Ethics

Ethics

Do unto others as you would have them do unto you. Never lie. Never mislead people into a material misunderstanding of the benefits or risks of the transaction. You may ask any question. You may decline to answer any question, especially when it’s private information, like your anticipated profit. Negotiate the best ethically viable transaction for you. Walk away or find a competent advocate for the other side when they are incapable of understanding the transaction.

Many states have enacted “good faith” laws that require the parties to the contract to act in good faith to complete the transaction. If you include too many contingency (“weasel”) clauses to allow you to cancel the contract and recover your earnest money deposit, then you may be in breach of the law and a judge may set aside your contingency and force specific performance on you. Your contingency clauses must be specific to the transaction without regard to immaterial issues outside of the transaction. You can have a “financing” contingency (it relates to your capacity to perform), but not a “subject to buyer approving a 3rd party assignee” contingency. If you have no duty to perform as a buyer, then your duty is to act as a broker and you must have the legal credentials for that duty.

If the bilateral purchase contract specifically states that your duty is to find a 3rd party assignee without recourse to you to perform on the contract, then you may be subject to broker licensure laws. You’re not subject to broker licensure as a principal party of a unilateral option contract or when you have a limited power of attorney to act on behalf of the principal.

As attorney-in-fact for the principal, you can sign the principal’s name and attach a copy of the limited power of attorney with an original principal signature to bind the principal to the contract. You also have a private Personal Services Contract that provides for your compensation in whatever way that you and the principal may agree. Talk to your attorney to learn how to use a limited power of attorney to act on behalf of a principal.

This is why I include calculations for the loss of the earnest money deposit or the loss of the option consideration for expiration of the option contract, rather than recovering the investment for a failed contract through an immaterial contingency.

If you have real money (or a promissory note) at risk for liquidated damages in the event of default, then you are protected from breach of “good faith”. A promissory note to be redeemed for good funds after satisfaction or removal of all contingencies is also considered real money. Never offer a note that you know you cannot redeem. An earnest money deposit is not required for a legally binding contract, but you will have difficulty enforcing your contract without a reasonable earnest money deposit, because the judge may not see that you have anything at risk. Option contracts are easier to enforce, because of the non-refundable option consideration and the recorded memorandum.

Of course, you can include short-term due diligence contingencies to be sure that the property conforms to your estimates for repairs, insurability, and After Repair Value (ARV). You cannot use a weasel clause to cancel the contract just because you cannot find an assignee for your contract. Your ability to find a 3rd party assignee is an immaterial issue with regard to your capacity to perform your duty as a buyer in your contract with the property seller.

You can include a contingency to cancel the purchase & sale agreement in the event that another of your submitted contracts that are pending on other property is accepted, because that relates to your capacity to perform. In general, you cannot cancel an option contract after the inspection period without forfeiting your option consideration payment.

You provide a valuable service to the property seller and to the property buyer. Never enter into a transaction that the other side believes is unfairly exploiting their situation. Distressed sellers and motivated buyers need your solutions to solve their problems and you must earn a profit for your services. If they disapprove of your pricing, then they are free to select the services of someone else. That is a critical free market concept called, “price discovery”.

In a free market society, both buyer and seller must be thrilled to complete the transaction, each from their own informed perspective. The transaction must add value by delivering quality goods and services to society. Wholesaling strategies provide benefits to each side of the transaction.

Be Sociable, Share!

Comments are closed.