Due diligence period vs. examination period?

mobile home university
1

Hi all, I’m confused about the sequence of events related to due diligence. I was reviewing the study material, and suddenly became confused as to the difference between a “due diligence period” vs. “examination period,” which seem to be used interchangeably. On page 112, it says, " Remember that you have a second shot at negotiation during the due diligence period. Sign him up, even if the deal needs fine tuning now, and then re-approach him during the exam period."

Please let me know if I have this timeline right:

  1. Approach a park owner, to see if he/she would be interested in selling. If “yes,” ask for basic income/expense information, which you say will be needed in order for you to make an educated and fair offer.

  2. Do some higher-level due diligence on the park, based on what the owner has provided, and what you know about other parks in the area, etc.

  3. Give the park owner with an offer based on this GENERAL due diligence. Negotiate as needed here.

  4. Assuming owner accepts the negotiated offer, sign a purchase agreement contract (which is, I assume, what the book means by “Sign him up, even if the deal needs fine tuning”) and enter examination period (“official” due diligence period) in which you investigate the particulars of the specific park.

  5. Based on findings during the exam period, optionally re-negotiate the price downward to arrive at final offer.

Does this sound right, or am I missing a critical step?

2

Sounds right. First investigate enough to know what you think you are buying. You negotiate a price saying “assuming the numbers and information you provided are right, I am willing to pay $XXX which includes the risk of unknowns.”

Then you go try to reduce your unknowns. Worst case, you are responsible for roads, water, sewer, electricity, filling lots, generating demand, rebuilding the park if you have to but maintaining it at least and keeping occupancy up through (how are you going to do this?) Et cetera.

During DD is when you demand the records that back up what the Seller “said.” And create your own records of “how it’s going / how it’s done / how is the condition right at this point in time” through personal inspection and subcontracted inspection.

Once you have all of Seller’s records & you have your own records, you will know what to expect (income, expenses) and what your leftover will be and your financing and you take it all and decide before the end of DD whether the price still makes sense. If you are satisfied with the risk-reward/return ratio, proceed. If it’s too risky for the return, then you move on to the next.

I have never renegotiated a deal after signing a contract but remember a blind offer is rarely accepted so you can use that as your starting point for negotiation. That might be what is meant by “sign them up” – send your offer before working out the final contract details haggling over price & terms (did you mean 17 or 13 homes were included, what happens if a home is sold during the DD period so Seller can’t transfer it to Buyer, etc).

Now, if there were a SPECIFIC item that you were NOT EXPECTING and it is significant enough to impact your returns and you can adequately quantify it, you might negotiate an accommodation (or you’re prepared to walk). But that’s not “fine tuning” during DD – do your “fine tuning” before you sign the contract.

This is like – The sewer system is at the end of its useful life and you need a $100,000 accommodation to recognize that you will have this capital repair expense item as soon as you take over.

This is a “second shot last-chance last-ditch effort to make the deal palatable for you to proceed otherwise you will walk,” right at the end of DD – but that’s not really a negotiation.

3

Makes sense. Thank you, Brandon, so much for taking the time to reply in such detail. I really appreciate it!