Manufactured Home Community Purchase Contract Suggestions

Why are so many purchase contracts for income-producing properties set up to create timing anxiety, which ultimately risks a failed transaction? I have seen both seasoned professionals and first-time investors unknowingly create conflicting deadlines in regards to key contract dates involving a Financing Contingency. When deadlines conflict, the entire process of purchasing a property can become overly stressful and costly for all parties involved, including negotiating for an extension or possibly losing earnest money, third party costs, or even legal ramification for breach of contract. This often leads to a “blame game” of sorts as to who is responsible for delays or failures.

With that in mind, have you ever had a contract that required an extension? Could it have been prevented? To find the answer, it helps for the buyer, seller, agents, and lender to consider all of the steps being exercised in a contract, before outlining the deadlines. Here are some common ones that most transactions have:

• seller provides full property operating data

• buyer site inspection

• title research and commitment

• loan application submission

• lender initial review

• issuance of a ‘conditional pre approval’

• buyer submits funds for third party costs

• ordering third party reports

• completing third party reports

• securing insurance coverage

• submit loan application support documentation

After these steps comes:

• final underwriting

• issuance of final approval

• meeting final conditions for closing

• drafting closing documents

• actually setting appointments to sign and return documents for funding

Knowing that all of these steps are taking place and that they each have timelines attached to them, buyers, sellers, and agents should ask themselves: do the contract timelines properly reflect procedures that all parties can realistically complete in the time allotted?

Case Study: John’s Story

John’s purchase contract is written for 60 days. Within the contract, he is given 15 days for due diligence (his site inspection, gathering operating data, etc.). He then plans to apply for a loan in the week following receipt of his due diligence items, as he does not want to go through loan expenses if his due diligence reveals unwanted property issues. As a part of the contract, he has negotiated with the seller to have the Financing Contingency expire 45 days after the contract’s start date.

This deal is almost sure to need an extension, or at the very least, present a very stressful 60 days for John. Why?

First, as his timetable suggests, John will actually submit full application for his financing as far as 20-25 days into the contract. However, if he does apply this far in, only 35 days remain in the contract for closing and funding.

In a commercial transaction involving financing, does 35 days realistically allow enough time for the steps listed above to be completed? Do a quick exercise and review the items remaining on the lists above by adding timetables for each to be completed, and calculate how many days you think John may actually need to complete this transaction.

Most commercial loan transactions typically take 45-55 days from start to finish. With this in mind, John’s contract expires 10 - 20 days prior to completion of his financing, and his Financing Contingency expires 20 to 25 days after he first submits his loan application. In addition, these timing issues will surely be compounded with unforeseen delays common to commercial transactions, for such things as insurance underwriting, completing title work, etc....

This scenario is easy to avoid, but takes place all the time.

First Steps to Cohesive, Smooth Transactions

1. Talk to a mortgage banker/lender to determine some typical loan application timelines for the property type, size, location, and loan terms you are seeking.

2. Before signing the contract, create a side-by-side timeline showing both contract and financing deadlines clearly labeled, and see how they match up. (Start the financing timeline on the date that the full initial application is delivered to the lender with the expense deposit and/or application fees.) Also, did you remember to allow for an unforeseen events, holidays, etc...

3. Deadlines for financing and closing should always take into account the buyer’s actual receipt of property information for either due diligence or the loan application. In an example where the typical loan application timeline is 45-55 days, set the contracts expiration date for 60 days following receipt of full and proper operating data from the seller. Truly, there is no reason to begin a financing contingency without the property data, because it is required for both the loan underwriting and the appraiser. So, if the contract is signed on the 1st, and the seller takes 11 days to provide the requested property data (i.e. rent roll, operating statement, copies of leases), the contract timing, in essence, begins on the 12th day.

4. Sometimes, updated property data is needed throughout the loan process; for example, a rent roll that may have become outdated. Sellers can prevent delays in financing by being aware of this upfront and preparing to update and turn over any information immediately upon request.

Remember, a commercial mortgage for investment property will many times place larger emphasis on the property for financing approval than the buyer(s). When the dead lines within a contract do not allow enough time for this data to be collected, delivered, and reviewed, the door is open to a failed or delayed purchase, along with possible costly monetary losses or legal issues.

Avoid these pitfalls by understanding how the loan process contract deadlines can work together, and you will set the stage for a smoother transaction.

Contact Dean at (512) 901-9110 or dthompson@kccapital.com