Why should you Include Contingencies in Your Self-Storage Contract?

Whenever you make an offer, you need to make sure that there is a way to back out of the contract. When you make your original offer, you make a lot of assumptions. You assume that the seller has told you the right cash flow, but until you can review the books, you don’t know for sure. You assume that you will be able to get financing, but you don’t know until all of the tests and studies and appraisal have come back satisfactory. You assume that the property is in workable condition, but you don’t know until you have your inspections done.

Whenever you buy a property, you want the contract to be contingent on financing. You may have spoken to your lender, and they may have told you that you can make the numbers work and the financing is all but guaranteed. However, until you have that final SBA approval or approval from underwriting, you don’t know for sure. Make sure that you can back out of the contract without a lawsuit if you are unable to come up with the money for the project.

You also need to make sure that the property is contingent on due diligence. This makes it so that you can have whatever tests, inspections or get approvals without having to list each one. There are several inspections that you should plan on doing on every property that you purchase. You don’t want to buy a property without an inspection so that you know what you are buying, a feasibility study to know if your project is even viable, and a variety of additional inspections depending on what you are doing with the property.

If you are buying a piece of land that you are going to build self-storage on, then you not only need to get a feasibility study, but you also need to find out if the city/county will allow you to build. You also need to do soil tests and verify that your numbers actually work. If you don’t give yourself an opportunity to do that prior to closing on the property, then what will you do if you discover that you can’t do what you wanted to do after you purchase the property? You may be stuck with land that you don’t want.

A feasibility study allows a third party company to come in and verify your research and do a lot of additional research. They will look at the market to determine if the market is oversaturated. They will look at the market to make sure that it can handle another self-storage facility. They will look at traffic patterns and they will determine if you are in a good location or if you have been out located by another facility. They will review your numbers without bias. Sometimes you can get emotionally involved in a project and you want to make it work. As a result, you can skew the numbers in your favor. A third party has no interest in the transaction and so they will just provide the facts.

If any of these tests or inspections or approvals comes back in the negative, you want to be able to back out of the contract. In some cases, you will be able to structure the deal so that the earnest money is refundable if you back out. In other cases, your earnest money will be non-refundable. The important thing is to make sure that if you need to, you can cancel the contract. As always, happy investing.