A few key provisions for your Purchase & Sale Agreement
If you have bought properties, you know how critical it is to get your PSA right, and if you haven’t, undoubtedly it makes you nervous thinking about this agreement. I want to share a few things that I have found to be critical for a PSA. This isn’t a complete list but can be considered things to also think about.
You have heard that you need to get an attorney involved. For buying multifamily real estate, this is an absolute requirement, no exceptions. Doesn’t matter if you are buying in-state and the MLS has a standard agreement. Read it and have an attorney read it. I have never found a “standard” agreement to have everything I needed in it. They can all be revised through addendums and cross-outs.
If you don’t have a PSA that you have used in prior deals and the broker or seller offer you theirs, it may be okay but again always have your attorney review it.
Before sending anything to your attorney, you need to be clear about separating the business issues from the legal issues. You decide the business issues. Make those decisions before you send it to your attorney. These are things like due diligence periods and earnest money deposits.
Be sure your attorney knows to ensure your protection. For example, you may need to terminate the agreement, so be absolutely sure of the deposit you’re getting back, and that criteria. “Ask me how I know”, as Rod Khleif says. Your attorney needs to be a bona fide real estate attorney, experienced in creating and revising PSA’s.
What to include, here are a few things.
Service contract terminations – if there is a cost to terminating a service contract, such as Cable, who pays for it. In your due diligence you might find a term contract for cable, HVAC maintenance, etc., and an obligation to pay through the end of the term. Whether you’re the buyer or the seller, it needs to be clear who pays if the buyer doesn’t want it continued.
Leases available as pdf documents, if you’re the buyer. If the seller has them all on paper, it’s very difficult and time consuming for you to sit in their office, read every one, and determine all of the details you need from the leases, such as move-in date, security deposit, pet fee, lease end date, provision to switch to month-to-month at lease end, move-out notice due, etc. It takes time to audit these leases and sitting in their office reading paper leases is not the place to do it. Require them to scan them in if they need to.
Contract extensions – regardless of how long you make your contract, it is always a good chance the contract may need to be extended. If you’re getting to the end of the contract period and you realize you can’t close by that date, you need to extend it. Sometimes the other party is completely amenable but other times they may squeeze you. If it is the buyer needing to extend, the seller will likely require an additional deposit. Maybe a big one. If it is the seller, the buyer might incur costs from the lender having to rerun all of their closing costs calculations. Put in your PSA a provision something favorable to you. If you’re the buyer, have it say you can extend the PSA for 30 days with no additional cost or deposit. Or two 30-day extensions for no cost. The seller may push back but wouldn’t you prefer to have this negotiation before the PSA is signed rather than when you’re desperate?
Occupancy guarantees if you’re the buyer. Drops in occupancy during the contract period are not that uncommon. If it’s important to you, there can be a provision that compensates you if occupancy drops below a threshold. Be clear about how it is calculated, such as one month’s rent or three month’s rent for each vacant unit below that threshold, and be clear about how this is to be determined. Have a provision that they deliver a signed rent roll, say three days prior to closing.
Financial due diligence – in recent years, to get a deal you might have needed to waive most of this provision. Maybe even put hard money down early in the process. Today is different, don’t do that any more. Get a reasonable time period in place to ensure you have a committed lender. Not just a term sheet but full approval inside the financial due diligence time period.
Right to Assign – you can put your own name on the initial PSA and then prior to closing, assign it to your LLC. This is common.
Continuation of lease-ups or renovations – as a buyer, decide if you want the seller to keep re-leasing vacant units during the contract period. Most likely they will want to do that but there is the risk that they place anyone with a pulse, just so they can keep occupancy numbers up. You might require the right to approve new tenants, or require a specific renter qualification criteria, or might allow them to place new tenants up to 15 days prior to closing. This provision is common.
Same with renovations. Clearly they need to fix broken things but if your intent as a buyer is to do the renovations yourself, you risk the seller doing subpar work. Decide if you want them to continue or not and put that in the PSA.
Certainly lots of other provisions are required, but these are a few that I’ve found to be important in a PSA. Get your attorney’s advice and take their recommendations for changes that more fully protect you and your interests.