Tuesday, February 2, 2010

The Power of the Inspection Period

An "As-Is" transaction is one in which the buyer (whether it be a buyer of real estate, equipment or a complete business) gets no warranties from the seller relating to the property that is being purchased.  Though it would be nice to have those warranties, "as is" purchases are fairly common practice.  The key to protecting yourself as a buyer is to provide yourself with an ample "inspection period" (also called a "study period"), during which you will be allowed to perform inspections of the property, which might include the following:

1.  review financial statements of the seller relating to the property to verify that the income potential is as stated by the seller;
2.  hire a technical person to perform a physical inspection of the property;
3.  appraise the property, so that you will know its likely resell value;
4.  hire a third party to perform an environmental assessment of the property;
5.  review historical property tax records for the property; and
6.  if the property is real estate occupied by third parties, obtain copies of leases and estoppel certificates (ie. statements by the tenants that the landlord is not in default).

The list goes on and largely depends on the nature of the property you are purchasing, but remember that all of your inspections should be completed during the inspection period, as most inspection period provisions give you the right to terminate the contract for any reason during the inspection period (but not afterwards).

If possible, try to negotiate warranties from the seller, instead of having to take the property "as is".  Even if you get those warranties, however, they are only as good as the seller's bank account.  So, you still need to conduct your inspections.

The power of the inspection period lies is your willingness to walk away from the deal (or renegotiate price) when your inspections reveal negative information.  Always, retain competent legal counsel to negotiate your inspection period provisions.

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