In most multifamily purchase agreements, there is a due diligence period for the buyer to inspect the property and its management documents to ensure that the terms of the purchase agreement are reasonable and meet with the buyer’s expectations of outcome. However, after the due diligence period has expired, and prior to closing, the buyer may be exposed to unanticipated risks.
The first of these risks naturally involves damage to the property and the corresponding cost of repairs and loss of income. To mitigate this potential concern, the purchase agreement should include specific remedies, discussion of insurance claims and, a buyer walk-away provision if the damage is too extensive to remedy on a timely and cost-effective basis. The purchase agreement should also allow for a pre-closing inspection as late as 24 hours prior to closing.
Another risk involves the economic performance of the property. The due diligence period allows for the buyer to object to not only physical conditions of the property but also economic performance. The buyer should ask the seller to agree on post due diligence performance thresholds for the property including occupancy, rent collections, concessions, past due payments, and operating expenses. This element can be particularly frustrating to a buyer if the acquisition debt is debt-service constrained. If the property rent collections decrease or vacancy increases prior to closing, the buyer’s lender may reduce loan proceeds, even if the buyer has received a financing commitment and waived the financing contingency in the purchase agreement.
Lastly, the buyer needs to be protected against management issues which could impact the integrity of the purchase. Such items can include seller-agreed upon repairs, improvements, personal property and personnel remaining on staff. Buyer and seller also need to agree upon procedures for rent pro-rations and management held security deposits.
When there is a longer than typical period of time from execution of the purchase agreement to closing, the buyer may find it advantageous to sign a land contract, which provides the buyer with the opportunity to manage the property while waiting for closing to occur.
To protect your interests as the buyer, make certain that there is a list of property performance thresholds and safeguards that run up to the transfer of title.