$50k nonrefundable after 15 days. Is that the deal or the trap?

Question

12 unit brick walk-up, one market, one broker, seller is an estate. LOI accepted at $1.06m. Their attorney sent back a draft PSA with a 15 day inspection period and $50k earnest that goes nonrefundable at the end of it, wired to their attorney's trust account. Assignment is permitted with notice, no consent needed, which is the only friendly thing in the document.

I don't have a buyer yet. I have four operators who have said send me things and two who have actually closed on something in the last year.

The argument for signing it: the estate has already had one contract fall apart and the hard money is the reason they're talking to a nobody with no track record instead of waiting for a broker to bring them a fund. Fifteen days is enough to get rent rolls, deposits, a walk and a roof opinion. If the numbers hold, $50k is the price of controlling a $1m asset for six weeks and my downside is a number I know in advance.

The argument against: I'd be buying an option on my own ability to find a buyer in about three weeks, and the two buyers who actually close are both slow readers. If both pass I'm either closing it myself, which I can't, or I'm out $50k for the education. And it feels like the sort of thing where a wholesaler talks himself into hard money because he wants the deal to be real.

The middle path someone will suggest is a staged deposit, $10k hard at 15 days and the rest at 30. I don't know if an estate attorney entertains that or just moves on to the next buyer.

So where's the line for you on going hard with no buyer signed?

luis_carrera · Accepted Answer

The line isn't the dollar amount, it's whether the diligence you can complete inside the free look actually answers the question the buyer will ask you.

On a 12 unit that question is short. Bank deposits for 12 months against the rent roll, security deposit ledger and where the money physically is, leases with any concession sheets, the roof and the sewer lateral, and taxes on reassessment after sale, which in some states resets on transfer and in others doesn't. If you can get all of that in 15 days, then at day 15 you're going hard on a known asset and the only open variable is buyer appetite. That's a real bet.

If the estate can't produce deposits in 15 days, and estates often can't because the records are in a filing cabinet at somebody's house, then you'd be going hard on the rent roll alone. That's not a bet on your buyer list, that's a bet on a document you've already been told once wasn't reliable enough to hold a contract together.

So I'd write the deposit language around delivery, not the calendar. Inspection period doesn't start until the seller delivers a defined list of documents, and it runs 15 days from delivery. Estate attorneys sign that more often than they cut the deposit in half, because it costs them nothing if their file is clean. Get whatever you agree on into the PSA in writing, and have your own attorney draft the delivery list since what counts as delivery varies by how the contract is written.

Ask for the staged deposit too. Worst case they say no and you've learned what they care about.

carlos_nunez · Answer

windlass is right about tying the clock to delivery and I'll add the practical version: ask for the documents now, before you sign anything. LOI stage. If the broker sends you a rent roll and a T12 and then goes silent on bank statements, you have your answer about whether the 15 days will be usable.

I went hard on $30k on a small retail deal in a similar spot last year. Closed the assignment, made $41k, and I still think it was a bad decision because I only had one real buyer and I found that out on day 20.

joe_delgado5 · Answer

$50k against a $1.06m purchase is under 5%, which is normal money in commercial. The thing that would stop me is four operators who say send me things and two who close. That's not a buyer pool for a 12 unit, that's a hope.

Before you sign, call the two closers and describe the deal without an address. If neither of them says a number back to you, you already know.

mitchell_ray4 · Answer

What happens to the $50k if the estate itself can't close? Probate can hold things up and an estate has moving parts a normal seller doesn't. Is there language about seller performance or is nonrefundable actually nonrefundable in every direction? That would decide it for me more than the buyer question.

gregpowell66 · Answer

solder asked the right one. Also get the roof looked at in the first four days, not the last four. On a brick walk-up of that age I'd want eyes on the parapets and the flashing and the lateral, and if it's steam or a single boiler that's a capital item your buyer will price at a number you won't like.

ema, if the boiler is original you'll be handling that objection whether or not your deposit is hard, so find it early enough that it's a fact in your package rather than a discovery in theirs.

samantha_ruiz · Answer

I've signed two of these. The first one I went hard with no buyer and got lucky. The second one I paid an operator a small fee to review my underwriting before day 15 and he ended up buying it, which was accidental and I don't recommend it as a strategy.

What I'd actually say is that going hard is fine when you know what you'd do if nobody buys it. If the answer is "I lose $50k," say that out loud and see whether it changes how you feel about the deal. If the answer is "I bring in a partner and close it at a worse split," write down who that partner is and confirm with them before you sign, not after.

$50k nonrefundable after 15 days. Is that the deal or the trap?

6 replies