What's 1st: Offer Or Due Diligence
I am a newbie and I have just missed a property that I spent a great deal
of time researching. I know that my problem in this case was the "speed"
of producing an offer. But it took me some time to do the due diligence.
In this case the property was on non conforming lot, missing about 4000sf
to become conforming, but had a almost twice the required frontage.
A neighbor, whose lot had more than enough land but lacked frontage
proposed to exchange in such a way that both lots become conforming.
While researching the viability of such exchange, validation of preliminary
building plans, waiting for lawyer's responses etc, the property went under
contract. And even now, there are still questions I have not answered. I
wanted to make an offer with contingency on satisfactory resolution of
remaining questions.
But I see now, that I should have made an offer sooner with some kind of
general due diligence contingency.
My real estate agent suggested "Subject to inspection" contingency as universal
way out, but I have already inspected the property with my partner who is a
contractor and I thought the absence of "Subject to inspection" clause
would make my offer stronger. Not to mention that it would be strange to have
inspector come and see the property just to have an escape strategy.
I searched the forums on this site on the subject and found suggestions to
make single simple contingency such as "Subject to partners approval" or
"Subject to finding acceptable financing" but...
I heard somewhere that there's some form of "Subject to due diligence" clause
used by developers and I wonder if someone can recommend a suitable clause I
could use in such cases that would not scare the seller, yet would give me some
time to research the property.
Any help is greatly appreciated.
altre
Well altre, it seems to me you ar actually asking two questions here.
1) How much due diligence do I do before the offer and
2) How do I write a due diligence clause to get me out of trouble if I find it after the offer.
1) I do very little due diligence before I make an offer. I made an offer this week on a building in Milwaukee I'd never even seen. All you are attempting to do prior to making the offer is make sure that the deal basicly "works", i.e. that assuming the information provided by the seller is true you can make money on the deal you are submitting. The purpose of the due diligence period is to then confirm whether the information provided by the seller is true.
2) I use, at most, two contingencies. A financing contingency and an enviornmental contingency (but then again I buy commercial space, if I was in the residential business I don't think I'd even use the enviornmental contingency). If I find some "problem" in the deal during my due diligence period I am, of course, going to bring that problem to the attention of my banker. Guess what? He's going to turn down my mortgage application. More contingencies than that I do not need.
altre,
In my experience with brokering land, buyers have a contingency for an upfront "feasibility period" or due diligence period--length depends on the circumstances, but generally, it is 45-90 days. Checking for environmental (in addition to many other things) is done during this period. The provision is typically written so that at the end of the contingency period, the buyers can move forward or terminate without having to give the owner any reason. Of course, there's the unstated option of essentially saying to the owner, based on what I found out, we would have to renegotiate this deal or I'll have to terminate.
commercialking,
If you were a residential developer, you would either be playing Russian roulette by not having an environmental done or have to be a cash buyer. Lenders typically require a Phase 1 in residential land deals.
Nancy
"Nancy" what is a phase 1 ??
[addsig]
patrecejames,
A Phase 1 is a study of a property by an environmental consultant to determine if there appears to be any environmental contamination. It basically consists of reviewing all regulatory agency and municipal files, looking at historical aerial photos, and physically inspecting the property.
If in the consultant's opinion, there might be contamination, then they would recommend additional steps (Phase 2), such as soil and groundwater testing, or ground penetrating radar, to confirm and quantify the extent of contamination.
Nancy
Thanks for your replies,
it seems that for commercial deals, mortgage contingency is an excellent
tool, although I am sure it would not work in my case. Bank would
care less if I can build what I want on this lot. They lent the money
on the basis of appraised value of the property.
I think I could use some form of "feasibility period" clause suggested
by Nancy, modified to fit residential market. Although, I am a little
cautious about vague clauses.
Is there any legalese for this kind of clause, or can I come up with my
own language depending on situation?
Also, it would be very helpful if some experts in residential market could
share their experience with seller (and listing broker) reaction to such
a clause.
altre
Thanks Nancy these are great suggestions!
Here's what my RE attorney came up with for this specific case:
"This offer is contingent upon buyer being satisfied that prior to closing
a written agreement can be established with the abutting property owner to
allow a land swap.
In addition the right of way with other contiguous property owners shall
also be modified to buyer's satisfaction.
Buyer shall have until <date> to perform due diligence and may cancel this
offer up until said date if said agreements cannot be obtained.
If this offer is canceled on or before said date, buyer's earnest and down
money shall be refunded in full."
altre