Some buyers can’t move beyond the idea of buying an RV park simply because they have “paralysis by analysis” on how to write a contract. To top it off, they won’t seek legal counsel because of the cost, so they end up never acting on their dream of RV park ownership. Since that’s a terrible ending to your investment options, here’s a quick guide to try and illustrate the basic parts of a contract, not from the perspective of an attorney, but simply an observant RV park buyer.
What is the purpose of a purchase contract?
Basically, a purchase contract is an agreement between a buyer and seller that establishes such items as the price and the assets being conveyed. Without a formal contract, no buyer would spend the time and money to create the various third-party reports required to buy a property, so nothing in America could be bought or sold unless the buyer was willing to just show up with a suitcase of cash and trade it for the title. Since RV parks are far too large a transaction to be handles like buying a hamburger, then contracts are an essential part of the process. It’s supposed to create a formal, working relationship and rules for the orderly progression of the purchase.
What are the key pieces of a contract that all buyers should want to have?
Although every state is different – and every contract is a custom creation based on the property and the buyer’s and seller’s goals – there are few things that most good contracts should include including:
- Due diligence period. This is the time frame in which the buyer may conduct studies and examinations and, if they are unfavorable to the buyer, elect to terminate the contract and receive their earnest money back.
- Financing contingency. This is the time period in which the buyer may attempt to obtain financing for the purchase and, if unable to do so under terms they like, again terminate the contract and receive their earnest money back.
While there are many other items that are important these, in our opinion, are the two most essential.
What should all buyers want to avoid?
Just as there a few key items that most buyers want in a contract, there are few items that I’ve never heard of any buyer wanting in there, and these include:
- Buyer specific performance. Under this concept, if you fail to cancel the deal during the due diligence or financing contingency period, the seller can force you to buy the RV park even if you don’t want to.
- Lack of seller specific performance. While buyer seller performance is never a good thing, seller specific performance is essential. Without this, the seller can walk away from the deal at any time, so your contract is basically worthless. Why is it fair for the seller to have specific performance and not the buyer? That’s where the earnest money comes in. If the buyer does not cancel the deal yet does not show up, the seller keeps their earnest money. There is no earnest money on the part of the seller to provide liquidated damages.
- Large amounts of earnest money. The RV park industry standard amount of earnest money is around 1%. You always want to keep earnest money low since 1) the more you use the more you put at risk and 2) the more you use the fewer deals you can tie up at one time.
- Non-refundable earnest money. It is rarely a good idea to put up “non-refundable” earnest money, as this means you will not get any earnest money back even if you cancel as required under the due diligence and financing contingencies. Since the seller knows the property well and you don’t know it at all, it’s a pretty good sign it’s a trap when they insist on non-refundable deposits.
Where can you get a standard contract?
To get a basic contract form for a commercial property, you can find them on-line from a number of sources (some free and some for a low price) or simply from a broker who is handling an RV park for sale. Once you have a standard contract form, you have a basic chassis that you can modify to meet your goals. It is unnecessary to get all contracts strictly from an attorney, as most of the purchase contract is a common, well-known form and is not unique.
Can you fill it in yourself?
Sure, as long as you know what you’re doing and not faking it. If you can’t read and understand each and every paragraph of the contract, then you should not submit it, and either learn more about what each section means or hire an attorney to do the work for you. Signing any agreement without a mastery of what you are committing to is a terrible idea.
Should you have an attorney review your work?
Absolutely, if it gives you comfort. But before you take that step, do the homework and study the standard contract and understand how it all fits together. You want to seek the counsel of an attorney for very specific questions, not a beginner’s guide to contract law. If you go to an attorney and have him read your draft of a contract and discuss your specific concerns that might be an hour or two of work. But if you go to an attorney wanting to have him build a contract from scratch, you’re talking about a bill five times larger and fully avoidable with more effort on your part.
Don’t let a fear of contracts prohibit you from buying an RV park. Although it’s definitely outside of anyone’s comfort zone, you can fully master the concept of contracts with a moderate investment of time and then you will be ready to put good deals under contract at will.