What the heck is a liquidated damages clause?

Hello all,

I heard this might be good for wholesale deals. There’s a guru that says its good to combine this with a inspection contingency clause. Any clues?



PS - I thought inspection contingency clauses kills deals. Now its OK? A little confused here.

Howdy Chairman201:

If you get a house under contract and decide not to buy it the seller can sue you if you have passed your inspection period or mortgage time. A liquidated damage clause is a prior agreement where you both agree that the damages although they may be more severe will by $$$ amount and no more. Something like that.

You have the right to inspect the property to make sure you want to buy it and inspections can kill deals. If you find that the septic system needs completely replace for instance and the seller will not fix it then that may kill the deal. A lot of new investors think that you can cancel the contract automatically. This is not true. The seller has the right to fix problems and still get the house delivered to you in the repaired condition. There is an option period in some contracts where for a small amount you can walk away for any reason and only lose that small amount. As an example I have a 30,000 foot building under contract for $165K with $500 earnest money and $100 of that is option money where if I walk away for any reason before the inspection period is over I have the right to receive the $400 and the seller gets the $100.

Hey Ted,

Isn’t that option part of the Texas Real Estate Commission (TREC) P&S contract? I distinctly remember seeing that towards the end of the contract. This is a nice option to have and I’m glad TREC saw fit to put it as part of their contracts.

Paragraph 15 of the TAR contract states that if the buyer defaults, , “the seller may enforce specific performance…and receive the earnest money as liquidated damages, thereby releasing both parties from this contract.” It’s a relatively long section, but the contract includes language for the option fee, earnest money, etc.