
(6) Advertises or holds self out as engaged in the business of selling, exchanging, purchasing, renting, or leasing real estate;
(7) Directs or assists in the procuring of prospects or the negotiation of any transaction, other than mortgage financing, which does or is calculated to result in the sale, exchange, leasing, or renting of any real estate;
(8) Is engaged in the business of charging an advance fee or contracting for collection of a fee in connection with any contract whereby the broker undertakes primarily to promote the sale, exchange, purchase, rental, or leasing of real estate through its listing in a publication issued primarily for such purpose, or for referral of information concerning such real estate to brokers, or both, except that this division does not apply to a publisher of listings or compilations of sales of real estate by their owners....

There are a few more prohibitions, but you get the point. The prohibition in this law can be summed up pretty succinctly like this:

If you negotiate a real estate transaction on behalf of another, and you make money from it, you need a license. 

The argument of the typical wholesaler (or rather, the guru argument taught to the newbie wholesaler) is that "since you have the property under contract, you're exempt because you're selling something you own." Aha! Yes, they're right, there is an exception under the statute for real estate owned:

(1) The terms "real estate broker," "real estate salesperson," ... do not include a person...who perform[s] any of the acts or transactions specified or comprehended in division (A) of this section...:
(a) With reference to real estate situated in this state owned by such person, partnership, association, limited liability company, limited liability partnership, or corporation, or acquired on its own account in the regular course of, or as an incident to the management of the property and the investment in it;

 Well, this is a problem. The statute references "real estate owned," not (1) real estate under contract, or (2) contractual rights owned. If you're going to skirt the licensing statute, you need to be selling real estate you own, and that's pretty clear according to the text above. So we're not going to find any comfort in this exception.

The only other way we can argue our way out of this box is if we claim that the transaction isn't a real estate transaction at all, but instead a simple transaction exchanging contractual rights. The question that we have to ask (and that the real estate commission will ask when they're considering whether to fine you $1,000 per day) is whether that's what is really going on here. Let's review the facts in a typical wholesale transaction:

1. Seller sees a "We Buy Houses" bandit sign or postcard, and calls the number.
2. Wholesaler inspects the house and executes a contract to purchase the house with the seller, probably telling the seller that he's going to find a buyer for the house
3. Wholesaler puts an ad on Craigslist or to an email list, stating "House For Sale"
4. Wholesaler fields calls from buyers and executes an assignment of contractual rights to buyer.

The disconnect is at #2 and #3. In both of those items, the seller is acting a lot like a real estate broker. He told the seller that he would market the property, and he offered to sell a house to the buyer. To accomplish #3, he probably had to do some advertising of a house for sale, which is expressly prohibited without a license (see (A)(3), above). 

The whole transaction is a sham designed to fool people, because the wholesaler knows full well that his only relationship with the seller is one where he agrees to market the property to another buyer. At no time in the transaction did the wholesaler have an intent to go to closing without finding a substitute buyer. This is where the real estate commission has a problem. No matter how many documents or complicated contracts are executed among trusts or LLCs or third parties, one fact stands out: a buyer and seller are being brought together by an independent third party, the wholesaler. Or in this case, we ought to say "unlicensed broker."

Ethical considerations

There's another problem with item #1 above in the wholesaling procedure. The "We Buy Houses" sign is misleading. It's a flat-out lie for most wholesalers, who never buy houses on their own account but instead find substitute buyers. It's fine to post a sign like that if you're a member of a syndicate that buys houses, but if you're only acting as a middleman--or a broker--you're doing nothing of the sort. Take that sign down before someone complains to the real estate commission about unlicensed activity. It's coming, sooner or later--Grandma finds out you made $3,000 assigning your contract to buy her house to a third party, even after you had tea with her and she thought you were "such a nice boy." This is the prime source of your risk, and it serves you no good to lie about the nature of the transaction.

Indeed, ethics are the primary justification for licensing statutes like this one. A profession like real estate brokers is expected to self-regulate, and the revocation of a license is meant to exile the bad apples from the business. The ones who make misrepresentations like "We Buy Houses," for instance. It seems like a trivial white lie, but at the end of the day, it is still a lie, and that's not looked upon kindly by courts of law.

Wholesaling is still an unsettled question of law and there is no case law out there in any state about the legality of the procedure. That having been said, if you're a wholesaler, I'd like you to give careful consideration as to how you conduct your business, and make sure that your #1 concern is to avoid any bad blood between you and your buyers and sellers. A disgruntled customer is liable to complain to the real estate commission, and given their recent broadcasts, the commission might think that you're deserving of that $1,000 per day fine.

THE INFORMATION ON THIS BLOG IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE LEGAL ADVICE. PLEASE CONTACT AN ATTORNEY LICENSED IN YOUR JURISDICTION BEFORE ACTING ON ANY OF THE INFORMATION CONTAINED IN THIS BLOG.

LLCs and Residential Mortgage Financing

LLC or not?  There's a parade of gurus and booksellers urging us constantly to form trusts, LLCs, offshore partnerships and pay them for their kits to do it. All of these have their place, but the easiest way to achieve our protection goals is to hold all rental property in one or more LLCs.

It sounds cheap and easy, but as with many other critical factors in real estate, the question is TIMING!

When is the right time to quitclaim our property into an LLC?

The answer to this critical question has to do with how banks lend to investors. There are generally two types of purchase money mortgage loans written in today's markets:

1. Residential conforming loans

- Lowest interest rates available (currently about 4.5-5%)

- 30 year terms

- Fixed interest rate for entire term of loan

- 20% down

- Lender will generally only write these loans for an investor purchasing property in their personal name

- Limit 10 per person

2. Commercial loans

- Higher interest rates (the lowest I've seen lately is 5.5%)

- Usually 20-25 year terms

- Sometimes a bank will offer a fixed rate, but most are 5/1 ARM (adjustable rate)

- Lender has the flexibility to write a loan in the name of any entity, including an LLC

- Usually 25% down or more

Usually the lender has plans to sell off residential loans into the residential secondary mortgage market (hence why they are "conforming" to the standards of the market). In contrast, the lender usually plans to hold a commercial loan in its own investment portfolio for the term of the loan. So usually you'll only see smaller banks writing commercial loans - my first one came from a bank who primarily lent to the Amish!

Purchase agreement. So whose name is going on the purchase and sale agreement - your own, or your LLC's? The answer is whether you want to end up with a residential conforming loan or a commercial loan. Since the residential conforming loan offers favorable terms, we definitely want to use all of these loans for our ten most expensive properties. 

The due on sale clause. Many investors will buy in their own name with a residential conforming mortgage and then quitclaim the property into their LLC's name. It is a widespread practice. A note about this: it's not without risk. Every residential conforming mortgage has a due on sale clause which gives the lender the right to foreclose if title has transferred. Quitclaiming a property from one's personal name to an LLC triggers this clause, but the lender doesn't have to do anything. In this market, most banks are happy to have a performing loan at all, so they likely aren't going to foreclose simply because an investor quitclaimed the property into a wholly-owned LLC. In the event that interest rates double, however, it's possible that banks might go hunting for defaults on low-interest fixed loans -- and you might be forced to refinance. At this time, it's a non-issue, but it's always something to keep in mind.

Cash out refinancing. One strategy is to buy with cash or a commercial loan and then later refinance into a residential conforming loan, pulling cash out of that property. This strategy works best when buying a house that needs substantial rehab. The problem you'll run into here is seasoning. A lender is going to require you to hold a property in your personal name for 6 to 12 months before refinancing. This means that you can't simply deed the property from your LLC's name to your personal name the day before closing the refi. (Sometimes banks will write a HELOC without a seasoning period - more on this in a future post). So in order to execute this strategy properly, you'll have to have some idea as to what your plans are in 12 months.

Portfolio loans. Once you hold more than 5-10 properties, you'll want to find a commercial lender who is able to combine multiple properties onto a single mortgage. The seasoning period will likely still apply, and commercial loan terms will apply, but potentially you can seek financing for an unlimited number of properties based solely on their valuation and cashflow.

Wrapping up. Try your best to find a bank that will write commercial loans for your properties, even if you don't plan to get one right now. It's useful for planning purposes to have a contact at that bank to pick his or her brain about the requirements. And as always, have a 12-month plan in mind!

How to get a bank to loan you cash

We detailed the traditional types of financing available to residential property investors in an earlier post. To recap, when you're about to sign a purchase agreement, it's important to consider whether you want the property to be titled in the LLC's name or your own personal name. Generally, it boils down to this:

LLC - Commercial mortgage
Personal name - Residential conforming mortgage.

90% of banks will not write a mortgage for an LLC, period. This is because they cannot sell the mortgage on the secondary market. The key to getting a commercial loan is to find a bank that is a portfolio lender; that is, a bank that holds and services its own loans for the entire term. These banks have the ability to be more flexible with its lending standards, as opposed to Big Behemoth Bank, which makes a cottage industry from churning out conforming FHA loans on single-family houses, dumping them to Fannie Mae on a regular basis to raise capital.

Planning for success. Here are some of the relevant questions to ask yourself when trying to determine what kind of financing you should seek:

1. Does this property need substantial rehab?

If you're putting more than $25,000 into a property, you might want to consider planning for a cash-out refinance into a residential conforming loan. Call your lender of choice, find out what their seasoning rules are, and mark your calendar for when you'll be able to do a cash out refinance. Follow their rules - hold title in your personal name for as long as they instruct you to - and be prompt about submitting that mortgage application.

A local bank in my area does a purchase-rehab loan with commercial terms. You send your rehab estimates and purchase contract, and they add them up and lend you 75% of the balance. These can be tremendous tools to streamline your business.

2. Is the purchase price less than $70,000?

Most banks won't write residential conforming loans with a principal of less than $50,000. It's difficult to find banks who will do otherwise, and you might be forced to go commercial here. In addition, closing costs tend to be fixed - between $1500 and $4000 - and borrowing less than $50,000 means that your total APR is going to be upwards of 7%, and most people would rather not borrow money at that rate.

3. Is this property one of the highest-priced property I plan to have in my portfolio?

If your potential purchase is going to be one of your more expensive acquisitions, you may want to consider a residential conforming mortgage as your endgame, since the favorable interest rate will have a larger impact on your ROI.

4. Do I plan to own more than 10 properties in 12 months?

If you're planning to ramp up your purchase activity by the time the seasoning period is up, you might not need to worry about what kind of mortgage you're seeking at this stage because you can refinance into a blanket mortgage from a small lender. If you're working in an area with low-priced properties, it might be advisable to plan to do this in order to keep closing costs low.

Beware Ohio Wholesalers - ODC Indicates It Will Prosecute

The legality of wholesaling is a much-debated topic. I'll save my own opinion for another post, because this one is about recent signals from Ohio Department of Commerce, Division of Real Estate.

The Division publishes a quarterly newsletter about real estate licensing topics, which also includes a list of disciplinary actions taken by the ODC and the Ohio Real Estate Commission. In the Spring, 2014 issue, an article appears on page 6, entitled "BEWARE: Seminars That Teach Unlicensed Real Estate Activity." Below is an excerpt from the article:

"Beware of seminars that provide instructions on wholesaling and option purchase contracts. Language included in these schemes include: “tying up the real property,” putting the house in contract until a buyer is found, and placing the home in contract for the purpose of re-selling the property. Despite what is being taught at these seminars, a real estate license is required to engage in these activities."

The division goes on to warn licensed brokers that they may be on the hook for discipline if they permit wholesaling activity.

"R.C. 4735.18(A) (34) provides that discipline may be imposed on a licensed real estate broker or salesperson for authorizing or permitting a person to act as an agent in the capacity of a broker or salesperson who was not then licensed as a real estate broker or salesperson. Steer clear of any individual, group, organization or otherwise that is promoting unlicensed activity...."

We've read indications on this forum here and elsewhere that Ohio has been recently going after wholesaling with a more aggressive stance. If you're a wholesaler in Ohio, be careful. If an upset buyer, seller or broker decides to file a complaint against you with the ODC, you might be on the hook to explain your activity or face a $1,000 per day fine.

For buyers: How to cancel a real estate purchase agreement

For many first-time real estate investors, purchasing their first property will be the first or second time they'll make a large transaction. The number of risks involved in real estate investing can fill our hearts with doubt.

For the doubters, you're in luck. Standard real estate purchase contracts are written to favor the buyer. There are several stages to the real estate purchase process:

1. Buyer sends an offer (or a counter-offer), along with an earnest money check (usually $1,000)
2. Seller accepts offer
3. Buyer's agent deposits the earnest money check into an escrow account
4. Buyer has a certain period of time (usually 10 days) to conduct an inspection of the property, and either accept the property as-is, or request that the seller perform repairs
5. Buyer has a certain period of time to obtain a loan commitment from a lender
6. If conditions (4) and (5) are satisfied, the property goes to closing, usually 30 days out.

Conditions (4) and (5) are the keys to a buyer's salvation when getting out of a purchase contract. Let's outline both of these.

The inspection contingency

Your realtor typically provides a standard form purchase contract with a home inspection contingency. During this time you'll have the opportunity to send in a home inspector, who will produce a detailed report about any needed repairs and send it to you. When you receive this report, you typically have three options: (a) accept the property as-is, without faults, (b) request that the seller make repairs, or (c) reject the property due to "latent defects."

The last one is the key -- there are always latent defects in every house, and it's the inspector's job to find them. No matter how much the seller discloses beforehand, some problems are always going to be missed. If you need to get out of a real estate purchase contract, you'll be able to use the inspection contingency to terminate the contract and get your earnest money back. Just be careful not to wait too long to do it -- in some contracts, the inspection contingency expires automatically after a certain number of days if you don't send a response to the seller, in writing.

The loan commitment

Standard purchase contracts typically protect the buyer in situations where the bank is unable to finance the property. Generally, the only thing the contract requires the buyer to do is to make a written application to the bank within a certain number of days. After that, the contract is conditioned on the bank providing financing -- that is, the buyer can't lose the earnest money deposit simply because the bank can't lend to the buyer.

How can we use this to get out of a real estate purchase contract? This depends on what kind of relationship you have with your mortgage loan officer. If, for any reason, the bank didn't receive the documentation it requires to close the loan, or you're unable to sign papers, the contract will automatically cancel. The bank certainly isn't going to loan to an unwilling buyer.

Conclusion

Most realtors are very familiar with these two "back door" provisions in real estate purchase contracts, and because of this, they're not surprised when a buyer expresses a desire to get out of a contract. Oftentimes, realtors and sellers don't even observe the procedure and will simply cancel a contract at the buyer's request. If you do find yourself in need of cancelling a real estate contract, be aware of the two major ways to get out of it, and be mindful of the deadlines for doing so.