Making an Offer – The Due Diligence Clause

Any time you put in an offer, you want to have an escape clause, a way to get out of the contract without any, or very little, penalty. This allows you to get a property under contract quickly and then do the necessary research to see if you actually want the property.

When you initially look at a property, you want to make sure that it has the basic elements that you want for your investment model, like a good return on investment or good upside potential, or that it is in a good location, or that it is in a strong market. But then, once you think you have those, you can put in an offer based on the minimal research you have done as long as you have a due diligence clause. That way if you find something about the property that doesn’t work for your investment plan, you can back out of the contract.

Your due diligence clause can vary in length depending on what you are doing. If you are taking over an existing property 3-6 months may be enough time to get your feasibility study done and your financing in place. However, if you are building a new self-storage facility, then you are going to need much longer. You will still need a feasibility study and financing, but you will also need to get all of your plans drawn and your permits in place and that can take up to a year.

If you are getting pushback from a seller on having refundable earnest money for a long period of time, then you can have the earnest money go hard at certain points in the contract. For example, once the property passes the feasibility study, you may let a portion of the earnest money become non-refundable as long as they are willing to give you as much time as you need to get the project approved. If you are unable to get the project approved, then you will lose that earnest money so you will also want to have a very strong idea of whether or not the city is excited about your project.

Don’t lose out on a property because someone else is able to get the property under contract faster than you. Do your preliminary research to make sure that the property fits your investment model and if it does, get it under contract with a due diligence clause. That way, if the property turns out not to fit your model once you do more research, you can back out of the contract without losing your earnest money. As always, happy investing.