Just because a mobile home park is under contract does not mean that you can’t still buy it – you just have to wait for the current buyer to drop the deal. And when that occurs you will have an advantage if you already have an active back-up contract. In this Mobile Home Park Mastery podcast we’re going to review how back-up contracts work as well as some basic strategies to do them properly.
Episode 416: All About Back-up Contracts Transcript
So the seller did not choose you to be the buyer of the mobile home park, or you found this mobile home park that looks perfect for you. But when you contact the seller, they say, oh, I'm sorry, I already put it under contract with somebody else. Is that the end of the movie? Well, this is Frank Rolfe, the Mobile Home Park Mastery podcast. We're going to talk about backup contracts is something a lot of buyers do not utilize, and they're making a mistake because issuing a backup contract on a property can often prove to be very successful. So what is a backup contract? Just as the name implies, it's a contract that states if the contract that the seller is currently under fails to matriculate, to close, then the deal then goes to you under your backup contract. Now, why do people not do more backup contracts? I really think part of the problem is people get depressed, discouraged when someone says, oh, I'm sorry, I'm going to go with somebody else, and they just think it was utter rejection. So they just kind of move on to the next deal and say, gosh darn it, what did I do wrong?
Where did I go wrong? Should I have offered more? Was it something that I said? Don't become overcome with rejection when it happens, because, let's be honest, a huge percent of mobile home park deals do not close. What is that percent? I'm not sure exactly what the percent is, but it might be as much as 50%. If you've sold a lot of parks over the years, and we've sold hundreds. You know from experience that when you put something under contract, it's by no means a guarantee it's ever going to close. Things pop up in diligence, things pop up in financing. The buyer could get cold feet. Buyer could be unable to obtain the capital for the down payment. There's a million reasons why a deal might collapse. But because we all know inherently there is this large percentage of the time in which they don't happen, you need to realize that there's a very good chance it will come back on the market. We've seen it happen many, many times, both as a seller of parks, but also as a buyer of parks. And since we know inherently it's a good shot the deal won't go through, then why not put on a backup contract?
What would be the reason for that? Well, there really isn't any. So how do you then do it? How does that work? Well, the first thing you have to do is to express to the seller or the seller's broker that you're really the right buyer for this property, you want to differentiate yourself from whoever has it under contract. You don't know their name, you don't really know anything about them, but yet you kind of throw them under the bus and say, look, I don't know about this person or what they, where they're at or their financials and stuff, but I'd be perfect to buy this property. Why? Because I'm enthusiastic about it. Because maybe you're located near it, because maybe you own another mobile home park located near it, maybe because you've got the money burning a hole in your pocket in the bank, maybe because you have a 1031. Whatever the case may be. You want to explain to them that you're not just some person calling up, not just some other buyer. You are the exactly the right buyer for the property and tell them you are so excited about this property that you just refuse to give up because you know there's a good chance that deal is not going to go through. And if it doesn't go through, you want to buy it.
Now, what's going to then happen? You get a call from somebody and they're all excited. I'm the right buyer. I want to buy the property. Well, more than likely you're going to want to back that up if you're the seller, if you're the broker, because the doubt is also in your mind, will that person really close? And if you have a backup contract, it makes it all the more likely that the deal will ultimately happen, and if you're the broker, that you will get paid. So when you then say, I'd like to go ahead and evidence my enthusiasm by going ahead and getting a contract done with you guys will speed up the process if the deal falls out, most any seller or broker is going to be fine with that concept. So then how does a backup contract work structurally? Well, in most contracts, the trigger is the date of the contract, but in this case, it can't be because it's already under contract with somebody else. So your contract would not go into effect until the other contract falls out. It could fall out based on a certain date, as far as the end of an examination period or financing period.
Or it might just fall out somewhere along the way. Perhaps the buyer calls the seller and says, hey, I need a big price reduction, and the seller says, nah, I don't think I want to do that because I already have a backup contract for as much money as you were paying, and then they move seamlessly on to you. Now, one interesting thing that happens often with backup contracts is that the backup contract and the buyer under the backup contract is in a stronger position than the original buyer. Here's why: because when the first buyer puts it under contract, the seller who's all excited about the next chapter of their life typically go out and spend emotional capital and real capital lining up what they're going to do next. Often it revolves around moving someone in a northern climate for example, most of those sellers, upon sale, they always seem to move to the South. So they're already out there looking at beach houses down in Florida, maybe in the coast of Alabama, and they're down there looking at that condo in Destin that they want a whole lot.
And what happens is when that first buyer doesn't go through, they're crushed because emotionally they had already in their mind they'd already set up to move. They were already out the door. They may have already been talking to brokers about putting their home on the market. So you actually go in in a better position than the first buyer, because if the first buyer cancels, that now puts the seller on the defensive. They're in a much more weakened position for two reasons. Number one, they've already started planning out their next life and they want to get out the door. And the other reason being when a property gets dropped, it's kind of an insult to the property. It makes people think, well, what was wrong with that property? Maybe I don't want it after all. It's like a failed restaurant location. You ever notice if a restaurant fails on location, at least a couple times, it's hard to get that third restaurant to go in there because they think that that location just has bad karma, that people associate it with failure. So you'll be able to renegotiate, if you need to, that deal much more successfully as the backup contract than as the original contract.
I know it sounds unfair that one would be treated differently than the other, but it's just the way it works. That's just a natural evolution of life and how it happens. So the bottom line to it all is that backup contracts are a really good idea. It allows you to seamlessly take over if the deal fails, it blocks out any other buyer because they've already signed up with you. Same position that you regretted when you called and they said they were already under contract, and you have a much clearer path for renegotiation, for getting over any hurdles, bumps in the road, because the seller will bend over backwards to get that deal done. But all that being said, there's one thing you have to know about backup contracts, which is the concept of tortious interference of business. Now, what this means is you can enter into a backup contract, but you cannot do it in a manner where you try and get the seller to undo the existing contract. It's a very fine line. You can look it up on Wikipedia or AI, but you don't want to fall into that trap, into that camp. There was a deal years ago where there was a huge lawsuit between Pennzoil and Texaco because one big oil company
Tried to coerce a seller to break their contract with one company to go with the other. You're not allowed to do that. You're not allowed to try and incite them to riot, and you're certainly not allowed to try and get them to walk a contract that is fully executed and in good shape. You can't do that. What we're talking about here instead is the backup contract, which acknowledges on the front end that, hey, if the other deal dies, I'm here, but make no efforts to undo that original deal. That's not going to work out for you.
The bottom line to it all is that a backup contract is an excellent tool. Many park owners apparently fail to grasp this. They don't try and go for the backup contract. But going forward, when you go after a deal and you find out, oh, I'm sorry, I can't go with you. I've already gone with somebody else. Don't give up. Keep going. If you really like that deal, get that backup contract signed up, because the odds are very good it's going to come over to you. This is Frank Roth with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.