When Kris Bennett made a deal with a mom-and-pop self-storage building, he had no idea the headache it would cause and the money he’d lose just to get out of it. Today, Kris tells us about the due diligence tasks and time period required for self-storage units, the warning signs to look for before making a deal, and how he got out of this sticky situation.
Kris Bennett Real Estate Background:
- One of two self-storage managing partners at PassiveInvesting.com
- 14 years of CRE investing experience
- Recently closed a 15K sf self-storage facility and adding another 150 units, or 22,000 sf of climate-controlled units
- Under contract on two self-storage facilities in NC and CO totaling $18 million in price
- Based in Vacaville, CA
- Say hi to him at: passiveinvesting.com
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TRANSCRIPTION
Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Kris Bennett. Kris is joining us from Charlotte, North Carolina. He was a previous guest on the Best Ever podcast. If you Google Kris Bennett and Joe Fairless, the episode will show up.
Kris, thank you for joining us again today, and how are you?
Kris Bennett: Ash, I’m doing great, man. Happy to be here.
Ash Patel: Right. Best Ever listeners, I hope you’re having a great weekend. Because today is Saturday, we are going to do a Situation Saturday, where we discuss a specific situation that our guest has encountered. Our goal is to give you the tools to overcome this situation, should you encounter it as well.
Kris is one of two self-storage managing partners at passiveinvesting.com. He has 14 years of commercial real estate investing experience, and has recently added 150 self-storage units to his portfolio. Kris, thank you for joining us today. Let’s dive into your sticky situation.
Kris Bennett: Yeah, great. So to kind of to give you guys a little bit of background on the deal and the situation etc. So I’m based in Charlotte, North Carolina, I’ve made a ton of phone calls to owners looking for properties to purchase. This one was about a 2,200 square foot facility. So basically 22 units in total; it was 22 10 by 10s on an acre of land here in the Charlotte area. Technically, in Gastonia. Most people won’t know where that is, but it’s just right next to Charlotte, North Carolina.
So a small deal, but if you’re doing some quick math, you realize, okay, 2000 square feet, give or take on an acre of land -it sounds like you could do a lot more with that land, and you would be correct. So that’s why we liked this deal, it was a very small deal. We don’t do small deals anymore. But you can make a lot of money and do really well in small deals and nothing wrong with those. So we were targeting this one, actually, call it two years ago or so maybe three years ago. It’s 2021, so three years ago, I would make phone calls and call this guy pretty regularly. I’d call them up probably the first part of 2020, before the Coronavirus thing became a thing, and he was like, “Yeah, I’m thinking about selling,” and then the Coronavirus, hit and all the shutdowns went to play. So he said, “Let’s go ahead and hold off.” And I said, “Yeah, let’s hold off, I have no idea what’s going on with the world.”
So we reengaged around June or July 2020. So almost a year ago now, depending on when you’re listening to this episode. We put it under contract, big picture, high-level view of everything that happened—we can dive into the details of it, of course, but big picture was we put it under contract, we had a, I think it was like a 60-day due diligence, 30 days to close. So we put it under contract the end of July, we wanted to close it at the end of October of 2020. That was the plan. But we needed to extend it, not because of us, but because of the seller. And in the very end, we discovered some things that he did not disclose to us, it caused us a lot of heartache and headache. We ended up not closing on the deal, almost sued him, ended up losing about $6,000 of our due diligence money, and decided to move on. So that’s the big picture there of the deal.
Ash Patel: A couple questions.
Kris Bennett: Yeah.
Ash Patel: What’s the typical due diligence period for storage units, usually one of this size?
Kris Bennett: Sure. So something like this size can be done a lot faster, 30 days would be okay. It just depends on your contractors and how long it takes them to get a survey done. Usually, the survey takes the longest. We knew some folks in the area, and we can get that done pretty quickly. But being that this was more of a mom-and-pop deal, we wanted to give ourselves a little bit more time. So anywhere from 30-60 days. If you’re going larger, like a bigger deal, the seller might say, “No, I want 30 days due diligence to kind of speed up that process.” But 30-60 is typical.
Ash Patel: What are typical due diligence tasks that are unique to storage units?
Kris Bennett: Well, it’s not too bad actually, because when you go there, it’s going to be similar across the board with other types of properties, like let’s say multifamily – you’re going to get a roof, property inspection, a roof inspection, of course, you can get a Phase I, so that the inspection process—the building inspection is called a PCA; you get a PCA done, you get a phase one environmental to make sure there’s no environmental issues with the property, with the dirt etc., the survey done of course…
With storage, you might do a few different things where you actually walk the units and double-check the rent roll with the locks, to make sure that if unit 55 is rented to a person, it actually has a person’s lock on there. And sometimes facilities have their own locks, where they keep a unit locked until it’s actually ready to be rented. So making sure that an actual person is renting stuff in the unit.
Now, you don’t open doors and look inside typically, because once a tenant moves in, the stuff inside belongs to them, and their lock on there – the manager or the property owner has no idea what the combo is. So it’d be virtually impossible to do that, to actually open up the unit and look inside. So we don’t do that, but we check everything else. So you might check the flow of water on the property and the erosion issues, gate issues is another big one, because there’s a lot of those gates obviously, and they either go up and down or they slide back and forth, left to right, whatever. Sometimes the gate is one of the biggest things that goes out most often. So you’d have to do some due diligence and finding out when’s the maintenance done in the gate and the last time it was fixed etc. Are there any break-ins recently? Because people sometimes jump the fence and try to break into a unit. Usually, crime that occurs at a facility is an inside job, believe it or not; somebody knows the manager, or the manager knows somebody, and they’re trying to get into someone’s unit, and usually it’s an inside job. But sometimes, somebody will try to hop over the fence and get into a unit and steal some stuff. So it’s kind of similar with certain things, but then a little bit different with the units, the gate, etc.
Ash Patel: On a siden note, Kris, I would think that for a thief, this would be like being in Disneyland; all you have to do is get a pair of bolt cutters and just open up units till you find something good. Is that a problem in this industry?
Kris Bennett: It can be. It depends on where the facility is located. If you’re located in, let’s call it, a Class A neighborhood or market or whatever, not typically going to happen. If you’re in a Class C or maybe even D or whatever, or lower class, I guess, neighborhood—and when I say, “low class,” I don’t mean the people, I just mean the location itself, maybe more crime-ridden area… You’ll have more often more occurrences of break-ins at the facility. It’s pretty tough though, because when you get in there, let’s say you hop the fence and get in, you cut the lock, it’s not like it’s easy to cut a lock. It’s not that easy, actually, if you’ve ever tried. And then there’s some techniques and it depends on the type of lock. But if you have a disk lock – usually those are what’s used by tenants and what’s usually promoted by the manager, because it’s the safest type of lock to prevent theft… Anyway, those are pretty hard to get into. But once you get in, how are you going to get the stuff out? Like, you need to throw it over the fence to your buddy. How do you actually get out of the facility? That’s why it’s usually an inside job, because you’ve got to drive a car in there. How do you get access through the gate? So maybe you’re a thief, you rent a unit there, so you have access. But how do you know who else has stuff in there? Well, the manager would know. So the manager could tell you, “Oh, yeah, unit 55, we need to get into that one.” So that’s where the inside job comes into play.
Ash Patel: Interesting. And on your due diligence, I’m assuming you do something similar, where you put earnest money down, but it’s refundable if you find something that doesn’t meet your qualifications.
Kris Bennett: Yeah, that’s right. So usually a 30 day or a 60 day due diligence period; you put down your earnest money deposit, maybe 1% or 2%. On a mom-and-pop deal, it could be 5,000 bucks, it could be 2,500 bucks. It depends on what you guys negotiate, of course. So you put that down until the end of the due diligence period, at which time it then goes hard or non-refundable.
Ash Patel: And this 2,200 square foot self-storage facility is the reason you no longer do small deals?
Kris Bennett: No, not really. It’s the reason I won’t do a mom-and-pop deal where the guy wants to do a handshake. We didn’t do a handshake here, we had a contract. But he kept talking about handshake deals, and he would not use an attorney. So that’s on him, right? So we have an actual contract, no issue with that whatsoever. It’s enforceable in a court of law, but he doesn’t want to use an attorney. So I will never do a deal with anybody that does not want to engage the services of an attorney.
Ash Patel: An attorney just for the real estate transaction?
Kris Bennett: Yeah, just for the real estate transaction.
Ash Patel: So I’ve got to tell you, I think that’s area-specific, because here in Midwest, a lot of deals are done without attorneys. The title company basically handles everything. I know growing up on the East Coast, it’s a lot different; everything is handled through attorneys.
Kris Bennett: Yeah, it depends on where you’re at. North Carolina you have to have an attorney to do the closing; they can have a notary that comes by. That’s what we did to buy this house actually, I live in now, we had a notary. But they’re under the supervision of the attorney, technically. So you can’t use a title company. If I dive in more the story you’ll see why—
Ash Patel: Let’s do it. I’m dying to hear this.
Kris Bennett: So what happened – we put it under contract, we cut loose on the due diligence… So we got the inspection done, the phase one done, we had the survey going, no issues there… We had the title search completed. So title, for those of you guys who don’t know, title is basically like ownership. So who’s owned the property in the past? Can uncle Bill come out of the woods and all of a sudden say he has a right to possess this property, whereas you have it under contract and now you have an issue, right? So they do a title search to make sure there’s no other heirs or whomever has the right to the property, and not any liens on the property, etc. So title search came back clean, everything was good.
So we went back to the seller and said, “Hey, our due diligence is going to expire. We’re ready to move forward on the property. Are you good to go?” And he said, “Yeah, good to go.” “Okay, great, everything’s good to go.” So our earnest money goes hard, it’s non-refundable at this point in time… And then he comes back to us and he says, “Hey, there’s a well on the property.” It’s kind of a weird thing, but there was a well on the property for water access, even though storage, unless you have a manager on-site or an office, which this one didn’t, it didn’t have any manager or an office on-site, he had to have water access. So they made him put a well in it. So he had a well towards the back corner of the property, which showed up on the survey.
He said, “Hey, I need access to that well,” because he had another property that was one parcel over. So just imagine, you can see it 50 yards away or whatever. Okay, so he wants access to the well on this property. His property is 50 yards over. And he said, “And the property in between us – I sold that in the past,” which we knew of, and he said, “I granted them access and I have an easement that accesses this well. So if I tap into the property in between us, and then this property’s tapped into your property, which you’re going to buy, we should be okay.” And I said, “Hey, I don’t know of any easement. We did all the searches, we got the survey done and easement doesn’t show here. We would have to grant you an easement.” And the contract says, “You cannot go back and change anything material on the property.” That’s where the contract comes into play, right? They can’t make any material changes. So he cannot go and then record an easement all of a sudden.
So we’re in a bit of a conundrum here. So we’re like, “I don’t know what he’s talking about with this water thing.” So I went and searched the records for—and I had our attorney do it as well. She found out and I found out—I can’t remember if it was her, but anyway, one of us found out that he used to own this whole tract of land, he sold the middle piece to an auto repair place, the storage is on this piece, and then he still had the land over here. So that’s how it was laid out.
Ash Patel: Okay, so just for visual,—
Kris Bennett: Yeah.
Ash Patel: —the road is in front of all three parcels of land, so to speak.
Kris Bennett: That’s right. Yep.
Ash Patel: And to the leftmost side is the automotive business?
Kris Bennett: Let’s say, it’s in the middle, it was the automotive business. Yep.
Ash Patel: What’s to the left of that?
Kris Bennett: The left of that is his land
Ash Patel: That he’s going to keep?
Kris Bennett: Yes, that he’s going to keep.
Ash Patel: Okay.
Kris Bennett: About an acre or so.
Ash Patel: Okay. And then to the right of the automotive business is your storage unit.
Kris Bennett: It is the storage. Yeah.
Ash Patel: And a well is behind all of that?
Kris Bennett: It’s on the storage property, in the back corner, closest to the automotive business.
Ash Patel: Okay, so he wants an easement from his land through the automotive business, to the well?
Kris Bennett: That’s right.
Ash Patel: It doesn’t seem like a deal-breaker…
Kris Bennett: It doesn’t seem like a deal-breaker. So we said, “Okay, if you want to do that, that’s fine.” But we still had the issue that he brought up of the automotive business having an easement and access to the well. Because he said, “I don’t have to record an easement going from my land to the storage. I can just tap into the automotive business next door, and they are tapped into your well.” And I was like, “I have no idea what you’re talking about, because there is no easement from the automotive business to the well on the storage property.” So that’s when went back to research, to figure out, “Okay, how does this automotive property have access to this well?” Legally. Can we just cut them off? Can they do something to us? What’s the situation here?
So we found out, when he sold the land to the automotive business, right between the two parcels, he recorded the access — I believe it was on the deed, but it was not a separate easement that was recorded on the storage property. So he actually went about the process the wrong way, in other words. So when title did their search, it didn’t show anything, because there was no easement recorded. There was nothing recorded on the deed for the storage property. It was recorded on the deed for the automotive business. So if you went in there and you read it, you would see it, but there was no reason to go and read the deed of a property adjacent to you, because it didn’t show an easement at all whatsoever. So that’s what happened.
So three parcels; the one in the middle had access to the well via the deed, but no recorded easement for our property or on our deed whatsoever. So it didn’t show up in a survey and it didn’t show up at the attorney, in the title search for our property.
So this guy comes back, and I told them all that. I know it might be confusing for some people, but basically, he wanted access to water; there was no legal way for him to get it, in other words. So now he’s kind of stuck. He’s under contract to sell a property, he can’t legally access the water… And you might wonder, what the heck does he need the water for? I don’t know, because it was vacant land and he just; in his mind, he was like, “If I have water access, my land is now suddenly worth more money.” Which if you knew the location where this is in Gastonia, that was probably the furthest thing from the truth. So this wasn’t in [unintelligible [00:15:32].17] this is like in the outskirts of Gastonia, kind of in the country a little bit. So we had some new neighborhoods coming in around us, but it wasn’t going to make this acre of land that much more valuable, long story short.
This gentleman tried to show a lot of respect and patience. He was about 70, I want to say close to 80, but definitely 70 years old. Every phone call that we had with him, if I had to talk about something real quick, it dragged out to be about a 20-minute phone call. And I’m not exaggerating, every single time, every single phone call just took forever to get through to explain stuff to him. I told my partner at the time, “Man, he’s either very clueless or he is the best negotiator in the world. I can’t tell which one is which, because he’s wearing me out.”
So anyway, we said, “Okay, if you can get an easement running down the road here to get access…” He doesn’t want to drill anything, he doesn’t want to tap into us or whatever. He just wanted to have the easement from his land to our land to access water, just because he felt that made it more valuable. So we said, “Okay, no problem. If you want that, we’ll go ahead and get it done; we need to extend the contract to do so.” So he agreed to do that, which was a little bit like pulling teeth. But then he went down to the city, said he got the easement, said he got approval, which there was no way that it was going to happen that quick.
And then throughout the process, you could tell he was kind of getting seller’s remorse. I think this was part of his retirement plan and he was going to hold on to it for quite a while. But when we were talking to him at the very beginning, he said, “You know, I’m getting too tired. I’m getting too old for this, I don’t want to manage this stuff anymore and deal with tenants and all that stuff.” He only had 21 people there.
But at the same time, as he realized he was going to be parting ways with this facility that he had built from the ground up and owned ever since — I don’t know when he built it; I forgotten — in the ’90s or whatever. I don’t think he did break away from it, mentally. So you could see his attitude and his desire to get the deal done change the more time went on in our contract process.
So he, at one point — I know I’m talking a lot here, but to give you guys an idea… At one point, he said, “How much can I pay you guys just to go away?” And we said, “Eugene, we got it under contract, man; we have expenses that we’ve already spent on this thing. We can’t do that, we’re already expecting to close on the deal. You’ve signed a contract to close the deal.” [Crosstalk]
Ash Patel: Was this a killer deal? Was this an okay deal?
Kris Bennett: I would say it was am okay deal; it was probably a double. If you had to think of a baseball. Not a Grand Slam by any means.
Ash Patel: Got it.
Kris Bennett: Probably a double. That’s actually a good question. 22 units on an acre of land; you could probably triple that. If you didn’t want to do all that development, you could add in parking, which that’s one part of what we were planning on doing, was actually just adding the parking, putting gravel, getting it graded, just to be able to put units later on or even portable units. You don’t have to build them from the ground up, you can put a concrete foundation, you can put portable container units on there as well. And then we were going to flip the deal in about a year, a year and a half. The rents were below market, there’s no way to rent online, there was no power at the facility, there was no security cameras… There was nothing. There was zero marketing done whatsoever.
I actually set up a Facebook page and a Craigslist ad and ran that ad on Craigslist probably every other day. The Facebook page I would pay a couple bucks to run ads in the area to generate phone calls and just to see who would call my number. I set up a Google number to see who would call in and what they wanted to rent, and we got great feedback from that as well. So we knew that there was demand in this market and there was a new neighbor coming in up the street being built by D.R. Horton. So it was perfect. This is just down the road from our facility. So there was a lot of upside in the deal, but looking back, it was probably maybe a double or so.
Ash Patel: Yeah, so there was a lot of value-add that you guys would have to do.
Kris Bennett: Yeah, the market itself wasn’t the greatest. He was renting 10 by 10s [unintelligible [00:19:10].05] climate control for 50 bucks a unit; we were advertising it for 75 and getting phone calls. So it wasn’t like it was a big stretch.
Ash Patel: So Eugene wants you to walk away from this deal now. How does that conversation go?
Kris Bennett: Yeah. Exactly right. So now that the listeners can get a better picture of it like, “Okay, why would you want to go through the process of this?” “Well, because there was upside in the deal.” Maybe we would have done better than a double; maybe it would have been a Grand Slam, which is fine. But we could see the value that we could add there. And we were buying it for $112,000. So if you do the math on that, it’s really cheap. So that’s why we wanted to do this deal.
So anyway, so we were ready to go and buy the deal. But he said, “How much can I pay you guys to walk away?” We said, “We’re not going to do that, you need to close the deal with us.” And he said, “Well, I’m not going to close. I’m not going to sign the dots, I’m not going to close anything.” And we just tried to gently—I can’t tell you, man; we used a lot of patience, because I understood his situation. He also had a family matter that came up during this process, so we kind of gave him a little bit of breathing room there, unexpected family death. So we were trying to be very patient with him. But we said, “Hey, do you have an attorney? Because your attorney needs to really explain to you what’s in this contract.” And this, I think, is important for listeners.
So we talked about the due diligence process, and the earnest money deposit, right? The buyer can get their earnest money deposit back during due diligence, and they can walk away, and sellers usually feel like, “Oh, well, you can just walk away, [unintelligible [00:20:29].10] hit me for retrade,” in other words, reduce the price, and now I’ve got to retrade with you, because you already have it under contract and I don’t want to do all that…
But what does the buyer get if the seller walks away? What are the remedies for the buyer? And that should be spelled out in your contract; it’s called specific performance. That’s the legal term for it, where the seller is obligated to sell your property; there’s a number reasons why, but it’s because your real estate is unique, and even two houses, two houses aren’t the same, even two across the street, or two next door to each other. Same floor plan, same everything. One has a backyard, the other has a smaller backyard; one sits on a hill, the other doesn’t. Whatever. One’s closer to the bus stop, the other one’s not. So no two properties are alike. If the seller has agreed to sell, then they must do so and they signed that contract.
So that was our remedy, right? So we could lose all the money, and all the due diligence and all that stuff and get our earnest money back. The seller says, “No, I’ll give you the earnest money back, and I’ll even compensate you above your earnest money to cover all your due diligence.” That doesn’t matter, because I want the property, the property is unique.
You think about all the emotions tied up in that. When I talk about the upside of the deal, it’s like, “Oh my gosh, we’re going to make some money on this. It won’t be a home run, but it’s a good deal.” You’re ready to go, you’re emotionally involved in that process… To then say, “I’ll give you your earnest money back and pay your due diligence fees” isn’t going to cut it for a buyer.
Ash Patel: In your defense, you weren’t stealing this property; you were going in there and you were going to have to put a lot of time, money and effort into making it better.
Kris Bennett: Oh yeah.
Ash Patel: So it wasn’t like you were just going to buy a cheap, flip it, sell it. That specific performance clause, is that in every contract? Is that typical?
Kris Bennett: No, it’s not.
Ash Patel: It’s not, is it?
Kris Bennett: No, it’s not. Typically, this is one thing that is good about the Commercial Realtor Association. I’m not a commercial realtor, but a Realtor Association provides contracts for their real estate agents, and those contracts are really buttoned up very, very well.
Sometimes buyers and sellers won’t like to use them, because they seem kind of maybe amateur or something like that. They want to get their attorney to draft a contract. Totally fine either way, but that realtor contract actually has everything buttoned up really nicely. So that’s what we used in this case. I am a real estate agent, I have a license, but I’m not a realtor, but we were able to use a contract from our attorney that was her commercial real estate contract, basically her realtor contract. So that has it in there. There is not a clause – or at least in North Carolina, it doesn’t say “specific performance clause,” it doesn’t say that in there. But it describes the actions that happen should the buyer breach or should the seller breach; and it describes those actions, and those actions can be summed up with the term “specific performance”. In other words, the buyer is to be compensated for their loss, obviously, and they have any remedies under the court of law, something like that. Basically, they can force the seller to sell the property, because they have a contract in place to do so.
Ash Patel: Is there a case law that backs that up?
Kris Bennett: In North Carolina, absolutely. That’s why it’s in there. Yeah, absolutely. The contract in North Carolina has grown from one page or three pages to 14 or 15 pages, and it covers all those things. That’s why you want to understand your contract as a buyer, or even as a passive investor, whoever you’re investing with; you want to make sure that those folks, the sponsors understand what they’re doing right, and understand the contract and the remedies. Because if you’re giving them your money, or even using your own money to buy something, you want to make sure that you understand, if I don’t perform and I don’t do what I say I’m going to do, what am I penalized with? I can lose my earnest money. Usually, that’s the only remedy to a seller, is the earnest money deposit. And that’s usually why a seller wants to have a higher earnest money deposit, if they’re getting good advice from a broker or whomever, because they will cover and compensate not just for the time of the property being tied up, but also the emotional aspect of things, right? I’m getting ready to sell, you’ve already contemplated in your mind as a seller “I’m going to the beach with my money” or whatever, and then the buyer suddenly backs out, or the buyer suddenly breaches. Well, what sort of compensation do you have?
So as a seller, you don’t want the earnest money to be high; the buyers usually want it to be low. But that’s the compensation to the seller. Well, what does the buyer get? The buyer gets to sue for specific performance to compel the seller to fulfill the obligations of the contract that they signed.
Ash Patel: You had that in your contract, so why not pursue legal action? How did this end?
Kris Bennett: Yeah, we debated it for quite a while. And if it were a larger deal, let’s say — let’s say, it was a $2 million deal, whatever, a little more sophisticated seller, that would have been a different conversation. This guy was nearly 80 years old. At one point he wanted the funds to be direct deposited to his Edward Jones account, which – we have nothing to do with that. That’s not going to happen. My guess was to avoid taxes, but that’s not the way to do it.
Ash Patel: Yeah.
Kris Bennett: We didn’t want to go and beat the guy up. Why do that? You know…
Ash Patel: And did you lose your earnest money?
Kris Bennett: No, we did not. So we got him to sign off that we can get it back, and we did, but we lost our due diligence costs, right? So the attorney—
Ash Patel: The $6,000?
Kris Bennett: Yeah, attorneys, title, PCA, Phase I and survey.
Ash Patel: And there was no reasoning with him to get reimbursed for those?
Kris Bennett: None. Zero.
Ash Patel: Yeah.
Kris Bennett: He was very hard to get a hold of towards the end, of course, for obvious reasons… But once we got our attorneys involved, and said—well, we had them involved the whole time. But we said, “Look, you guys just call them and let them know that we’re willing to terminate, and we just want our earnest money back. That’s it.” So once they sent that over, he signed off on it and it was good to go.
Ash Patel: I have to share a similar story. I was purchasing a $500,000 strip mall, and it turns out that the middle son—this was the youngest son, who had just inherited this strip mall when his dad passed away, and he wanted to sell it very quickly, before his brothers got wind that he was going to sell it. So he inherited it. He took possession of it, it was in his name, and his brothers—well, let me back up.
The realtor calls me and says, “Hey, any chance you can close in four days?” And I’m like, “No, the title company can’t get this done in four days.” “Alright, well, I didn’t think it was going to happen, but I told him I’d ask. And that was just weird, I didn’t understand that. So as time went on, I get a call from my realtor, and she says, “Hey, by the way, the seller is not going to sell you this building anymore, but they’re going to reimburse you for any expenses.” And I’m like, “No, we have a contract. What do you mean?” And I didn’t know this specific performance clause—I’m going to write this down now to check my contracts…
Kris Bennett: Right.
Ash Patel: But they said, “Yeah, the older brother found out that he’s going to sell it and he wants to keep it in the family.” And I’m like, “Okay, now it makes sense. He wanted to sell it real quick, before the big brother found out that he was selling it.” And all I did was I threatened a lawsuit if they didn’t fulfill their end of the bargain, and go to the closing table. And I got some legal advice online, just by searching forums, and from what I gathered, there isn’t a lot of remedy for the buyers. You have to prove specific damages, and in this case, future income is not a specific damage. So all I could have sued for is whatever costs I was out. But what an important lesson learned to look for that specific performance clause.
Kris Bennett: Yeah, it’s huge. That’s a great story right there.
Ash Patel: Yeah.
Kris Bennett: It’s huge.
Ash Patel: And like you said, have a remedy if the seller fails to close. And could that remedy be a financial penalty, a $20,000 penalty or something, if it’s in the contract?
Kris Bennett: Absolutely. As a buyer and seller, you can amend that contract and add whatever you want to add to it. So absolutely. You can say, “Seller, if you fail to perform in selling me this property, change your mind, get cold feet, whatever, you owe me $150,000, just because.”
Ash Patel: Yeah.
Kris Bennett: Just because that number popped in my head, you agree to that. And you can do whatever you want with that. Yeah, absolutely.
Ash Patel: I’m going to get a copy of that North Carolina commercial real estate contract.
Kris Bennett: Yeah.
Ash Patel: Because here in Ohio, it’s very simple. It’s almost identical to the residential contract. Thank you for sharing all of that.
Kris Bennett: Absolutely. Your listeners, go ahead and Google that, “North Carolina commercial realtor offer-to-purchase sale contract.” Again, it won’t say, try to do a search in there and for specific performance, it won’t say that in there; but it’ll be a section there that talks about buyer’s remedies in case of seller breach, and it’ll describe what happens in there, and so that’s what you’re covered as a buyer, that if the seller backs out, “You know, I’m not going to sell the property anymore.” Or in this case, Eugene wouldn’t sell it to us unless we gave him the easement, right? So he’s kind of twisting our arm there. So what are our remedies in that case? Well, Eugene can’t go make any material changes to the property. It says that in the contract, that the seller is not allowed to make changes like that; they can’t go record something after they put it under contract. So he couldn’t do it, and he still had to sell us the property as-is, if we decided to sue him for that.
Ash Patel: Yeah, it’s amazing how each section in these contracts, there’s reasons behind the fact that they’re in there.
Kris Bennett: That is exactly right. So part of the lessons is, don’t do handshake deals. Somebody—when I say it, you would probably think, “Yeah, that makes sense, duh!” Well, why do we have contracts? That’s so convoluted. I don’t like contracts; we just have got to shake hands and let’s just do like the olden days. No, the reason we have it is because in the olden days, somebody tried to screw somebody else over, and so they ended up going to court, and that’s why it’s in the contract now; at least the standard Realtor Association Contracts.
Ash Patel: And of course, a disclaimer there – just because it’s in the North Carolina contract, it may or may not apply out of state.
Kris Bennett: Very good. Very good. Absolutely. Absolutely.
Ash Patel: And Kris, one more question. Do you do letters of intent?
Kris Bennett: Absolutely.
Ash Patel: They’re non-binding.
Kris Bennett: Absolutely, non-binding.
Ash Patel: Why do you do it?
Kris Bennett: To get the seller on the same page and to agree to the basic terms; price, due diligence, earnest money deposits, etc, closing date, extensions if any. To get those basic terms out of the way, so that we can save money when we go back to the attorney. So we give the attorney the LOI, “Here’s the basic terms. Let’s go and get the contract drafted.” You wouldn’t necessarily have to do that on every single deal if you’re dealing with maybe a smaller mom-and-pop person or whatever, you might just send them a contract. But the LOI is definitely non-binding. So hopefully, that answers your question first, before I get to the story.
Ash Patel: It does.
Kris Bennett: But definitely, in commercial real estate, it’s customary to use an LOI to talk about the basic terms first, before we started getting attorneys involved and drafting a PSA and negotiating and all that stuff.
We did have a situation with a broker – I have to be kind of vague about this because I know the deal hasn’t closed yet and all that, and it’s not our deal. So here’s what happened – we put a deal under contract managed by one of the big guys… When I say one of the big guys, I mean one of the bigger self-storage management companies out there. I’m kind of being vague here. There was a commercial broker involved. We agreed to terms in the LOI, we’re getting the contract drafted, the PSA drafted. We went back and forth probably on 2-3 revisions – maybe it was the fourth, I don’t remember, but 2-3 revisions on the PSA. Once you’re doing that, you’re spending money on the attorneys and all that stuff. I mean, you’re working—
Ash Patel: PSA is what?
Kris Bennett: The Purchase and Sale Agreement, that’s contract.
Ash Patel: Okay, yeah.
Kris Bennett: Thank you. So we’re going back and forth negotiating some terms in the PSA, besides the main ones, the purchase price, etc. All of a sudden, the broker calls us, we’d checked in with him on like a Thursday and a Friday saying, “Hey, any updates on the PSA? Just want to get the revisions back and have it under contract.” Because we had like very few minor things left to discuss, and that was it really.
So we didn’t hear from him; we heard from him the following Monday, I think, it was Monday or Tuesday. He said, “Hey, got bad news. The seller received another offer and they’re going to go in a different direction.” We were like, “What in the world are you talking about they’re going to go into different direction? We’ve been doing this whole song and dance here now for like a week and a half. What gives?”
And long story short, they got another offer that was a higher number, a larger purchase price. The company was already managing the facility. So the seller, in their mind, bigger dollars, easier transition. I’m not obligated to sell to this buyer, even though we had it under LoI and we’re negotiating the PSA”, and they are 100% true, right on that. So did we lose money? Yes, and we lost time, and the emotional rollercoaster of that as well.
So yeah, then we went in a different direction, we lost that deal. So it’s important once you get it under, quote unquote, “LOI,” that you negotiate that PSA as quickly as possible, because they don’t have to sell it to you until they have signed that contract.
Ash Patel: Yeah, the reason I brought that up is I’ve never done an LOI as a buyer. And if I want to make an offer for whatever it is, the listing realtor will often ask for an LOI, and I send a contract.
Kris Bennett: Yeah.
Ash Patel: Because that little bit of time that can lapse, you can lose deals. So I go straight into the contract. And I guess from my perspective, that is the working LOI, where you send your version of whatever you want in the contract, and then they can come back and say, “Well, your due diligence period is too long, we’re not going to agree to a financing contingency.” But at that point, you’ve already got the contract in the process. So that’s my perspective.
Kris Bennett: Yeah, yeah.
Ash Patel: I hate LOIs, because they’re non-binding.
Kris Bennett: Yeah, absolutely. So we have done it where we send over the LOI and the contract.
Ash Patel: Okay, got it.
Kris Bennett: Yeah. And so we’ll send both, just because like you just said, it gets the process going, and it reduces the time and the negotiation. So it’s already in there, you want to just strike something, whatever, send it back to us marked up, etc. So it really depends on, in a sense, what’s customary. So we switched, we’re doing bigger deals now, much bigger deals. We’re closing one tomorrow, which is very exciting. We’re looking forward to that one. But it’s very customary now in the storage space, if you’re doing larger deals, the broker or the owner, we’re expecting LOI, not the PSA. But we’ll send both in some cases; not in all cases, but in some cases, we’ll send both.
Ash Patel: And I like that, because it’s almost like a cover letter to the contractor, where you highlight the high level, important things that are in the contract.
Kris Bennett: Yeah.
Ash Patel: Kris, great conversation again. Best Ever listeners, if you haven’t already heard Kris Bennett’s earlier podcast interview, it was incredible. I got a lot out of it, and I’m sure you will too, if you have any interest in self-storage.
So, Kris, I know you have a closing tomorrow, this is crunch time… Thank you for taking time out of your day and share more important lessons with our Best Ever listeners.
Kris Bennett: Happy to do it, man. Had a lot of fun. I appreciate you having me on.
Ash Patel: Yeah, and good luck tomorrow with your closing.
Kris Bennett: Thank you so much, Ash. I appreciate it, man.
Ash Patel: Alright. Take care.
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