The starting point for buying a mobile home park is the contract. But what are some of the essential items in this all-important document? In this week’s Mobile Home Park Mastery Podcast, we’re going to discuss some of the key components to writing a successful contract, and some strategic suggestions to make the contract more effective. Since the contract is your primary tool in acquiring mobile home parks, it’s worth your time to fully understand the techniques to give yourself an edge.
Welcome to the Mobile Home Park Mastery podcast. This is Frank Rolfe. We're on the fourth part of our five part series on the legal side of park ownership. We're going to be talking today about some tips, some secrets to the actual purchase contract to buy a mobile home park. Now I'll tell you on the front end, I am not in any way an attorney. I have never been to law school, never even took the LSAT. I don't technically have any knowledge about the law firsthand, and I'm certainly not qualified to give you legal advice. What I'm going to be giving you are just some suggestions of 20 years of buying mobile home parks, just some different tips I've learned over time. These are my own personal opinion and in no way should be construed as any form of legal discussion.
The first is on the contract itself where you have the buyer, the buyer in most cases on the contract needs to be your name and/or assigns because here's the deal. Not your insurance agent, not your bank, pretty much no one wants you to buy the park in your personal name. They want you to buy your park typically in the name of an LLC or an entity of some type. By having an and/or assigns, it gives you the ability at closing to assign that contract to your entity, allowing you to buy it in the name of that LLC or whatever entity you've decided to buy it in. So it's kind of important to have and/or assigns in the buyer's blank and not just your name.
Number two, it's always very important to have very well punctuated what is included in the sale. A lot of times with mobile home parks, you're not buying just the land. You're also buying often park owned homes, maybe some vehicles, maybe a commercial building comes with it. Whatever the case, you want to have a full laundry list of all those different items that are included because guess what. After closing, often the seller conveniently forgets what he might have mentioned to you was included in the sale and decides to go ahead and take that with them. Those items can include such items as a tractor or riding lawn mower or vehicle. And even in some cases, park owned homes. They'll say, "No, I didn't convey those with you. You just bought the land." Even though that's not what was discussed. So make sure you have a full itemized list of everything that you are buying.
It's also very important in any contract that you have an adequate due diligence period. In fact, this is probably to us one of the most important items. What is a due diligence period? It's a period in which you're allowed to examine every part of that property to see if it meets your needs. And if it does not, to cancel the contract and get your earnest money back. It's basically a no risk way for you to investigate the property and make sure it's exactly what you wanted. And if it is, then you can go forward, but if it's not, then you can cancel. Due diligence provisions are found in many different contracts out there, but do make sure that the diligence provision you use allows you to cancel for any reason in your own unfettered judgment. Do not have a diligence provision that requires you to have a legitimate reason to drop or one that the seller agrees to. That could only cause you problems and heartache down the road when you try and cancel the c ontract because you don't want to buy the park, but the seller tries in fact to make you go forward or to not get your earnest money back.
Also, make sure your diligence period is long enough to conduct proper due diligence. You're going to have to do everything from look at all the financials on the park to getting a phase one done. You're not going to get that done in a week or two. You'll need to give yourself at least 30 days of due diligence in order to get all the studies done that you need. Also, have a trigger that starts the contract and the due diligence and that typically will be the receipt of a laundry list of items that mom-and-pop needs to give you in order to start your evaluation, such things as the rent roll. Mom-and-pop will sometimes say they have these things at their disposal, but as soon as you sign the contract, they don't arrive. We've had cases where they only arrived two or three days before the end of due diligence, and that's not fair to you as a buyer. If mom-and-pop don't have these things, it's best to have the contract not started until you receive them. Th at way, their delay does not cause you any pain or suffering, and in fact only gives you a longer due diligence period.
Just like due diligence, you also want to make sure you have a financing contingency. A financing contingency is the period that allows you to obtain a loan for the park, and the terms are only agreeable to you. And if you don't like the way that the terms come out in the proposed financing, you still have the right to cancel the contract and get your earnest money back. And as always, the financing world's a little risky. You don't exactly know what will happen. Until a loan is done, it's never done. So as a result, you need the flexibility and the freedom to be able to cancel if something goes awry. So due diligence provision and a financing provision are pretty much essential.
Also, make sure that your contract does not have what's called specific performance in it on the part of the buyer, only on the part of the seller. What's specific performance? Specific performance is something that says that whether you like or not, you must go forward. On the part of the seller, it's only reasonable that they have specific performance. They signed the contract. You do your diligence. You do your third party reports. You get your financing, and you want to close. There's no way it would be reasonable for them to suddenly say, "No I changed my mind. I don't think I'm going to sell it to you after all." They must be forced to sell it to you. Otherwise, you've wasted all of your time, all of your energy. It's simply not a fair situation.
On the flip side though, there's no reason why you as the buyer should have specific performance to buy it if you don't want to buy it. So you need to make sure in your contract that even if you don't cancel during your due diligence and don't cancel during your financing contingency for whatever reason, if it comes down to closing, and you don't go forward and buy it, you have that right. And all you lose is your earnest money. But you cannot be forced by the seller to go forward and buy it when you don't want to buy it. It makes absolutely no sense at all.
Also, make sure that your contract has plenty of warranties. What's a warranty? A warranty is something in the contract that basically says that the seller is agreeing that things are in a certain order, and if they're not, they'll have to make good on it. It's a very important safety guard to make sure that people tell the truth in what you're buying and what the terms of the sale are. In the event for example that mom-and-pop tell you that there's no existing employment agreements with someone, and it turns out that there are, and you had them sign a warranty that there were not, theoretically you could take them to court and collect whatever the damages were from that existing employment agreement. Now will you go to court and do that? I don't know. It's hard to say. And if it's not really a large amount of money, probably not because as we all know, in America it takes a lot of money to go to court these days. However, just the very fact that you ha ve the warranty typically is enough to scare most sellers into telling the truth and not doing anything that might lead them into a warranty issue. So warranties are definitely a good thing to have around.
Also, make sure that after you sign the contract and get it in there with the title company that you have a very firm list of dates as far as what's to happen on what date. You don't want to leave anything nebulous there. You want to make sure that everyone is in agreement on what those due diligence period end dates are, and that financing period end date is. Because you don't want to have any argument later on with mom-and-pop who say, "No wait. You missed your deadline by a day." You want everyone to know what they are. That agreement, that list of dates should be produced by the title company, and it should be set in stone and agreed by both parties. So there simply is no argument later on as to what is what.
Another issue on the contracts are you've got to make that they're meaty enough to cover every possible eventuality. Our contracts that we use are very very long. They're many more pages in a standard contract in that state. Why is that? Because we've tried to cover everything that might happen with a mobile home park transaction based on years of experience. Don't feel the necessity to use just the contract that's produced by your state board of realtors. That's typically a shorter form contract, and while it still gets the realtor their commission, it doesn't always get the job done as far as you as the buyer. So often you are left with a big gaping hole in some areas, the things that are very important to you. Particularly regarding due diligence, finance contingencies, and warranties.
So always make sure that you have a contract, and you know every paragraph of that contract backwards and forwards, and you're in firm agreement on it. When you go in to buying a mobile home park, it's very serious business. And that contract, that's your basic tool. That's like the rifle to a soldier at war. You've got to make sure that you understand everything about the contract and how it works, how to fill it out properly and all the provisions in it so you don't make any type of mistake. Because again, that's all you have to work with when you're out there buying the mobile home park.
A couple other things about contracts. We have found that typically the first person to provide the contract wins. So if you have your own standard contract, and it's a good contract, and you're comfortable with it, make sure that whenever you submit that contract, it's done on your contract form. And if mom and pop says, "Oh gosh, golly, let's just use my contract instead." Be insistent you want to use your contract because typically the person who provides the contract wins. What will happen is the other party will have their attorney review the contract, possibly make some amendments and make some changes to it. But typically the bulk of your contract will remain intact. And that's what's really important is the fact that the basic chassis, the basic body of your contract is what everyone adopts, particularly if you've got well written in there a really good diligence paragraph, financing contingency, and the warranties. That's really what put you in a much better position than the average buyer.
Now again, everything I just told you is based on our experience. It's not based on me being a lawyer. I am not a lawyer. And let me tell you, it's always a good idea when you go into a market that you've never bought a mobile home park in before, even if you have a standard contract that you're happy with. It's a good idea to have someone who's licensed in that state to read that contract and make sure that it abides by all the rules of law of that state. If you're trying to do it inexpensively, what you might do is call your state mobile home association. Every state has one. Find out who a lawyer would be who's familiar with mobile home parks. That typically eliminates any type of learning curve that a regular attorney would have in learning about mobile home parks and their contracts. But always make sure the contract you're using fully aligns with the rules of that state and that it's good to sign.
Again, this is Frank Rolfe with the fourth in our five part series on the legal side of park ownership, talking about mobile home park contracts. It's important that everyone who goes out to buy a mobile home park has a contract, one they're comfortable with, one that they understand. As long as you've got that, you're definitely putting the right foot forward. We'll be back shortly with our fifth and final part in our five part series on the legal side of park ownership, talking all about seller notes, the items you want to make sure are in the notes, some stories in the past from us on notes and what's gone good and what's gone bad on them. So again, this is Frank Rolfe, and I'll be back with you again soon.