Real Estate Acquisition Tips

Recovery Of Due Diligence Expenditures

by Marvin Levin

This idea requires the same out-of-the-box thinking as did Mutual Benefit Of A Long-Term Option, which pertained to long-term options to buy.

In this instance, take the example of a rural property covered with manzanita. The groundcover is so thick that one literally cannot drive on the property. The buyer wants a two-year escrow, and the seller is absolutely firm with a nine-month escrow term.

So, what does a buyer do? The problem is that he would have to spend approximately $100,000 to clear the property in order that prospective lenders and investor partners could see the property. The buyer’s concern is that the nine months, with delays for weather, would not give him enough time. Buyer and seller understand that the clearing would be enormously valuable, but the nine-month escrow may, in effect, trick the buyer into improving the property for the seller without enough time for the buyer to do his work. However, the buyer also realizes that he might put the whole deal together in less than nine months, but he simply isn’t confident enough to take the chance.

Possibly the smartest thing the buyer can do is walk away. But, there is another possibility that he should at least consider. That other possibility is to make the following proposal to the seller. Okay, I will live with the nine months if you will live with the following: If I clear the property for a $100,000 expenditure and if I am unable to close, you will give me either: (a) an additional one year, provided I pay you a certain sum of money each month for the extended time; or (b) I will not ask for an extension, but if you should then sell the property within the next 10 years for a price which is more than the sale price to me, then from that excess you will return to me the $100,000 clearing expense.

Well, there are an enormous number of variables in the above illustration. The purpose is to illustrate an idea, rather than to give firm parameters. Of course, a buyer would not want to pay a monthly option fee to extend, and the seller would not want to return the clearing expense from an increased price unless the increase was adjusted by some sort of index (otherwise, the seller would be returning the clearing fee from future inflation instead of from the increase that the clearing produced to the value of the property).

If you run into a client that needs subdivision financing, please contact me.