Contracts, Deadlines and Earnest Money – Where to begin?

How do you protect yourself when you are writing an offer? Do you review the contract with your attorney? Do you have your attorney write the contract or do you use a standard commercial MLS form? There are a lot of areas in the contract that are important when you are buying a self-storage facility, but we are going to discuss 4 key areas of a contract that you should specifically watch no matter who draws up your contract. You need to pay attention to the earnest money, your escape clauses, the purchase price and when you set your deadlines/dates. Keep reading to learn more!

Most of a contract is simply standard clauses that are there because someone sued someone else and now it is pre-determined how that issue is going to be handled. However, there are some areas of the contract that are negotiable and when you are in a multiple offer scenario, you want to make sure that you are competitive. You also want to make sure that you are protecting yourself every time that you write an offer on a self-storage facility, especially on the areas that are negotiable.

You should set up your contract so that your earnest money is refundable until the end of your due diligence period. When you determine how much earnest money to put down, put down enough earnest money that your seller takes you seriously. If you are wholesaling a property, put down a smaller amount with the promise of a much higher amount at the end of due diligence period when the money is no longer refundable. This gives you time to find a buyer for the project. Then your new buyer is the one that is going to be putting down the larger deposit, not you. If you are in a multiple offer scenario, the seller is going to be looking at the amount of earnest money that each person is putting down as how serious they are about the property. If you want to win in that situation, you need to make sure that your earnest money is competitive.

Next, make sure that you have an escape clause. Is there a way for you to back out of this contract if your numbers do not come back the way that you expect them to? You do not need a million escape clauses that make the seller nervous, but you do need at least one. Contingent on cost bid analysis or simply contingent on due diligence work. Due diligence means something different to everyone, however, it is an escape clause that does not scare the seller. This allows you to back out of the contract without losing your earnest money. Every seller expects you to research the property. This just gives you time to research the property before your earnest money goes hard.

Your purchase price is always important. I am sure you have heard other people say that you make money when you buy a property. This is true, but with self-storage, you also make money while you own the facility and when you sell it. You do want to make sure that you get a good price on the property. You should find out what the CAP rate is for the area. Obviously, the seller is going to try to get the lowest CAP rate possible and you are going to try to get the highest CAP rate possible. When you make your offer, look at deferred maintenance, assume that you are going to have some of your tenants move out, and hope that a lot of the tenants are not family and friends that have elevated the books. Make an offer that makes sense for you. Don’t get emotionally involved. You don’t want to end up overpaying for a property only to discover that it doesn’t cash flow the way that you wanted it to.

Watch your dates. You need to make sure that you give yourself enough time to complete each aspect of the contract. For example, if you are getting an SBA loan, you need to check with your lender to find out how much time you need to get your loan. These types of loans can take several months. How long do you need for your due diligence? Are you getting a feasibility study and if so, how long before you can get the results? You need to give yourself time to review that during your due diligence period. Always take into consideration the fact that you must work with other people’s timeline when you are setting your dates.

If you need an extension on a date, make sure that you get that extension either the day prior or before 5 p.m. in the time zone of the property. Your contracts typically say 5 p.m. is the deadline so keep that in mind. Sometimes it is hard to reach a seller to get a signature so if you know you are going to need an extension, reach out the day before so that you can reduce the stress of trying to get a same day extension. If you must get a same day extension, make sure that you put in the addendum that if they do not accept the extension, this is your notice of cancellation. That way you do not lose your earnest money.

Contracts are not as difficult as they may seem, but you should have an attorney review them for you to make sure that you are protected. You do not want to lose your earnest money or accidentally agree to something that you don’t want

to do because you didn’t read or understand the contract. 

Have fun making offers! 

As always, 

Happy Investing