Ep. 5 | 30 Seller Deliverables To Request For Your Due Diligence

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On this episode of The Mobile Home Park Lawyer Podcast, Ferd takes us through 30 Seller deliverables to request for your due diligence. Ferd lets us know why we need all of these deliverables, and the best ways to approach different types of sellers. Enjoy!

 

“Often times people ask me well, what do I need to look at? What do I need for underwriting? How do I know if my pricing is right? How do I know if this is a safe deal? And getting a quality list of seller deliverables will really help you get there.”

 

HIGHLIGHTS:

0:00 – Intro
2:03 – When do you ask for the seller deliverables?
7:16 – Request environmental reports for the property
8:04 – Ask for any construction drawings or as built drawings of infrastructure
10:24 – Copies of any easement agreements, amendments or derestriction
10:33 – Copies of any permits, certificates of occupancy or licenses
10:54 – Copies of any leases
11:27 – Reports, tests and ratings of the infrastructure
11:41 – Any appraisal of the property
12:09 – A copy of their current insurance policy
12:27 – A copy of any writer first refusal for any portion of the property
12:45 – Copy of any property tax bills or assessments
13:05 – Any letters of non-compliance from any governmental agencies
13:15 – Copies of utility bills
13:51 – Copies of all vendor and personnel contracts
15:20 – Contact information of all vendors and personnel
15:47 – Certified rent role
16:13 – List of 5 best and worst aspect of the property
16:35 – Copies of their bank statements
17:43 – Copies of financial reports
18:12 – Copies of tax returns
18:51 – List of any capital expenditure over the last 5 years and projected over the next 2 years
19:02 – List age and type of material of all utilities and infrastructure
19:17 – Status of the utility
20:01 – Date and amount of the last 3 rent increases
20:51 – The list of any personal property which is included in the sale
21:01 – List of any mobile homes included in the sale
21:18 – A list of any criminal activity or problems over the last 2 years
22:17 – The local police department will give you a report of the criminal activity

 

RESOURCES:

Due Diligence – Seller Deliverable List

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation. Here today we’re going to talk about seller deliverables. And really what these are, these are the due diligence items you request from the seller. Often times people ask me well, what do I need to look at? What do I need for underwriting? How do I know if my pricing is right? How do I know if this is a safe deal, all those sorts of things that you ask and you kind of get to understand during due diligence. And getting a quality list of seller deliverables will really help you get there. And these things are designed a lot to help you uncover problems to help you save money. To order reports that they’ve already got, to help you understand the property and then just down the road to have more resources available for when they may or may not come up. Also this is just really a fact finding mission as well. And it gives you a chance to really vet whatever the seller tells you to see if it’s true or not. And then some of these things will be in the purchase contract will be seller reps and warranties that these things are accurate, or these things are valid and there’s some other action steps associated with them. So ultimately, you know, there’s a number of things that go into due diligence. I’ve talked about the 10 landmines you need to avoid in your due diligence. I’ll also talk in another podcast about key steps and processes to go through during your due diligence.

Well one of the due diligence things you’re going to do is review the seller deliverables. So you may ask, when do I ask for the seller deliverables? And that can be a little subjective. Sometimes I will put it in the purchase contract as an exhibit listing all these things. If I’m buying from a professional seller, that’s what I’ll do. And whenever I sell, I have them ready to go when I’m negotiating the LOI. So that as soon as I get the contract, I just drop them on the buyer’s lap. And what that does is it puts the buyer on the clock. Cause a lot of times in the contract and in my purchase contract, the shot clock, if you will, on your inspection period, your due diligence period, it doesn’t start until certain things are delivered by the seller. And typically that’s going to be the title commitment and the seller deliverable list. Sometimes it’s going to also include a survey, but surveys can be out of your hands. Cause you got to hire a third party. So you could argue, it’s not fair to tie the timeline to that. If you’re the buyer, you want to get it that way. If you’re the seller you don’t. But what I try to do is have all these documents ready, typically in a Dropbox file. And then I send a letter as soon as I deliver them saying, you have receipt of the deliverables, you know, five minutes after countered execution, please review for compliance and completion and accuracy in the first 48 hours. Otherwise I’m going to deem that you’ve accepted them and then a best practice would be, you know, getting them to sign off that I’ve accepted, that they’d been received. Doesn’t mean they agree with all the findings, doesn’t mean that they’re going to close or waive any inspection provisions, but it means that they’re agreeing that you deliver everything.

So, I’m a professional seller. So if I sell, I don’t care if you ask for all this stuff, if I buy it from a professional seller, I’m going to ask for all the stuff, I’ll just put it in the purchase contract. If I’m going to buy from ma and pa, it’s really a gut call. And a lot of times I won’t put it in the purchase contract because it offends him sometimes in order to overwhelm them. Cause as I’ll go through this list here in a minute. There’s a lot, there’s a lot of stuff on here. And some of the stuff, some of the requested items take some effort, some work to compile. And some of it’s kind of personal like tax returns. I think it’s important to see your tax returns. In certain times it’s not even available. So I always try to, you know, comfort the seller. Look, if you don’t have it, that’s fine, but you need to represent and warrant that you need to tell me that. And into my contract, I’ve got some survivability provisions and I’ve got some representations and warranties. And if you deceive me, then I later find out about it. I have the right to sue you at law or equity. Meaning every day you can look in the mirror and look over your shoulder is today the day Ferd comes to get me for lying. So I just want to say, don’t lie. Tell me what you got. And that’s what this list is about.

The kind of the risk, I guess if you don’t put in the contract is after you execute the contract, when you make these requests during your due diligence period, the seller might say, no, you don’t have a contractual right. And you could put some vague statement in your contract like seller must deliver everything I ask. Well, good luck suing on that provision. Now you could say best efforts are commercially reasonable, that kind of thing, but that’s subjective as well. So really use your muscle, if you will, if the seller does not comply as to say I’m going to terminate and sometimes the sellers will cave and comply. When you threaten to terminate, sometimes it’ll piss them off. Sometimes they’ll say, go for it. I closed a deal one time, I didn’t even have a contract. Frankly I had my binding letter of intent and took it to the title company. And the guy never delivered all the seller deliverables. I got enough of them and I got enough of the third party reports. I got the survey, I got the phase one environmental. I then knew the market was good. I got my appraisal. I got my loan commitment, all those things. So I closed the property despite never receiving a number of items on this list. So technically my shot clock and my due diligence was on day zero. And I even closed a contract at a title company with an LOI. And as long as your bank’s cool with it and contracts, you could have a contract on a napkin really, and you could have a very brief contract.

As you know from my earlier podcast, I have a more robust contract and I recommend that for you. And I have a binding letter of intent, which I recommend as well, but this sort of deliverable list is important and it really is kind of a launching pad and it gives you something to work on under contract. So you don’t get stale. You don’t move on to something else and forget and start eating clock. And I always think it’s good. You know, assure the seller like, hey I’m going to work on your property. I’m not in the business of tying properties up and farting around. I’m going to work on it, by work on it. I mean, I’m going to do my due diligence. I’m going to kick some tires, turn over some rocks. And if everything works out, like you say sir or ma’am, well then why would I not buy it? That’s what I’m here to do. I’m not doing this for practice anymore, okay. This is designed to get me to closing, to a win-win.

Okay. So I’m just going to jump in the list. Some of these will be pretty self-explanatory. Some of them I’m going to have minimal commentary for, but this is my, I say my due diligence list, my seller deliverable list that I will use to put the contract or request immediately after getting the contract or shortly thereafter.

First, number one, environmental reports of any kind conducted on the property. This is important because if they’ve already got a bad environmental, then you can kind of save time and bail. Or if they’ve got a good environmental or a partial nominal study, why go get bids from 10 different companies. First call the company that already did it and say, hey how about I pay you $250 to update the report as opposed to getting bids and paying anywhere from $2,000 to $5,000 per phase one environmental.

Number two, copies of any existing surveys or plat. This can save money in the same way, but also  its the possible survey is sufficient. You don’t have to order a new one. And it also gives you more information. Survey could be very detailed, a lot of good survey an alta survey with lots of table A items that will, that’ll show easements and things like that. That’ll give you a lot information to the property.

Number four, any as built drawings or construction drawings and infrastructure. This is one that I feel like is more helpful down the road. It’s not as much during due diligence, but it’s more like, hey three years later when I’ve got to find a water main or you know, sub-meter or something, or shut off the water valves to. You know, look for a leak or something, it would be nice to have that.

And it’s kind of a sidebar. It’s always good to keep a strong relationship with the seller, especially seller finance deals, of course, but even on a cash deal. The first park I bought and I didn’t know all this stuff, nobody gave me this list. I didn’t know all this stuff when I was doing it, and I wasn’t even an attorney yet either. So I mean, it was, I was kind of fishing in the dark, if you will. And I remember my dad and I, we had a water problem and we had to find the water main, to shut off water to the whole park, to look for this big leak and excavate. And we looked and we looked and we could not find the water main. We couldn’t figure where to shut it off. So what are we going to do? I’m going to call the city and shut it off down the street and re pipe and put in new shut off valves and dig up main lines and get city permits for it and inspections. And we could’ve been out of water for days, would cost thousands and thousand dollars. Luckily we still had a good relationship with the seller and we were reasonable during our due diligence and partially because we were more ignorant than we are today, but we were all around good guys. And we called and said, hey can you help us out? And sure enough, the guy said, oh the water main, you’ll never find it. You know, on the east side of the property there’s that tree line, over the past the tree line there’s a creek. Past a creek there’s no tree line. Yeah. There is was a corn field. Yeah, that’s the other guy’s property. Yeah, for some reason the city put the main line over there. You got to shut it off over there. We would have never found that. We would have never had, we could have dug every inch of our property and been off by 200 feet across the creek, cross tree line. Would’ve been screwed. So lesson learned, be nice to seller, but also lesson learned get copies of as-built drawings if they have them. Great. They’ll give them to you for free. And if they have torn up or ripped up papers at least you know the engineering firms that did it and you can go back to them later.

Okay. Next, copies of any easement agreements or amendments or deed restrictions. You know, title works, pull up and catch all this stuff, but sometimes it doesn’t. So you might as well ask. Six, copies of any permits, certificates of occupancy or licenses and the annual fees and renewal dates for each. These are all items you want to verify with the city. But sometimes the city personnel will forget one and this could be like a crosscheck and or just makes your life easier. When asking for certain specific items with the city state or other government agency.

Number seven, copies of any leases, amendments, addendums, extensions, or revisions to the lease. Lots of times you don’t get this. I mean, they just, ah, my leases are month to month. I haven’t updated in five years. And the people I’ve bought parks were like, we know towards these names are from our hometown. They died. Okay. They don’t still live here and you know, you try, but you at least eventually put those into the assignment of leases. And then if there’s related to the Park owned home to a bill of sale, so try to get them, read them, make sure they’re all the same template. If they’re not, you got to read each template once.

Next reports, tests and readings and compliance documentation for any infrastructure like sewer, water, wells, things like that. Water plants, sewer plants, and lagoons get documentation on that.

The next one, number nine, ask for a copy of any appraisal on the property. This is one that people will push back on. I pushed back on the seller. I’m like, it’s none of your business, right. And what they’re trying to do is figure out how much you paid for it or how much, you know, you’ve increased the rent and all these other things to basically see if they can retrace down the road. They don’t need my appraisal, but I always ask for it. I don’t get it a lot of the time and my and pop don’t even have appraisal sometimes. But it does help sometimes with pricing.

Number 10, a copy of their current insurance policy and binder showing the premiums and coverage. It’s possible that their insurance guy’s better than yours or cheaper than yours. So, right, so you got a free comp, but they also kind of get a better feel for what, if there’s any claim history you can ask for a loss report. So you’ll know if there’s any claims previously, because that could impact your insurance coverage.

Number 11, a copy of any right of first refusal for any portion of the property. This is pretty atypical in a mobile home park, but I still ask for it, even if they’d have it, that’s a big problem. And I make sure in the contract that they wrap and warrants that they don’t have that, but first right refusal.

Number 12 copies of any property tax bills or assessments. I generally pull this myself from the County records, but they’ve got it handy. Let them do the work for you. And you use that to one for proration’s closing, but two, to kind of estimate, if your property taxes would increase based on the price you’re paying and the prices on the books for it, in doing three years’ worth, that kind of shows the history as well.

Number 13 letters of noncompliance, many governmental agencies, I’ve actually never received one of these. So they’re either lying or they’ve been good boys and good girls.

Number 14, copies of utility bills. This is pretty important. You know, there’s copies of their water, sewer, trash, gas, electric, other, especially you want to look at their water bills compared to their collections to see if there’s any leakage. And you want to see what the trash bill is. You want to get quotes for their trash bills. If they’re paying gas or electric, that’s pretty unusual. You want to see what it’s for. I mean, you pay electric for street lights and you got to budget that, I mean, you’re not going to be able to save any money in the street lights that they are. And typically I have tried to add streetlights and sometimes it’s per meter usage, but a lot of times street lights are really just a fixed fee. So you’ve got to look at their bills. You can kind of get a feel for that. I asked for two years, but generally even six months is okay.

Number 15, copies of all vendor contracts and 16 copies of all personnel contracts. You want to read those and make sure they don’t automatically attach to you. And you’ve got to try to spit the hook on them. If you can. And in your purchase contract, you want to make sure that all of those contracts have to be canceled immediately prior to closing. So you don’t automatically have to inherit a bad contract. Speaking of vendor contacts, I almost never signed a trash contract. The trash companies, they’re just, Oh my gosh, they’re the worst. And I found that they continue to provide service if I don’t sign their contract. If they absolutely require it. I do minimum, I say 30 day termination clause and they say, we can’t do it three years. Three year renewal, five-year all this crap. I say, I insist, I insist and they don’t agree. I go to different trash company. And I think that once they didn’t cave. For the most part, they don’t cave in month to month, but you can’t get them to cave on a lot of provisions. And it’s just so one sided and I’ll take advantage of you. So when I do sometimes don’t tell my trash company this, but what I do is I don’t even change the trash service in my name, the bills come to the park for whatever reason sometimes, I just have, get a set up on auto pay and I just pay the bill. It’s coming from a different account. I don’t have a long-term contract, but then it’s amazing. I can go from 20 to like 30, 40, 80 units in the park and they just say, Hey, can you bring me 10 more dumpsters? Sure. 10 more dumpsters, sure. And my bill stayed the same for years. It’s kind of crazy, but those contracts are so horrible. I just do whatever I can when I have to sign them.

Number 17, the list and the contact information for all vendors and personnel. This can be helpful to kind of get the name and number of all the people who have already worked on the sewer lines, who already worked on these electric meters, who already mow the grass and already have the snow contract and you can get bids from them. And I try to get them to give me a kind of a grade, you know, A B C D E F G, that kind of stuff. You know, I guess I said too many there, but you get the point. So you can kind of get their opinion of who’s good and who’s not.

Number 18, certified rent roll. This is important, and this should be updated every month of due diligence and updated at closing. And this would include things like the unit number, the rental amount, moving date, name and phone number, number of tenants, delinquency balance, security deposit amount. You might not get all that stuff. You at least need the name and the number in the security deposit. Ideally the delinquency balance.

And number 19, this is pretty subjective, but the list of five best and worst aspects of the property. Might as well get the third opinion. And it kind of makes them feel warm and fuzzy too. I could ask that question sometimes on my cell and I’m kind of like, this is stupid, but I asked for it, you know, lots of people do it. You know, I didn’t invent everything on this list. I put together some, a couple here, a couple there from other people’s lists and from deals I’ve seen.

Number 20 copies of bank statements. Some people are super anal about this, especially if their lender requires it. But I bought a park in Rantoul, Illinois, and the guy was like 95 years old. He owned three mobile home parks and 75 rental houses. And all of them were in his personal name and they were all in the same checking account. So what good would it have done for me to look at his bank statements? Oh, great. He’s got a Netflix bill that doesn’t help me. You know, in theory, this helps you to see if the rent deposits are valid and kind of monitor’s expenses. I feel like most sellers, especially, I don’t know, I don’t want to pick on mom and pop, but most sellers are either inept or immoral and they lie to you all the time. So I really don’t trust a lot of stuff. You can rig your bank statements, right? I can start, I could drop my own cash in the bank account by wanting to claim look, people are paying. I mean, it would be a huge pain to do that, but people do that stuff. It happens sometimes. So I don’t really trust the bank statements, but you might as well ask for them, because maybe it helps. Maybe they’re honest. I should be more optimistic my wife tells me.

Okay, number 21 copies of financial reports, the PNL, profit laws or balanced sheet for two years. This is more important for banking than I think the bank statements for lenders. I tend to ask for this and look at them and I review them. Sometimes it’s garbage, but a lot of times it’s not. Nowadays more and more companies have, you know, rent manager or accounting programs. So it tends to be more valuable. So I ask for it. In any professional operators going to have this kind of stuff.

Next is copies of tax returns, two years. This is sometimes, it’s a big deal for mom and pa. So sometimes I don’t ask for this or I ask for it. And I said, don’t worry about that one. Because they’ve been cheating on their taxes basically, professional operators, I don’t think really ever cheat on their taxes. We know the juice ain’t worth the squeeze, as I like to say, but for mom and pa, they’ve been rolling the dice and they’re collecting cash and all this. And I’ve seen like they’re paying for their kid’s truck out of the account and all this kind of crap. You can ask for it. I generally don’t die on that Hill if they say no and this kind of all these things, this is the wish list. But you can tell by my, you know, color commentary here which ones I think are crucial, which ones are not.

Number 23, this one’s important. The list of any capital expenditures and the amounts over the last five years and projected over the next two years. It’s just good to get a better feel for what they spent money on.

Number 24, list age and type of material of all utilities and infrastructure. So obviously it was like Orangeburg sewer. I hate it. But if it’s, you know schedule 80 PVC and it’s one year old, okay, that’s good to know. And so on for the other infrastructure.

Number 25 is related status of the utility system, what’s the condition and any deferred maintenance or infrastructure issues for the utility system or just the general park.

And then also with that status of the utility system, meaning is it sub-metered, is it a private water lines, public water lines, does the tenant get the bill, does the landlord get the bill? Who pays for it, tenant or the landlord, just going to get a better feel? Obviously the goal would be hey, city water, city sewer, direct bill to the tenant. You know, the worst would be private water, private sewer, not sub-metered and paid by the landlord. And that unpacks a number of things, including your expense ratio and your ultimate profitability.

Next on the list, number 27, the date and the amount of the last three rent increases and then ask them. Any state or city specific rent increase rules. I asked that one, just kind of curious more than anything, because I still go look that up myself, you know, what’s does law say, but it’s interesting to see, you know, what’s the rent increase. I had a deal where the rent have not increased since at least 2009, I bought this park in 2018 and that was the oldest lease that I could find, like literally the same rental rate for nine years. So that gives you some information. Some States by the way, require you to disclose the prior years, you know, maybe one, two, three, five prior years of rent amounts and the next one, two, three, five years of rent amounts on the lease. So that could be important to know as well.

Number 28, the list of any personal property to be included in the sale.

And in 29 related to that, list of any mobile homes, including the sale. And I like to get the lot number, the size, the dimensions, the year, make, the model estimated value or insured value and obviously the VIN as well. So all that’s kind of important, but the more detailed you can get on the bill of sale, the better.

And then the last one of the 30 seller deliverables that I request would be a report of any criminal activity or problems over the last two years. And this one can kind of become Pandora’s Box. So I’ll even sometimes ask like, can you do it per tenant. You get the per tenant opinion. Which is probably really shouldn’t do I’ve never done it. I don’t think I would do it, but you know, I’ve had one lady be like, oh this guy he’s nice. But I think he has, you know, some quote guy friends over from time to time and he bakes and he kind of sings and dances. I’m like, okay, she just said he’s gay. She was, that was like her report. It was like nothing related to his tenancy. You know, not like he’s a late payer. He has drugs or, okay well that was interesting. And they’ll tell you this guys, this lady’s got a new boyfriend or this lady boyfriend’s a jerk. Okay what do mean is a jerk? Is he violent? Okay. I really try to stick with criminal activity. So I’m not really too nosy. And I don’t want to get in sideways in the FHA laws or anything like that. I also fact checks myself. We call the police department and pull police report from the entire park. The police typically will give you this. And generally for free, like sometimes want like a hundred bucks. Sometimes they’re annoying. You got to bug them like five times, but ultimately they’ll give you a criminology report.

So overall, I mean, as you can tell, that’s a lot information to ask for from a seller, which if your time, you mean your shot clock on the inspection period starts when you get this stuff, that’s really good for you because you know, I’ve gone months and months under due diligence and never been on day one because I’ve been waiting for these items. So when you’re buying, this is helpful, but when you’re negotiating pre-contract you got to make sure you don’t scare away ma and pa, because you’ve just got this big daunting list. And they are like, ah, I don’t want to sell to this guy. So all told due diligence is crucial to buy mobile home parks and it is largely dependent on the seller deliverable list you get.

So don’t be afraid to ask for it, if you read all this and you have more questions, ask more questions. If there’s something that I’m missing from my list, ask for that too, shoot me an email at ferd@mhplawyer.com and tell me about it. I’ll put it on the list. I might even give you a royalty. No, I won’t. That was not binding by the way. But anyway, I’d love to know, maybe I’ll give you a shout out or something. Maybe you will be a guest on my podcast. You know how many listeners I have, I really don’t know how many listeners I have either, but it might be worth it to you.

So anyway, thanks for listening. Check me out on the www.mobilehomeparklawyer.com and you can get a copy of this due diligence list.

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