Creative and Extended Contingencies still available in your area?

Question

Just curious with all the developers out there if "creative contingencies" are still available.  I'm in Southern California and for most property purchases, the most buyers get is a short due diligence and financing contingency - even for raw land!  In fact most time, you can't close on the property unless you offer cash.  So as I read and hear about creative deal structures, I can't help but wonder what geographic areas these are occurring in.

Jason Mak · Answer

@Jessica Zolotorofe Thank you for your response and yeah I definitely see your points.

Jason Mak · Answer

@Tim Ryan  Love the motto!  I agree, LA doesn't make for a good place to invest and I haven't bought a deal here in over 2 years.  My last deal was this deal out in Riverside but since then I haven't been able to find any new deals.

I've began to look out of state but haven't taken the leap yet so to speak haha.  Many of my partners have been doing for several cycles and have preferred to stay in the coastal cities.  I'd love to hear more about your process and system of investing out of state sometime.

I see you are from Arcadia.  I live in San Marino but I'm redeveloping the former All Pro Fitness site at 56 East Duarte so I'm in Arcadia all the time.  We should grab a coffee sometime and trade notes.

Jason Mak · Answer

@Jessica Zolotorofe  Hi Jessica - Thanks for taking the time to give me a detailed response.

What you said about due diligence, financing contingencies and non-refundable deposits are pretty common place here and in line with how I've executed most deals in the past.  Unfortunately, in my market, these terms are getting squeezed as you mentioned.

However, I raise this question because in listening to BP podcasts and reading about "creative financing" other creative deal structures on BP, I find them hard to believe they can be done in the SoCal market.

One example is wholesaling, I've seen it around for smaller residential properties, but most commercial owners with a moderate level of sophistication would never allow their properties to be tied up by a wholesaler when their are willing cash buyers on the market.  Same with land buyers who try to buy offers "contingent on entitlements".

These types of deals are talked all over BP podcasts and the forums which begs me to ask if anyone in large high-demand metro cities such as Los Angeles or the NY/NJ areas are actually able to "tie up a seller" using such deal terms.

Jessica Zolotorofe · Answer

Hi @Jason Mak  I'm not sure what type of "creative" points we use, but for commercial deals in that purchase price class we typically have sophisticated counsel on the other side, so negotiating is more reasonable. And it is typical that we can't get a financing contingency in the more popular areas to invest, but that doesn't mean it has to be a cash deal. Just means that it's your problem to find financing before closing, and you don't get to terminate if you can't, and your deposit is on the line. So in those types of deals especially, you should already be in communication with a lender you have worked with in the past, or that has reviewed your info and if your financials check out, has given you a pretty good idea of loan terms or if they will write the loan at all.

As for due diligence contingencies, yes, we used to get more like 45 or 60 days DD as the standard, now we are seeing far more like 30 or even 21 with the right to extend for 30 days if a Phase II is necessary. High levels of competition are one thing, buyers buying properties without conducting any due diligence is just not a good business decision. Asses your risk. If the property is such a good deal that you have to have it and the potential liability for environmental or title issues are worth it, go for it. Otherwise, have a team of a responsive and fast moving title agent, surveyor, engineer, environmental team, lenders (brokers definitely help shop deals faster than you would and have relationships to push things through that we couldn't necessarily get done as quickly) and lawyers to get your due diligence, lease review, title review, etc. done fast. If you have a loyal team that you keep going back to with $5mil+ deals, they'll do what they have to do to fit into your time frames. Someone who has to first start calling around to get all of the moving pieces coordinated on a few days' notice, and then find a lawyer to pay them quick attention is probably taking a much bigger risk agreeing to a shortened due diligence contingency than someone with people set up ready to hit the ground running.

As far as hard deposits, I would never agree to anything substantial except that I would agree to release a portion, or for the entire amount to go hard AFTER due diligence is waived. Also, sometimes if you can’t close timely for whatever reason, or need to extend your due diligence period, then the seller wants a portion of the money hard, and additional money up that will be refundable or really applicable to the purchase price if you close. That way, they feel that there is more on the line and  you aren’t just stringing them along. And again, that would be in a case where, for example, your financing was really close but your lawyer just needed another week to get it closed. If, on the other hand, it was something like an oil tank that you find that wasn’t ever properly decommissioned, then you would want to go back to the seller and say, this was unforeseeable on our end, we need a little bit more time to figure out how much it will cost to remediate, and deposit stays as is. By then, not only have the other buyers probably moved on, but logically speaking, the seller will have the same issue no matter who they sell to, and even if they legitimately weren’t aware before, now they are and would probably have to disclose, so makes sense for them to just extend with you at that point in the process and just hope you proceed to close.

Only other thing I can think of is to agree to a shorter diligence period, but then make it a condition of closing that title is clear and you receive clean estoppels. That way, it is a seller default if they can't deliver those things before you close as opposed to your obligation to terminate if they don't.

It’s all about playing your cards right at the right time-when you have leverage, and knowing when you don’t.  If you do get into a bind, we sometimes see bridge loans, just temporary until you can get your financing closed, but otherwise, I’m not sure I can think of anything too “creative” without a specific fact pattern.

Jason Mak · Answer

@Jessica Zolotorofe

Jason Mak · Answer

That's interesting.  I mostly look to purchase multifamily and commercial deals in the Los Angeles area between $5m-$10m - purchasing for myself and with my own funds, not wholesaling.  The buying competition for a decent property/location here is pretty intense.  If most sellers aren't receiving all cash they are asking for short contingencies, non-refundable deposits etc.

What types of creative financing and creative deal points have you seen in the Southern Califronia area? Would love to hear about some deals that you helped to close and the type of creative terms you were able to help your client obtain.

Jessica Zolotorofe · Answer

Really?? I have closed quite a few deals in CA lately and they are all pretty flexible. Are you talking about residential or commercial? I've never worked on residential in CA, so I can't speak to that part, but do you have a good lawyer? If it is not customary to use lawyers there, then I can see residential having that issue, but anywhere a lawyer can jump in to negotiate, I really haven't run into that problem. Sure, you have the few hard headed sellers, but for the most part, I've been fairly successful in the NY/NJ area. I get push-back on assignment clauses occasionally, but there are ways to draft around seller's concerns and still get the deal done usually. Are you wholesaling and need the extra time or ability to cancel, or are you actually needing more time to conduct your due diligence?

Creative and Extended Contingencies still available in your area?

Most Popular Reply