Closing a real estate deal involves signing a wide range of contracts and agreements. Whether you are a property seller or an investment property buyer, it is essential that you understand the implications of each one. In fact, this is the only way to ensure that your interests are well-protected. One particular real estate contract that is seldom talked about outside inner real estate circles is the hold harmless agreement. What is a hold harmless agreement in real estate? Why is it included in a real estate transaction? And should you sign a hold harmless agreement when buying an investment property? This article will provide you with detailed answers to all these questions and demystify every aspect of the real estate hold harmless agreement.
What Is a Hold Harmless Agreement in Real Estate?
The hold harmless agreement in real estate is a contract that transfers all property liability from the seller to the buyer. The hold harmless clause can be negotiated directly between the two parties and might even involve a closing agent who is looking to protect him/herself from future liability. Generally speaking, all parties should be aware of the reasons why the clause is there.
The most common use of the hold harmless agreement in real estate are deals involving foreclosed homes. When closing foreclosures, there are often lien issues that can take months to resolve. Including a hold harmless agreement allows the seller to transfer the responsibility of resolving them to the buyer.
Now that you are familiar with the concept of the hold harmless agreement in real estate, let’s examine whether or not you should sign it and outline some of the best practices that you should implement during closing.
Should You Sign a Hold Harmless Agreement in Real Estate?
The notion of hold harmless agreement in real estate intimidates a considerable number of real estate investors. This is especially the case for novice investors. The existence of a clause that transfers all liability to the buyer might even prompt them to back away from the real estate deal. Needless to say, this is an erroneous misconception. In fact, there is nothing insidious about a hold harmless agreement in real estate and the use of such a clause is actually commonplace in the housing market. Investors who refuse to sign them might end up losing out on a highly profitable real estate investment.
This is not to say that a hold harmless agreement in real estate is something that you should sign hastily. Agreeing to such a clause should only happen after you have understood all the implications of the contract. Here are some of the steps you can take to ensure a smooth deal.
1- Consider retaining the services of an attorney
The simplest way to handle a hold harmless agreement in real estate is to hire a real estate attorney. Working with an experienced attorney will help you avoid the common pitfalls of distressed property investing. This is especially advisable for beginner real estate investors. An attorney can do the necessary due diligence on your behalf and inspect every aspect of the contract to make sure that everything is in order.
2- Talk to local authorities
When investing in REO properties or any other type of distressed real estate for that matter, you always need to take extra steps when assessing risk. Several things can go wrong the moment you close the deal and critical issues may only come to the surface months after the sale has gone through. With that in mind, you should sign a hold harmless clause only after understanding the full scope of liabilities that comes with it. This is why talking to the county where the transaction is taking place is essential before signing the agreement. In fact, a local administrative division can give you a detailed breakdown of all the liens and liabilities that are associated with the investment property.
3- Do a title search
A title search is extremely important when investing in real estate. This is even more so the case when you are taking on a host of potential liabilities. Working with a title search company will allow you to check the validity of the title and uncover any issues with the chain of ownership. Even if the seller claims to have performed their own title search, you should always conduct one of your own before signing the hold harmless agreement in real estate.
4- Conduct an inspection of the investment property for sale
Checking the title and liens are not the only things you should do when dealing with a hold harmless agreement. Before signing the contract, you need to carry out a thorough inspection of the property to ensure its structural integrity. Preferably, a licensed professional should handle the inspection process.
Can You Opt-Out of the Agreement Even After Signing the Contract?
This is a question that is frequently asked by property investors who are still unsure about signing a hold harmless agreement in real estate. Generally speaking, opting out is not feasible if the buyer was made aware of all the liabilities that come with the investment. However, there are certain cases where the seller has deliberately withheld information from the buyer. In this situation, you can sue for material misstatement of facts long after the transaction has been finalized. Attorneys who specialize in fraud litigation are the ones who usually handle these cases.
The Bottom Line
The hold harmless agreement in real estate should never deter you from purchasing an income property. As long as you stick to the guidelines outlined in this article and take all the necessary steps to understand the liabilities you’re taking on, signing the agreement should be a non-issue. If your real estate deal falls through because of a hold harmless agreement, then head to the Mashvisor Property Marketplace and check out the supply of foreclosures and other off-market properties!
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