Welcome to the Self-Storage University Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate self-storage facilities. And your host is a partner in one of the largest real estate portfolios in the U.S. with nearly $1 billion of holdings, Frank Rolfe.
Webster's Dictionary defines a contract as a written or spoken agreement that is intended to be enforceable by law. This is Frank Rolfe with the Self Storage University podcast. We're going to talk about contracts, but modifications of contracts and how that works when you submit a contract to buy a self storage facility and the seller wants to make changes to it. Now let's first point out that a contract giving it a little more embellishment is something that's mutually agreeable by both parties to solidify an agreement to buy and sell a piece of real estate, in this case a self storage facility. And we all know the basics of a contract. We all know the contract typically is going to state who the buyer is, who the seller is, how much you're paying for the property, what's included in the sale, and then a due diligence period, a financing period and a projected date of closing. You take that agreement and you add to it an earnest money check and take it to the title company. And lo and behold, you have a fully binding agreement, typically. But sometimes between your starting spot and getting to the title company, there's a detour.
And the detour typically comes when the seller most typically wants to make changes to the agreement. So, what happens when they want to do that? How does that process work? Not the submission of the contract, but dealing with the changes that the seller may want. Well, let's first note the things we just discussed. They're set in stone. There can't be any changes to the buyer, the seller, the price or the diligence, the financing or the closing date. But in a typical agreement, all of those things combined only amount up to what, Maybe a paragraph of that contract. So, what's all those other pages in there for? Well, a lot of those pages in there are for something that's called warranties. Now what's a warranty? A warranty says, basically it implies that when the seller says something that they weren't lying about it. And a warranty and agreement basically states that if someone told you X, if someone told you that that facility has 200 units, that it doesn't have 150, it's a way that you try and ensure you don't get shortchanged, that the seller realizes there's teeth behind everything that they tell you and so they don't dare lie to you, those are what warranties are.
And often when you start cutting out those extra pages of the contract, the seller may want you to exclude. A lot of what is going to go are warranties. Now, it's up to you as the buyer to decide how much of those warranties you really need. Because let's get honest that warranties aren't as great as they sound. If you've ever had a property that you bought and the warranties were violated, seller told you X, X isn't the truth, you later find out after purchasing that they lied to you, you're not probably going to go after them unless it's an enormous amount of money. Because it comes as no surprise. The US Judicial system is a mess. So for you to try and collect on a warranty, you're going to spend at least $25,000 in legal fees just to start the process. You're not going to spend 25,000, try and get back something that only cost 15,000. And also if you lose the case, then the other party can sue you, possibly for their legal bills. So you might spend $25,000 even though you're in the right, but you might get a judge or a jury that are complete idiots.
And next thing you know, you not only lost your 25,000, they counter-sue you for their 25,000. Now you're out $50,000 and you accomplish nothing. So warranties aren't really as valuable as they might appear to be. However, warranties do tend to sober sellers. But if you have to give on some of the warranties, well, I guess you can if you feel that you must. But just remember that you're going to weaken your position as you take the warranties away, it makes the seller less worried about it all. But yeah, you might be able to remove some warranties and then you have typically in contracts some redundant language. And this redundant language just is put in there by attorneys so that everyone agrees that, hey, this is what the laws of the state say, but it doesn't change the laws of the state. So yes, some of that redundant language you could probably also remove. Now, it's going to make things a little more gray area, but if you ever were to go to court and it was a big deal, well, you'd probably win. If in fact the law says X and you were following that, you don't need to really say it again in the contract.
I wouldn't have to have a contract that said, well, but you know, if I rob a bank, my no, my penalties would be 10 to 30 years in prison. And well, but that's already the law. So again, it's kind of a reminder in there to make sure everyone's on the same page. And once again, really to sober, the buyer and the seller. But some of that redundant language, okay, we could probably remove some of that. And then you have some things that you really just can't change much. But sometimes a seller is going to want you to change their specific performance, basically take it out. You can't do that. If you take out seller specific performance, that means the seller can change their mind up till the day at the very minute of closing, so they could come back and say, you know what, I changed my mind, I don't want to sell you the storage facility after all. Sorry, you know, nothing personal. And all your effort, all your third party reports, getting a loan, the whole thing all down the drain. So, you have to have seller specific performance. But sometimes the seller is going to want you to amend the contract to add in buyer specific performance, and you should never do that.
What buyer specific performance means that if you do not cancel the agreement during due diligence or financing, you have to buy the property even if you don't want to. Now I can't imagine how you would be dumb enough to get yourself in that position. But let's assume you had a car wreck and ended up in a coma. And while you were in your coma, the due diligence and the financing period ended and you didn't cancel. Well, now you have to buy the property. You wake up from the coma and they say, ah, well, and here in 30 minutes you got to go to the title company, we're buying the storage facility. And you say, well, I didn't even do diligence on it. And they said, oh well, but you stupidly signed on something with buyer specific performance. Remember that the seller has your earnest money as liquidated damages if you don't perform. So, it's very much different than seller specific performance where you don't have any liquidated damages at the ready, but buyers, they already do. So you do not need to ever sign buyer specific performance. That's a really, really bad idea.
Also, if you take much out on due diligence or financing contingencies, again, it's going to cause problems for you because people are going to argue over it.
So a due diligence provision and a contract will state that you get the right to do all your different studies and things like that. And at that point you get to make the decision whether to go forward or not of your own sound mind. But if you take a lot of those words out, it may be where the seller says, wait, no, I'm kind of involved in this diligence and I don't think that was a reasonable reason. You'd never want to get situations like that. You don't want the seller to determine whether you can cancel the contract or not. That's a terrible idea. So, you don't want to get into those kinds of items. And same with the financing period. You got to have a financing period. This is America 2025. Now you have to have some backstopping ability that the lender will come forward with the money at closing or you can't close. So, you've got to get that also accomplished. And so, you can't make a lot of revisions there. So what's it all mean in the end? It means that any contract that you can read and fully understand that appears satisfactory to you is fine.
And if you can shorten that down a bit, well, that's all good news. But you can't take an agreement down to what some sellers want, which is taking it down to like a paragraph. It's just not going to happen. We've had sellers who say things like, what, my word is my bond. You know, I shake your hand and therefore I will do everything that needs to be done. That all worked great, maybe in like 1880, but in the modern world, that ain't going to work. So, that would be the no written agreement concept. Forget that one. But then some sellers want you to agree to something that's somewhat similar. They want you to agree to having maybe some writing, but writing light. And remember that everything you remove from the contract could come back to haunt you later. Could require greater litigation to clarify what in the world was going on. So, while you respect the seller's opinion that he would like to have something short, short doesn't really work for everyone in the end. In fact, you can tell the seller there's some things in there that are to their protection as much as yours.
So why would you want to remove the parachute from the airplane? A lot of sellers, often they're just repelled by long agreements because they're too cheap to hire an attorney to look at it and they don't want to read it. A lot of it comes back to their own effort and/or lack thereof, or just procrastination. But a contract, to be successful, has to state all the basics. It has to state a minimum number of warranties and concepts because it really protects both parties. And remember, going back to the Webster's dictionary definition, the whole point of the contract is something enforceable by law. So in the end, a successful contract would have to be one that has enough language in it that the law can backstop both buyer and seller. So, they perform as required and everything has a happy ending. This is Frank Rolfe with the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.