The Most Important Date in Real Estate Investment!
When you have identified a piece of real estate, you’ve done your due diligence, and you’ve finally arrived at the buying decision and it’s yes. The next step is drawing up your offer contract.
There are obviously many key components in a contract but there is no more important item in your offer than a waiver date. If you are unfamiliar with this term, the “waiver date” is the date at which time your conditional period comes to an end. When you draft an offer you will want to include a conditional period so that you have the time to perform a proper due diligence; however once that time is expired and you have completed your due diligence, you will arrive at a decision point: a go or no go. That point is called the waiver date and it means you will either waive all your conditions and move to a firm transaction or elect not to waive those conditions due to some issue you found along the way. In which case the deal would normally become null and void, or you may elect to negotiate with the landlord over the items you may have found as well as an extension of the date.
In most offers you will find a number of dates. For example, the offer date or the execution date, certainly the closing date, but nothing is more critical and important than the waiver date. Some might suggest that the closing date is the most important as that’s when you actually take ownership of the property but I would argue the closing date is often set more by convenience to the buyer or the seller or dictated by the schedule of the legal teams. The waiver date however is the date when you actually go firm, you’ve done your work, you’ve decided to buy the property and you are now committed both ethically and financially to that property. Going back after this point or changing your mind, may be possible but will certainly be a difficult undertaking.
As you can imagine, by the very nature of this date it can be a contentious issue. You as a conscientious buyer want time to do your proper due diligence. The buyer on the other hand wants the commitment to buy as quickly as possible if not immediately. I have seen deals in an extremely hot market go through without a conditional period, or in other words bought firm on signing. However, this is a highly dangerous situation for most buyers, wrought with all kinds of potential pitfalls. Personally I would never buy without at least some conditional period. Buying without one should be left to the very experienced or the very foolish.
Now that you have a feel for the importance of the waiver date, the next question becomes how to set the date or more importantly how long of a conditional period do I need so that I can determine the best waiver date. In today’s market, it seems a common time frame is generally 30 days, or perhaps 45. I like to put in at least 45 business days. I will tell you from experience that despite the best of intentions none of these time frames will likely be enough.
In reality, the waiver date is really driven by a couple of key factors that are involved in your due diligence. An efficient investor can review the financial information, tour the property, and really have a good feel for how the building operates in just a few days. This part is the easiest to fit in a conditional period. However third-party inspection items like the roof or a phase 1 environmental study are totally dependent on the speed and availability of your consultant. It is not uncommon for a simple Phase 1 to take 2 to 3 weeks. So now, 21 days into say a 30-day conditional period, you are turning your phase 1 results over to your lender for review by their risk management group. I can tell you, only the large preferred clients would get an approval in a week. And that’s assuming absolutely no problems.
Inspections are obviously important, but the real dictator of a waiver date will be the time it takes for you to be approved for financing. Unless you’re paying cash for the property you will likely not be willing to proceed unless you know you have the appropriate funds available to close.
The challenge is significant! On one side you have a purchaser who wants to keep the time of your conditional period to an absolute minimum, on the other side you have a lender saying that as a minimum if everything goes smoothly you might, (the key word being might) have an approval in 30 to 45 days. They rarely make the minimum. Further, if you’re buying apartment buildings it’s very likely you will be using CMHC backed financing and they themselves have their own lengthy timeframe for approval beyond the lenders’.
The bottom line, it’s virtually an impossible task to set an exact date with any kind of confidence and more often than not we are setting ourselves up for failure.
In all my years of investing I can probably count on two hands the amount of times I have been able to actually waive all conditions on the initial date stipulated in the offer.
Here’s an example: I was recently involved in a deal where the waiver date was set for 45 business days from the time the seller provided all the due diligence materials. This equated to over six weeks for a conditional period which seemed adequate in my mind. Three weeks into the due diligence, the lender provided preliminary approval and submitted an application to CMHC. CMHC then notified the purchaser it would be a minimum of 6, possibly 8 weeks for their approval from the time they receive the application. This would put us at least 3 to 4 weeks beyond the waiver date. The purchaser asked for an extension, the vendor said no, result – dead deal.
In summary, understand the importance of the waiver date. Know your due diligence process so well that it can be run like a well-oiled machine. Have open communication with the seller and set the groundwork for the timeframes you require to get all your approvals in place. As an owner I’m much more likely to be more flexible on a waiver date if the purchaser can show me the process he’s following and the timeframes he’s allotted for approvals. Have your purchase and inspection team ready to go should you pull the trigger. Be prepared for problems, in fact expect them. Notify the seller early if the there is an issue that might extend the time required. Owners don’t like to hear on the waiver date there is a problem or worse a problem the purchaser knew about weeks earlier and didn’t identify it.
If you make the date great! You have done a good job. If you don’t, be prepared to negotiate and work hard to keep any extension short, it’s an easier pill for the owner to swallow.
Stay tuned for my next article were I will go over in depth a variety of strategies and techniques, both in process and in contractual wording to help you get through the conditional period as efficiently as possible.