This manual is designed to give you a roadmap, from start to finish, in achieving a successful due diligence examination of a mobile home park.
Since the failure of any one step of due diligence might result in your decision not to buy the park, we have organized the order of steps in such a manner as to minimize expense and effort. We have chosen the order to put the items most likely to fail at the front end of your examination, to get the bad news early on and to act on it accordingly.
We have organized the manual in a day-by-day manner and while this makes for good organization, not every deal is going to fit into this order and if possible you would like to have 45 or 60 days to do the diligence, or at least a provision in your contract that allows you to extend the period in case some of the third party reports are not able to be completed in thirty days. The real key is to make sure to complete all the steps in a complete and timely fashion.
Is 30 Days of Diligence Adequate?
Thirty days of diligence is an industry standard, but there is no rule that the due diligence period must be exactly thirty days. Of course, the longer the diligence period, the better it will be for you, the buyer. Sixty days is far superior to thirty if you can get it. And, of course, you can't get it unless you ask for it. Most people ask for thirty days because they are afraid that sixty days will scare the seller off, and less than thirty is way too short. That being said, I have done fourteen days of diligence on deals that I really wanted but that had a difficult seller. Less than fourteen days and you may just be wasting your time, since it is near to impossible to get a lot of third party reports completed that quickly, not to mention just the regular stuff that you perform yourself. If you are willing to forfeit your earnest money, then you can go as short as you want, and then walk the deal prior to closing, at the end of the financing period, if you don't want it after all.
If you have not completed your diligence in the required amount of time, say thirty days, it is sometimes possible to get the seller to give you an extension of time. If that is the case, the best way to get the extension is to meet with the seller and show him all of the work you have performed, so that he knows that your request is legitimate. When you propose such an extension to the seller, he is normally concerned that you are just wasting his time, and that you have no intention of buying it, or that you lack the money. It's your job to convince him that you can close, and will close, if he just gives you a few more days to complete your diligence. And you can even tell him what you have left to do, so that he knows you are not pulling his leg. If he says no, and you really want the deal and feel 99% positive it will work for you, you may elect to go forward anyway, and risk losing your earnest money if you walk before closing. Make sure that the contract does not require "specific performance" to buy the park. In that event, you cannot go past the diligence period without having to buy the park, even if you don't want it. You never want to sign a contract with specific performance in it for the buyer. The seller, on the other hand, should almost always face specific performance if he fails to consummate the sale to you.
Diligence periods in excess of sixty days are pretty unheard of, except in cases of extreme lack of park stability, such as not having any books, rent roll, etc. For example, it would not be unusual to ask more than 60 days to sort out bank foreclosure. However, except in that type of difficult environment, you will probably do some degree of damage to your reputation by asking for more than sixty days of diligence.
You will find in the due diligence process that there is no perfect park. While successful due diligence will help you formulate an idea on the true economics and risks of a mobile home park, it will still ultimately be your business decision as to whether or not to proceed with the purchase. Often, after assembling all of the data, you will still be unsure as to whether or not you want to proceed. This manual only helps you to collect that data. The decision to go forward is one that you will have to make on your own.
We receive more questions on due diligence than on virtually any other topic at MobileHomeParkStore.com and have written this manual to address those questions in great detail. If you follow all of the guidelines in this manual, you should be able to perform a satisfactory due diligence examination.
If this is your first park or you are looking for a second opinion we offer consultation on deal review and due diligence. You can check out the various programs on www.mobilehomeparkstore.com.
Good luck on your due diligence!
Frank Rolfe & Dave Reynolds
BEFORE YOU START
TO DO LIST
- Purchase Contract
- Due Diligence Clause
- List of Items to Request from Seller
Your Purchase Contract
One of the most important items that you will need to have is a good purchase contract that has been reviewed by your attorney. Don't ever just take a purchase contract you find on the internet or receive from the seller or seller's broker and sign it without first having your attorney review it.
A good purchase contract will have, at a minimum, the following:
- Full and Correct Legal Name of Seller (the correct name or company)
- Name of Purchaser and right of Purchaser to Assign Contract to an entity owned by Purchaser
- Legal Description and Address of the Property
- Description of Personal Property to be Included with Sale
- Purchase Price and Terms
- How Prorations are Handled
- Right of Purchaser to Conduct Due Diligence for a Period of at least 30 Days
- Right of Purchaser to Cancel and Receive a Refund of the Earnest Money and be Released from the Contract for any Reason during the Diligence Period
- Right of Purchaser to Cancel and Receive a Refund of the Earnest Money and be Released from the Contract if Financing cannot be Obtained at Reasonable Terms Approved by Purchaser.
- Who Pays for What: Survey, Appraisal, Title Policy, Phase I, Closing Costs, Broker's Commission, etc.
- Date of Closing and Possession
- Representations of Seller
- Representations of Purchaser
- Acceptance Deadline
- Signature Block
In the past I have provided a copy of the contract that I use to buy mobile home parks and if you would like a copy of my contract, I am more than happy to send a copy to you with the understanding that before you use it that you will have it reviewed by your attorney.
Due Diligence Clause
In your purchase contract you want to make sure that you have a good due diligence clause. Here is a copy of the clause that I have in my contract:
PURCHASER'S RIGHTS OF INSPECTION, LOAN APPROVAL, AND CANCELLATION.
(a) PURCHASER may inspect or cause to be inspected the condition of the Real Estate and all improvements and Personal Property;
(b) PURCHASER may inspect or cause to be inspected all other documents and materials relating to the Real Estate and Personal Property;
(c) Within seven (7) days after the effective date of this agreement PURCHASER shall make a written request of SELLER to deliver all documents and materials needed from SELLER for inspection and evaluation. Upon receiving this written request from PURCHASER, SELLER shall deliver any such documents or materials requested within seven (7) days of PURCHASER'S request;
(d) After all documents and materials have been delivered to PURCHASER, PURCHASER may cancel this Agreement for any reason, at the sole discretion of PURCHASER, within Thirty (30) days after receiving all documents and materials from SELLER. After the initial Thirty (30) day inspection period, PURCHASER may cancel this Agreement during the next Thirty (30) day period in the event that PURCHASER does not obtain a loan approval for the purchase of the Real Estate and Personal Property that is satisfactory to PURCHASER, and the determination of an acceptable loan shall be in the PURCHASER'S sole discretion.
(e) In the event that any Third Party Reports are required by Purchaser or Purchaser's lender, and these Third Party Reports are not completed during this initial thirty (30) day inspection period, the inspection period will automatically be extended for an additional thirty (30) day period and PURCHASER shall have the same rights of cancellation as PURCHASER has during the initial thirty (30) day inspection period.
SELLER shall allow PURCHASER, or PURCHASER'S representatives, access or provide documents for review, whichever the case may be, to the Real Estate and Personal Property, at all reasonable times and cooperate with PURCHASER'S efforts to conduct the inspections permitted herein.
