We’ve got another great question today from a reader…
When you share some of your deal stories, I’ve heard you talk about protecting yourself when you feel threatened in a transaction like someone’s not going to keep their agreement. Can you explain better what that means and exactly how I would do it?”
If you’ve ever been involved in team sports then chances are you’ve heard the saying, “The only real defense is active offense.” This little adage can also fit your real estate investing ventures.
When first starting out, it’s easy for the newbie investor to assume all parties in a deal will be trustworthy. Then one day, the $%!# hits the fan and you wake up to realize there are those who don’t stick by their original agreement. We call them deal thieves.
Follow Your Gut
If you feel threatened, it’s a good idea to follow up on that gut instinct and set things up in order to protect yourself and your business. In my own investor business I use a document known as an Affidavit of Equitable Interest.
Let’s say you’ve found a great deal and the seller is highly motivated. This seller really needs to get loose of this house; he’s more than ready to sign the agreement that you present. He’s so ready in fact, that you have a strong hunch that if another investor arrived on the scene with a higher offer, this seller would jump at the chance.
What to do? How can you put yourself on the offensive in order to defend your position as the buyer? This is where the Affidavit of Equitable Interest comes to the rescue.
This is an amazingly simple document. The best part is that this document is totally one-sided. That is to say, one-sided in your favor. You fill in your name and contact info, and the address of the property in which you have the equitable interest. (Meaning you are determined to buy this property!)
Cloud the Title
The next step is to have this document notarized making it completely legal. Remember that the wording on such legal documents can vary from state to state or from county to county. Because of that, it’s a good idea to have a real estate attorney look it over. Or you could also simply match it with the wording you see on other legally notarized, recorded documents.
You’re ready to take the document to the county court house and file it. This may cost around $7 to $15. Once it’s filed, you have announced to the world that you have an equitable interest, and you have now clouded the title on this one piece of property.
The Case of the Forgetful Seller
Now let’s say that another eager investor approaches the seller offering a higher price and dollar signs start shining in the seller’s eyes. He may tend to forget his agreement with you.
Investor number 2 draws up an agreement with the seller and takes it to his closing company to do the paper work – which includes the title search. The first thing they will see is the Affidavit of Equitable Interest that you filed. This cloud on the title means this buyer cannot purchase title insurance. No title insurance; no sale of property.
This seller is now faced with two options.
- Come sheepishly back to honor their agreement and sell to you, or
- Come to some other arrangement with you to get you to clear the title (usually by signing and recording a second affidavit).
Either way you come out ahead.
Think of how powerful and how simple this one step can be. You have set up a strong offense to defend yourself against a possible deal thief.
I’m not saying you’ll need to take this type of action with every deal you put together. The longer you’re in this business, the sharper your people skills will become. What I mean is you’ll be able to read people. This gut instinct will help you to know when to use the Affidavit of Equitable Interest for your protection.
A New Tool
It’ll be yet another valuable tool in your ever-growing investor toolbox.
Use it wisely.
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