On this episode of The Mobile Home Park Lawyer Podcast, Ferd takes us through 30 plus provisions, including 4 that will save or make you money, that must be in your purchase or sale contract. In this step by step guide, you’ll learn from the best on how to get the absolute most out of your deal, as well as protect yourself from all angles.
“This is important, whether you’re buying, selling, or assigning a purchase and sales contract, and I’ve really seen a lot of bad contracts.”
HIGHLIGHTS:
0:00 – Intro
1:54 – Put the full and correct legal name of the seller in the contract
2:14 – Put the full and correct legal name of the buyer in the contract
3:06 – It’s important to have good assignment language
5:25 – Get the legal description of the property and the address of the property in the contract
5:45 – List personal property in the contract
6:20 – Include the purchase price in the contract
6:28 – Include the earnest money deposit amount and date it’s due in the contract
6:46 – Include the right of entry in the contract
6:54 – Include language about policies and find out what objections you can have
7:50 – Reference the condition of the property
8:10 – Put in a clause about the risk of loss
8:54 – Your due diligence clock shouldn’t start until you have everything from the seller
10:17 – Include an extension fee in the contract to buy more time
11:10 – Mention seller required actions such as terminating any vendors contracted to the seller
14:59 – You need prorations at closing
15:23 – Include seller reps and warranties
16:37 – Include buyers reps and warranties
16:50 – Include a buyers right to terminate
18:06 – Make sure you have damage or default
19:00 – Have a closing date in the contract
19:27 – Include the buyer contact details
19:51 – Include a closing contingency for if you need an escape
20:37 – Have a buyer/seller cost breakdown
21:29 – If you have a broker, you need to include broker representations
22:03 – Make sure you have survival included in the contract
22:50 – Have a 10-31 exchange included
23:35 – Include a COVID clause, for extensions
23:51 – The FERPDA provision is an extra form to fill out if you’re from a foreign country
24:16 – There are boiler plate provisions which are usually included
25:07 – Have a signature block, obviously
25:09 – Include some exhibits like an aerial map
26:11 – Finally, have an allocation to purchase price
RESOURCES:
Purchase and Sale Contract – Key Terms
FULL TRANSCRIPTION:
Welcome back MHP nation. And here we are again today with another great episode for you. Today, I got a real sexy topic for you. Contracts. Yeah, I know I’m a lawyer. So you may think contracts are boring to everybody but us, but before you hang up on me, hold on. Cause today I’m going to show you and talk to you about 30 plus provisions that must be in your contract and then to make it interesting, I’m going to include four key provisions that are going to save you money or make you money. It doesn’t take tons of notes. If you’re driving that’s okay, because I’m going to have an opportunity at the end of this podcast, to give you access to a link where you can have this list of 30 plus provisions.
Before we go and I’ve got a question for you. Are you of the belief that all purchased and sales contracts are the same? Let me guess you got that from legal zoom. Well, hate to burst your bubble, but they’re not the same. And I’ve seen some really crappy contracts lately. Getting right to the point. I mean, this is important, whether you’re buying, selling, or assigning a purchase and sales contract, and I’ve really seen a lot of bad contracts from assignment guys, I’m talking one page contracts. That’s crazy. You can’t get it all in one page. You’ve got to be used to some seriously small, fine print in small font. Don’t recommend it. So I’m going to jump into the next 30 or so provisions that you’ve got include. Some of them are pretty basic, but some of them are more complex and I’ll dive into those with a little more detail.
First off, get the full and correct legal name of the seller. Don’t just put John Smith if it’s owned by John Smith, LLC. You can find this quite easily by looking up the property at the county records. Pretty easy to find online pretty much anywhere nowadays, it’ll be confirmed later by the title company, but get it right in your LOI and get it right in your contract.
Next, the full and correct legal name of the buyer, that’s you, right? And you want to have the buyer’s right to assign a contract. And I would not put on a contract. Like I don’t put Ferd Neiman. I don’t put Ferd Neiman, I put generally my parent company, Third Four Properties and or signs. Third Four Properties owns no properties, it’s a paper tagger. It’s my holding company. I then assign every contract to a special purpose entity, a new LLC that I create. But also by having that language in there and/or assigns, it gives me the flexibility to assign the contract to somebody else. Ideally to anybody else. A smart sellers attorney will try to limit that to a related entity, so I can’t just assign it to John Smith. And then I potentially just walk away or I try to be the middleman and make a buck, which that’s really what assignment guys do is they’re the middle man and they make a buck. And sometimes if it’s ours they don’t care as long as they get their piece, but it’s really important to have good assignment language. And then all these good provisions in your contract.
Quick sidebar. I had a contract under assignment in Missouri and I had a really short time to raise about a million bucks. And I wasn’t sure at the time I was going to get it done. This was the first time raising capital and I didn’t know if I was going to get it done. I didn’t have that kind of money laying around myself. So I tried to assign it and I didn’t have time to shop it on the open market. I tried to sign it to one of the top five operators in the country, actually two of them, because they both owned parks in this same valley. So I got ahold of them and found them. One of the groups said no way, no interest. Okay. The other group said, we’re interested send us your contract. They didn’t like my contract. They said, we can’t do it. We need these, this term, this term, this term and this term. I was like what? They said, yeah, you can’t do it, buddy. We need our contract. Our lawyers require it. So I said, well, I can’t really do that. I’ve built rapport with the seller and I’m not going to get them to say, oh, by the way, here’s this new big rich group resign with them. And trust me, I’m not getting paid in the middle. They would have cut me out of the deal. So I told these guys no thanks. In the meantime, I was like, what’s wrong with my contract? I’ve been using this to buy and sell properties for several years now, including with the retail developer, where we bought property in the tens of millions of dollars. And you know I thought it was a good contract. Well, it turns out it was. And the head attorney called me about two weeks later and said “I was on vacation, I looked at your contract, it’s fine. The baby lawyer who was covering for me when I was out of town, didn’t recognize that you had certain provisions in different places, but they were all really there. So we’d like to assign your deal.” My asking price was $165,000. By the way, I told them at this point I had already raised the capital and he said, okay, how about $200,000? So there I was, I had almost no money and minimal time in this deal. At this point, I was about to make $200,000, but it was too late. I’d already made some commitments to my investors and I wanted to do the deal myself. I thought if I’m ever going to be a promoter and syndicator, I needed to get one under my belt. And that’s what I did. And we got it done. And I don’t think I ruined the relationship with that buyer, but I didn’t end up assigning it to them, but I had the right to, and that’s really important. That wasn’t in one of the four key provisions. But now that I think about it, that’s also key provision. Get this stupid assignment in there.
Okay. Next get the legal description of the property in there. Don’t just put 123 main street, pull the records from the county. But typically the county’s not going to have a guarantee that it’s accurate. So you’re going to have to have in your exhibit A where you have the legal description put in there in parentheses to be verified by a licensed surveyor in X state. Okay. But do that. Also include the address of the property that’s next.
Next, if you’ve got a personal property, list that and put in an exhibit as well. I mean, if you’ve got mobile homes then obviously try to put address, year, make, model. I try to get estimated value or insured value and they need the VIN. If they don’t have good title, you want to at least put the homes in there. And without the VIN and the lease you get rights to it. And we’ll cover quit claim deeds and bills of sale, that kind of stuff on another episode. But I don’t identify and specify all the personal property. If they’ve got any other personal property like tractors or backhoes or snowplows, you might as well put that in there too, make sure you’re buying what you think you’re buying.
Next. Obviously you need to have the purchase price in the contract. That makes total sense. That one usually is not messed up.
Next is the earnest money deposit the amount. And then the date, the earnest money is due. I mean, you want to make sure that you don’t have to turn over the earnest money like at contract signing because you could quickly be in default if you’re going to mail the money in or wire the money. And so generally, you get two days or five days to wire the money, always wire the money to a title company. Never give it to the seller direct.
And then next you’re going to start to do work on the property. You want to have the right of entry, meaning the right of possession to do your due diligence.
The next key provision is the title commitment. It’s pretty obvious, but some things that are important in a contract that people miss is you need to have certain language in there about what type of policy, like the standard current Alta form. And then what if there are defects and then what are the objections that you’re allowed and rights to cure. I mean, if I get title and it’s got a bunch of crap on it that don’t like easements or other leans, I want to object to that. And it’s important for your attorney to provide a title objection letter, which also includes by the way, your endorsements. Like I typically add a survey endorsement, an access endorsement, a zoning endorsement. That’s basically like a supplement, a kind of additional insurance if you will, from the title company. Sometimes in order to get those extra layers of insurance, you’ve got to do more than just ask for it. You got to prove up. So you’ve got to get the zoning letter. You’ve got to get a survey, things like that. Otherwise the title company is not going to take that kind of risk. So we’ll cover some of the zoning stuff in a subsequent episode.
Next you need to have referenced the condition of the property. I mean, typically a lot of property sold as-is, where-is and how-is. But if you’ve got some other provision, like it’s not going to go down in value, it’s not going to materially change. That can be negotiable. But you at least need to reference in the purchase and sale contract what the represented condition is.
Next you’ve got the risk of loss. And this is really just, if something bad happens like an insurance claim while you’re under contract, who gets the money? And this could include other provisions like condemnation, eminent domain. I mean, for example, if you’re buying a property for a million dollars and during your due diligence period, before you own it, the state comes in and says we need to take the north 10 feet of your property along the property line. That may not hurt you that much at all. You may love that. It may not bug you. Well, if they’re going to pay a dollar for it, no big deal. If they’re going to pay $200,000 for that 10 feet. You don’t want the seller keeping that. You want the rights to those condemnation or eminent domain proceedings. Makes sense, right? Put it in the contract.
Next up. We’ve got the due diligence period. This is a key provision here. So write this one down, the due diligence period. The key here is not just the number of days that you have due diligence. Like we’ve got 30 days, but I typically think it’s not really fair for my time clock, my shy clock to start until I’ve really got the information that I need. So I tend to try and most of the time can get the seller to agree that my clock doesn’t start until I’ve received everything you’re supposed to give me. That is your due diligence list. That’s another item, all kinds of stuff. You can get a copy of my due diligence list as seller deliverables, what I call them, you can get a copy of that from my website, www.mobilehomelawyer.com. But the timeline is important to start at once you get those and not only in the due diligence list, but also the title commitment, and if you can the survey. Because what often happens is, the title commitment takes a couple of days. Surveys could take anywhere from two weeks to eight weeks. I don’t need burning clock. I’ve got a 60 day due diligence and I’m waiting for seven weeks to get the survey? That’s going to really hurt me. Cause to me, and really in the law, the survey is a supplement to title. The title says there’s an easement of record. Okay, well, what’s the easement look like on a map? I don’t know. I’m not a surveyor. I need to get a surveyor to go there and draw me a map and see if the easement is a problem or not. And really that just seems fair to common sense, but some people don’t put that in there. And then they got a 30 day due diligence and they don’t have all the documents until day 10 or day 15. It’s just foolish to waste that kind of time.
So next, number 15 of your due diligence period is an extension period. And typically I say hey, I’d like to have another 30-day extension and I’ll pay $5,000. You have an extension fee in there. You don’t want to pay zero. Cause then they could argue, you don’t have consideration. You’ve got to pay at least a dollar, right? But what this does is tell your seller hey, look, I’m working hard on your property. I just need more time. I’m going to pay you a fee, a penalty so to speak, to buy more time. That may be well worth it. You eat $5,000, but to buy yourself more time to raise capital from investors, do more due diligence, get your loan approved, get your other documents back. Some of these other items. And typically that money is nonrefundable, but applicable to the purchase price. Maybe you can get it refundable. I doubt it, typically it’s nonrefundable. Sometimes it’s applicable to the purchase price when you get a credit for it at closing. Sometimes it’s not applicable and it’s just pure penalty.
Next up. Number 16 the due diligence list I already referenced.
Number 17 is seller required actions. This is important. This is key. One of the seller required actions is they have to terminate any vendor contracts or personnel contracts. Another component of that is they have to send out any tenant correspondence on your behalf. Let’s say, for example, a rent increase. If you’ve got statutory deadlines, you want to make sure that rent increase clock gets going before you own the property. But you want to have control over that and draft that. Sometimes depending on the state, depending on circumstances, you may not want to send the rent increase letter. I tend to not send it if I’m going to do substantial capital expenditures and I’m going to increase the rent by more than just 10 or 15 bucks. I’m going to increase the rent $50. I tend to do that after I’ve already delivered and I’ve already shown the new tenants that I’m going to make their community better and add value that way. I’ve tried to have the sellers send it out and then kind of, I can try to blame it on the seller like, oh the seller jacked up the price so he can get more from it. But it’s hard to make that stick. Rumors can get around that you drafted it. So that’s kind of hit or miss whether or not you want to require the tenant correspondence, but you have the right to.
But back to the vendor personnel, I’ll give you a couple of terminations. I’ll tell you a couple of horror stories real quick. I bought a property and I required the seller to fire all the managers. And this, sometimes they say, I love the manager. Well, here’s how you can pitch it to them. I need to interview and evaluate the management during my due diligence. I don’t want to be tied to them and stuck with them. So I want you to fire them immediately before closing, If I’m going to hire them and hey, if they’re great, why would I not, then I will immediately rehire them on the day of closing. But what this does is this allows you to get rid of any personnel that are super overpaid. I bought a park that had negative NOI like literally no profit. And they had an $80,000 manager. So it’s for 22, 23 occupied homes, and it was crazy. There was no way I was going to rehire this person. At least at that rate, I did interview her and get to know a little bit during due diligence. And I was at one point considering offering her a job. It was going to be like in the $30,000 range. Well, that probably wasn’t going to work anyway. Well, eventually I decided I don’t want to hire her because she was bad for other reasons. Well, guess what? Shortly after closing, she filed an unemployment claim against me, which means my unemployment rate’s going to go up for all my other employees as well. I’m going to get into get stuck paying this woman’s wage. And she never worked for me. I would have been screwed or potentially screwed if I didn’t have this provision in my contract. Because you know what I got to do, I pointed to the contract and I said, look, this was a condition of closing that she’d be terminated. And I checked with the seller and the seller did terminate her and tell her she was not going to be rehired. So I then went to the state and I said, if she never worked for me, how could I have terminated her? She was done before I started. Thus you can’t file an unemployment against me. It went round around a few times. But ultimately that carried the day. I also was able to find some supplemental information that she was telling people she was leaving, you know, weeks before. So that kind of helped, you know, prove it like an, I quit attitude. If you quit, you don’t get unemployment. So that’s a key seller required action fire, all personnel.
Another one, the seller had a security contract. They had security lights like throughout the mobile home park and special cameras and 24-hour surveillance. And they could call, they could push the red button and the people would be there in five minutes. It was super heavy duty. Well, I don’t remember what it cost. I want to say it was like $1,200 a month, which was just crazy. But then also they had a 10 year contract with a buyout. The seller begged me to take it over. When they realize this right before closing, their manager had signed it, unbelievable the seller didn’t do it. But they wanted to help me pay for it. And they offered to pay like half. I just didn’t have a need for it. So they had to eat it. They had to terminate that vendor contract, and they had to pay a penalty that sucks, but sorry, not sorry, your problem.
Okay. Next up number 18, you got to have prorations at closing, typically taxes, rent. Some of those things are prorated as of the day of closing, but make sure it’s in there. If you can do something different, different than the norm, put it in there. I put it in there anyway. Sometimes attorneys try to say with local customer practices, well, I don’t know the local practices in every state and I don’t want to look them up and read them, just do prorations. It’s pretty fair.
Number 19, seller reps and warranties. This is really important and a lot of sellers, especially a lot of kind of elderly mom and paw, just some crotchety old men, they just won’t represent anything. And I’m saying to them, hey, this is required. This is normal. If you don’t know something, you don’t have to be responsible for it. But if I find out later that you knew and you did not disclose it and you misrepresented it, I want the right to sue you. If you’re being a bad guy, you deserve to be punished like a bad guy. So typical reps and mortgages and things like the seller has the right to sell, owns the property. There’s no other options to purchase or other or long-term leases other than the leases that for the mobile home tenants that have been disclosed and provided, the none of that stuff is there. But also things like the seller has no information or actual knowledge of any materially, adverse facts or conditions relating to the property or to its present use. So things like that. Are you aware that the municipalities trying to pass a new law getting to mobile home parks? If so, tell me, are you aware of any pending or threatened condemnation or litigation? Are you aware of any hazardous or environmental issues, any new or special taxes on the property other than those have been disclosed? Things of that sort. And there’s a bunch of legal ease, catch-all provisions for those, but that’s really the crux of it. And that can be important. Seller reps and warranties.
Number 20 is going to be the inverse of that. Buyer reps and warranties. I’m representing. I have the legal right and capacity to enter into this contract. The buyer reps are generally less important and less verbose, but it’s important to put those in there as well.
And number 21 is the buyer’s right to terminate, which is kind of goes hand and glove with the due diligence period. But then as part of that, what’s the provision for the earnest money deposit return. I was working on a deal a couple of years ago, this was a land development and we terminated the contract. It was clear. We had six months to diligence. It was like month four, and we realized that the state was not going to approve our plan. So we dropped the contract, the seller was difficult and the seller said, well I’m not giving you the earnest money back. We’re like, well, it says in the contract, you have to give the earnest money back. Well, this seller tried to tie it up. And the title companies are generally cheap and they are super weak in this, even though the contract says so they still sometimes fight it. But do you want to have a crystal clear provision in your contract that says buyer may unilaterally terminate the contract and this shall automatically serve as the sole authorization necessary to return the earnest money, that really neuters the seller. And it kind of puts the title company on hand on note too, that hey, give me my money back. Because they get tied up in the litigation for years. And sometimes the earnest money as $1,000 or $5,000. It’s still sucks, but sometimes it’s $25,000, $50,000. You don’t want to get that tied up. Because it’s probably not even enough to go sue and fight over. So it just becomes like lost in outer space of title companies. So you really got to get the EMD return in there.
Related to that is kind of a default, the next number 22, is you need to have default and damage breach provisions. You know, basically like if I’m the buyer and the seller breaches, like I can make him sell me the property, specific performance. You want that thing in there. But I also would say, I don’t want if he breaches and like sells it to somebody else, that’s not cool. My sole remedy cannot just be, oh, you get your earnest money back. Like, no, no, that’s not cool. Any other damages, like punitive damages, I need damages at law and equity, which include things like return of my earnest money and return and reimbursement of my due diligence costs. It’s hard to prove future profits. So you’re not going to probably get that. So leaving a vague nebulous term sometimes helps any damages at law or equity. So that would be the brief provisions. And then typically there’s a cure provision in there. Like somebody breaches, you have a right to cure so many days to fix it, and that’s not uncommon. That’s pretty fair to have on both sides.
Number 23, next the closing date or timeline. Typically closing is like 10 days after the inspection period is over. Because of my floating due diligence period, I tend to have a floating closing period. I just say 10 days after the end of the inspection period, where a lot of people put in, like must close by noon on December 3rd. I’m like, okay, what if that is five minutes after the inspection period. It is not going to be practical to get the title company in the bank, everybody ready to rock. So I like the floating closing date.
Next one’s pretty obvious, easy. The contact information put in the buyer seller, the respect of attorneys, the title, company names, phone numbers, address, emails. I like to have email notification be sufficient. So you want to have the emails in there.
The next one, this is a big one. This is something that I’ve kind of recently added to my contract because of some problems that we’ve had in the past. And this is a closing contingency and these are things that are out of my hand as the buyer. Basically saying, hey my due diligence is over, I’m waiting on some third party reports. If they come back bad, it’s not my fault. If they come back late, It’s not my fault. I want an escape or I want an extension and these are, I call them closing contingencies. They are things like the phase one environmental survey, good title, and an appraisal. If the appraiser says I’ll be done by the third and that’s in your due diligence and the appraiser hasn’t given me the appraisal back. I don’t want to lose my earnest money or have my earnest money go firm, meaning, non-refundable, go hard. So this is a provision to kind of kick the can down the road. I’ll tell you it is a little harder to get the seller to agree to this. So it doesn’t always work. But a lot of times you can still kind of I don’t say, sneak it in there.
Number 26 is the buyer-seller cost responsibility or cost breakdown. These are things like closing costs. Typically both parties pay the attorneys. The seller pays for the owners and title insurance premium. The buyer pays for any lender, insurance or any supplements or additional endorsements to title Policy. Buyer typically pays for like an environmental who pays for the surveys is pretty negotiable, but wherever you negotiate, you need to have it in there, it needs to be crystal clear. So put it in the contract. I’ve seen that happen, I saw one recently, it was like we’re going to demo 15 homes, the buyer has permissioned a demo. Okay, at whose cost? Because another provision said the seller shall help demo pre-closing. That makes no sense, that didn’t even bring up the whole who owns title of these homes, which will be covered in a bill of sale and a closing document. But really breaking down the cost is important to have in there.
Next, 27. Broker representations or waivers thereof. If you don’t have a broker, then you need to waive that. If you do have a broker that needs to be in the contract, This protects your broker too, which they’ll appreciate. But I had it happen on more than one occasion when I was doing retail, where I had a commission agreement and the client didn’t put it in the contract and then the client ended up stiffing me. Well, they made it a little harder, I’ve had to sue, okay, great am I going to sue for $3,000 or $5,000? If it’s 50, maybe, but put in the contract that makes it better for everybody. It makes it fair.
28 Is survival. Survival doesn’t mean you live or die. Well, it kind of is I guess, but what it really means is your reps and warranties survive the existing contract. Survive closing. So for example, if I’m the buyer and the seller doesn’t tell me, and misrepresents that the city’s already told them we’re not going to renew your permit, and the city is going to rezone the property or something like that. And then that happens if there’s no survival, survival ends at closing, then I’m kind of out of luck. But if survival is one year post-closing, which is kind of normal, or forever, perpetuity, then I can still go back on that seller. So typically when you sell you want to have no survival and when you buy, you want to have infinite survival. Somewhere in the middle is probably normal and reasonable, but you’ve got to reference it.
Next number 29, 1031 exchange. I think we all know what that is. If not, I’ll probably cover it in a different episode, but 1031 is basically, if I sell my property, I want to trade into, exchange into, like kind property typically of equal or greater value. There’s a bunch of restrictions. Like you’ve got to identify it in 45 days. You’ve got to close it on 80 days. Things like that, go through a qualified intermediary. Well, there’s some extra paperwork involved when you go through a qualified intermediary. So put a provision in your contract that both parties might or have the right do a 1031 exchange. And the other party will be reasonable to just sign documents and consummate that extra transaction. It is typically pretty simple, a lot of boilerplate stuff, but put it in your contract. Otherwise you could get stuck with a difficult adversarial party.
Number 30, this one’s brand new. COVID delays. I never had this on contract before, but it might behoove you to put it in your contract. If there are acts of God, or third party delays, or COVID 2.0, do I automatically get some more terms, some more inspection period?
Next is the FIRPTA provision. This is basically the U.S. government saying we don’t want people from other countries to be buying and selling property. If they are, we want to know about it. You’ve got to fill out an extra form. Title companies typically handle this as well, but you can put it in your contract to button that up and really you should. And I think it’s really related to the antiterrorism and where’s the money going? So FIRPTA provision.
Next, number 32. There’s a bunch of, I say boilerplate provisions that are always in, always in contracts. Things like, this is the entire agreement. This can be signed in counterparts or singed by fax or email, there’s a binding effect, which state has the governing law. There’s typically a sever-ability provision which basically means if one provision is deemed null, void, illegal, unconscionable, it doesn’t ruin the rest of the document. It just cuts out that one provision. A lot of times you’ll see timings of the essence. That just means that the timelines are real, they’re firm. There’s no floating around. It’s not an estimate, confidentiality. When you take possession, where do notices go, sometimes you have an offer and it becomes a contract which is duration of offer. Like this is valid until five o’clock on Tuesday. And after that, it turns into a pumpkin at midnight, I guess it’s five o’clock.
Next your signature block. That’s pretty obvious.
And then number 34, your exhibits, I talked about legal description. I’d like to put a map, an aerial and I put hash lines around it. A big retail developer showed me this, instead of just putting like a red square around the property, put some hash lines across it. Cause sometimes especially back in the day, things didn’t get scanned in color. They get photocopied and you can’t really see the square line very easily on a piece of property because the hash lines, you know, that was in exhibit. You want to have exhibits like a bill of sale or a former bill sale assignment of leases. Sometimes you have tenant estoppels. It’s not going to be quite as common in mobile home park land, but that’s basically the tenant promising and signing off that everything’s given to lease. I’ve never actually done it on a mobile home park deal. Retail deals or if you have a retail component or other office component as an appendage of your mobile home park, it becomes more important.
Sometimes I’ll put the due diligence list and seller deliverable list in the exhibits. I don’t always do that because depending on the seller it can overwhelm them. So sometimes use your discretion and you choose to include that during your due diligence, after you’ve already got the property under contract.
And then the last one, this is important. This is one of these key provisions to save you money. And this is the allocation to purchase price. And this is super important because of two reasons, one income tax, depreciation and amortization, especially if you want to do a cost segregation study. Having the breakdown of the purchase price in the contract is very helpful if you ever get audited. The second reason you want to have the breakdown, is you can help steer future property tax valuations. For example, if you were going to buy the property for a million dollars and it’s currently on the books to asses you for $200,000, there’s definitely a chance you could go up in valuation. If you include say $300,000 of that value in good will, good will is classified by the IRS. And I believe every state has intangible personal property, which means just not add valorem real property. So it really shouldn’t be considered by the tax assessor. There’s a lot more to go into cost segregation and tax evaluations and appeals. I’ll get into those in another podcast. I’ve got a lot of background in both of those areas. I haven’t been a former county assessor in second biggest county in the state of Missouri, and then having read all of the audit technique guides and the IRS handbook and you know, my background, financial analyst and accountant and stuff. But really that’s key to have that allocation of purchase price. What I typically try to do when I’m buying. And I just put buyer shall identify and allocate the purchase project during its due diligence period. Sometimes, a lot of times it goes through, and this is not adversarial as opposed to starting to pick numbers and stuff. Cause there’s a lot of subjectivity. I mean, for example, I bought a $2 million park. One time I paid $1.3 million, well, where am I going to allocate my $2 million, I have some discretion probably, how much is the land, which is not depreciable, how much is land or property improvements like roads, utility lines, fences, monument signs, things like that. How much is personal property like tractors and mobile homes? How much has good will or growing concern intangible. And then sometimes there’s other factors in there. But those are the kind of the main bread and butter categories. And it’s really important to allocate that for both the income tax and property tax reasons. Again, more of which we’ll cover at a later date.
That pretty much wraps up the 30 or so, I think we’re at 34 provisions of the key of the four provisions of your due diligence timeline being to start after you receive the documents, the second one being, make sure the seller has to terminate vendor and personnel contracts. Third one is to include the closing contingencies for the environmental survey, title, appraisal, etc. And then the fourth key provision that again is kind of distinct in mobile home park world is the allocation of the purchase price, because there’s a lot of benefit to doing some special tax and depreciation strategies in the MHP world that we’ll cover at a later date.
Hope you’ve enjoyed this boring topic, maybe made today a little more exciting and I hope it will save you some money or make you some money on your next deal.