We have been educating RV park buyers for years on the simple maxim that you can NEVER tie up an RV park under contract without 1) a due diligence contingency 2) a financing contingency and 3) no buyer’s specificperformance agreement. It looks like Elon Musk forgot about all three of these principles with his contract to buy Twitter and there are many morals to the story of Musk contracting to buy Twitter.
Why you need a due diligence contingency
When you put a property under contract you know far less than the seller. In fact, sometimes you have been skewed by the seller’s input to believe things about performance and condition that are completely untrue. As a result, you have to have a “due diligence contingency” in your contract so that you have the ability to get out of it in the event you find the reality does not match your initial projections. Most RV park deals go bad in due diligence due to 1) financial matters 2) property condition issues and 3) market analysis. You can’t buy an RV park if any of these are wrong. As a result, the due diligence contingency is designed to give you that important “eject button” from the deal if necessary. It also gives you the ability to re-trade for a better price. Most due diligence periods are roughly 30 days in length, and that gives you the time to make all proper assessments. If the contract is written properly, if you cancel the deal during due diligence then you get your earnest money back and walk free from the deal.
Why you need a financing contingency
Unless you’re buying the RV park for cash, there’s no way you can move forward without a lender having been secured. And your safeguard for this is the “financing contingency”. Just like the due diligence period, this allows you to make sure the property is able to attain a loan and – if you fail – you can simply cancel the deal, get your earnest money back, and walk free. Even though the property may meet your specifications and goals, there’s no guarantee that you can find a lender, particularly in the type of current U.S. financial mess we’re in. On top of that, even if you find a lender you have no guarantee that the terms (interest rate, amortization length, down payment amount, etc.) will be to your liking. And, just like due diligence, you need the ability to push the “eject button” if everything does not go your way.
Why you can never agree to buyer specific performance
Virtually all real estate contracts have “seller specific performance” which simply means that the seller must go forward with the transaction unless the buyer cancels. If that was not the case, then nobody could ever buy an RV park because there’s no way you’d put in all the effort if the seller could cancel up the last minute of closing (and no bank would ever agree to that structure either). However, that does not mean that you should also agree to “buyer specific performance”. That’s what your earnest money is for. If you do not cancel the RV park deal during due diligence or financing then you lose your earnest money if you don’t close, and that’s the liquidated damages that goes to the seller. But some sellers want to you basically “guarantee” you’ll buy the deal – and that’s insane. Although it’s rare to ever occur, let’s imagine for a moment that you tie up an RV park under contract and then have a heart attack. While you’re in the hospital you have more important things to worry about and then
suddenly realize that your due diligence and financing contingencies have ended and you never cancelled the deal. If you have “buyer specific performance” you might be forced to buy the property if the seller takes you to court. That’s a terrible – and unnecessary – risk. Simply refuse to ever sign on to “buyer specific performance”.
How Musk screwed this up so bad – and how to avoid his mistake
Apparently, Elon Musk should have taken our RV park course as he violated all of the three above rules. Why? Well, he was trying to make a bold statement with his offer, I guess. Now he has decided that he does not want to buy Twitter and Twitter has gone to court in Delaware to force him to close on the transaction. This could have been avoided had he simply done the three steps above. Of course, Twitter at $44 billion is a much larger transaction than most RV parks, but the basic root of his problem is that he violated the three commandments above and the wrath of the market is now coming down on him. These are not three maxims you should ever violate, period. If the seller demands differently, then just move on to the next deal.
Elon Musk is a very smart guy and has had a very successful career, but he went off the rails potentially with the Twitter deal. If you follow the three action steps above you can save yourself from following his example.