Real Estate Investing in the Real World
Real Estate Blog
SATURDAY, SEPTEMBER 01, 2007

I’ve often stated on this blog that real estate is an endeavor that rests largely on the investor’s ability to build and maintain relationships: with buyers, sellers, real estate professionals, tenants, neighbors, and a host of other stakeholders.

The keys to managing relationships are of course numerous and complex. There is one that we often overlook, however: the contract.

Robert Frost said that “good fences make good neighbors”. The same can be said for a well written contract. Clear, honest communication is one of the things that helps build and maintain relationships, and there’s nothing like putting your intentions down on paper if you want to expose potential future rifts and conflicts.

I just entered into a contract with my Realtor to manage a multi-family property that I bought with her assistance. This is an agent that I’ve worked with for years and we’ve developed a healthy, symbiotic relationship based on trust and mutual benefit. We do a lot of things off the cuff (just get it done and we’ll settle later) just because it helps us to stay flexible and get things done. However, that’s not how I wanted to handle this particular arrangement.

In my opinion there are a couple important things to remember about contracts.

1) Sweat the details and address the hard issues head on. By spelling things out you make your intent clear. Your goal is to write a contract in which there is very little latitude for interpretation. The process of writing the contract can do wonders in terms of partner alignment. In my opinion, the definition of a good contract is one that sign and then stick in a file and never look at again.

2) One size doesn’t necessarily fit all. You’ll often start with a standard contract, say for property management or residential lease. Don’t be afraid to adapt or modify to suit your unique situation. For example – what I need from a property manager differs fairly significantly from the service that most full service property managers offer (I’ll write about this in a future post) so I’ve tailored our agreement appropriately.

For critical agreements (like joint investment partnerships, etc.) it’s always important to get counsel from a qualified lawyer (which I’m not). But some of this stuff you can do yourself. There are great references on the web that have contract templates. A new one is the Microsoft reference which has all sorts of contract templates from FindLaw.com, including a Property Management contract .

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Comments(56)
posted by: Chris Smith
Comments
September 01, 2007
07:05 PM
Where were you when I was going through my "I can trust everyone, and don't need a contract right now" phase. You Frostesque spin on the need for contracts is 100% spot on.

I can't tell you how much that one thing has cost me in real estate deals. The most recent example is a development in Nashville that an ex-friend of mine nailed me on for $3MM.

Good post... all should take heed.
September 01, 2007
07:50 PM
1wealthbuilder: Thanks for sharing. Funny how a bad experience can be such a great teacher.

Note that I'm still a big proponent for the need for trust. Here's my take:

No trust + no (or bad) contract = train wreck, lawsuits

No trust + good contract = litigous, tense, unprofitable relationship

Trust + no (or bad) contract = poor alignment, misunderstandings, friends turn into ex-friends (as per your example)

Trust + good contract = streamlined partnership that can focus on solving problems.
April 10, 2008
08:19 PM
Chris,

Your comment to 1wealthbuilder is insightful. I recommend you expand it into a separate post so it gets the airtime it deserves.
Good post, keep up the good work.
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1wealthbuilder: Thanks for sharing. Funny how a bad experience can be such a great teacher.

Note that I'm still a big proponent for the need for trust. Here's my take:

No trust + no (or bad) contract = train wreck, lawsuits

No trust + good contract = litigous, tense, unprofitable relationship

Trust + no (or bad) contract = poor alignment, misunderstandings, friends turn into ex-friends (as per your example)

Trust + good contract = streamlined partnership that can focus on solving problems.
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1wealthbuilder: Thanks for sharing. Funny how a bad experience can be such a great teacher.

Note that I'm still a big proponent for the need for trust. Here's my take:

No trust + no (or bad) contract = train wreck, lawsuits

No trust + good contract = litigous, tense, unprofitable relationship

Trust + no (or bad) contract = poor alignment, misunderstandings, friends turn into ex-friends (as per your example)

Trust + good contract = streamlined partnership that can focus on solving problems.
October 11, 2009
10:22 AM
Trust + good contract = streamlined partnership that can focus on solving problems.
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Trust + no (or bad) contract = poor alignment, misunderstandings, friends turn into ex-friends (as per your example)
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