Waiver Date: Understanding the Most Important Date in Real Estate Investing (Part 1 of 2)
After months, perhaps years, of due diligence, you’ve done it—you’ve found the perfect piece of real estate to invest in! So, what’s next?
The first thing you’ll want to do after identifying your investment is to draw up your offer contract. There are myriad components to an offer contract (and we highly recommend securing the assistance of a commercial real estate professional before drafting an offer) but the one we feel is most important, and the one we’ll be focusing on in this blog post, is the Waiver Date.
Waiver Date: In a commercial sale, it is the date at which time your conditional period comes to an end.
When drafting an offer, it is prudent to include a waiver date, as this provides you with a conditional period during which you can perform proper due diligence to decide whether or not you will go through with the purchase. When you reach the Waiver Date, you will need to either accept or reject the conditions of the deal—go or no go. Essentially, when you reach the Waiver Date, you are either waiving all conditions and moving forward to a firm transaction; or, you are electing not to waive those conditions due to issues you uncovered. In the latter case, often this means the deal is null and void; however, depending on the landlord and your keenness on the property, it may be possible to negotiate with the landlord or extend the Waiver Date.
Why is the Waiver Date Important?
Offer Date, Execution Date, Closing Date—your offer will be filled with dates, why do we advise paying closest attention to the Waiver Date? Certainly, there are those who will argue that the Closing Date is the most important as it is when you actually take possession; however, we would argue that the closing date is most often set by convenience for either the buyer or seller, or is dictated by the schedule of the legal teams.
In contrast, the Waiver Date is when the offer actually goes firm, you are committed both financially and ethically to the deal. After this point, pulling out of the deal becomes an extremely difficult and onerous endeavour.
The Waiver Date essentially allows the interested buyer sufficient time to perform due diligence that could not be performed before an offer was submitted, perhaps in the form of on-site inspections or environmental tests of the acreage. As such, the buyer wants as much time as possible before the Waiver Date and the seller wants the exact opposite. That is why choosing the correct date is so essential, the buyer must ensure they have the time needed to perform the required due diligence in order to determine whether or not they want to proceed with the purchase. As many commercial investments run into millions of dollars, you can see how this one little date can become very crucial.
In hot markets, as you may have seen in the residential market recently, buyers are sometimes willing to go firm without a conditional period; however, this is extremely imprudent and wrought with all kinds of potential pitfalls. Buying without a conditional period should be left only to the very experienced, or the very foolish.
How to Properly Set Your Waiver Date
If you look at timeframes commonly used for waiver dates, you’ll probably see conditional periods of 30 days, or in some cases 45 days. As experienced real estate investors, we can tell you that despite your best intentions, whatever timeframe you decide on will likely not be enough; generally, try to set your conditional period for 45 days or more.
Property Inspection Basics
Plainly speaking, waiver dates are typically driven by only a couple of key factors involved in your due diligence. If you’re an experienced investor (or have one as an advisor, something we definitely recommend) then reviewing financials, touring the property, and getting a good feel for how the building operates can be accomplished in a few days; if it’s your first time or you're relying on an outside expert (e.g. reliant on their schedule) you will likely need more time for the basics.
Third-Party Inspections
Many of the tests performed in a Phase 1 analysis (contact us to find out everything you need to know about Phase 1 and due diligence) require two to three weeks to complete. Therefore, if you 21 days into a 30-day conditional period and you’re just turning in your Phase 1 results to your lender, unless you’re Coca-Cola, it’s very unlikely your financing will be approved within a week. Oops.
Rule of thumb is the longer your conditional period, the better your due diligence, which brings us to the most important condition when investing in real estate.
Securing Financing
Of course, inspections are important, but the real dictator of timing will be the time it takes for your financing to be approved. Unless you’re paying cash, you won’t likely be able to proceed until you’ve secured the funds needed to close.
Do not underestimate this challenge—it’s significant! On one hand, you will have the seller of the property looking to keep the conditional period as short as possible; on the other hand, you will have a lender who might approve your financing in 30 to 45 days only if everything goes smoothly (spoiler alert: it rarely does go smoothly). If you’re using the Canadian Mortgage and Housing Corporation (CMHC) for your financing, they have their own lengthy approval timeframe that is often beyond that of other lenders.
Do Your Best, Don’t Stress
Before you even try, we can assure you from experience, it is virtually impossible to set an exact waiver date with any kind of confidence all due diligence will be performed. In fact, in our decades of investing, we can count on two hands the number of times we’ve been able to actually waive all conditions on the initial Waiver Date stipulated in the offer. Do your best and don’t stress—remember, losing a property you had your heart set on is preferable to putting your hard-earned dollars into a lemon.
As an example, here’s what happened to us on a recent deal. We had negotiated 45 business days for the conditional period—equating to a little over six weeks, we thought we had plenty of time. Three weeks into the due diligence, we submitted preliminary approval from CMHC. Of course, Murphy and his Law had to show up. CMHC then informed us that they would need at least six, possibly eight, weeks to provide formal approval, putting us well past the Waiver Date. We reached out to the seller and asked for an extension but they weren’t interested—and there you have it, months of work down the drain as the deal was dead. It’s a tough pill to swallow, but as a real estate investor, one of the most important skills you can ever learn is the ability to walk away from a deal no matter the sunk costs.
Be Smart, Be Waiver Savvy
In summary: The Waiver Date is important, understand its importance and how it can affect your deal.
Here are our suggestions for improving your ability to both negotiate and effectively work within waiver dates:
Have a plan—landlords are much more likely to be willing to extend the Waiver Date if you have a solid plan with reasonable timeframes allotted for approvals
Run your due diligence like a well-oiled machine—in this instance, practice makes perfect so if you’re an inexperienced investor we highly recommend seeking the advice of someone experienced (like the incredible team at MCRE!)
Keep communications with the seller open and honest, set realistic timeline expectations
Have your purchase and inspection team ready to go as soon as you sign on the dotted line
Expect problems—notify the seller right away if you come across an issue that may hold up the approval process
In closing, if you’re able to complete all your due diligence before your waiver date, amazing job! Give yourself a big pat on the back because you deserve it; however, don’t expect to make your date and have contingencies in place in case you don’t. At the end of the day, most sellers would prefer extending the conditional period to killing the deal completely, so don’t stress if you aren’t going to be able to finish in time. Maintaining open and honest lines of communication with the seller and keeping your expectations realistic is your best course of action. And if the seller refuses to extend, perhaps it wasn’t meant to be in the first place!
Watch out for Part 2 of our Waiver Date series where we’ll have an in-depth discussion of strategies and techniques you can use to help get through the conditional period as efficiently as possible.
Happy investing!