Buyer beware, seller be fair

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As is readily known, caveat emptor is Latin for “let the buyer beware.” It is also the principle in commerce that the buyer alone is responsible for assessing the quality of a purchase. But what about the seller? What is their responsibility? Obviously, the purchase and sale agreement governs the terms and responsibilities of each party in a real estate transaction but mutual cooperation, proper disclosure and respect of each other’s position can be the difference between a smooth closing, a contentious one or one that never closes. In my early brokerage career, I was fortunate to have worked under one of the best and most successful recreational land brokers. His often-repeated line was “A good deal is when both sides leave the closing table thinking they each could have done a little better.”

In the course of history, the business cycle has never been defeated. Former Fed Chairman Arthur Burns once said:

For well over a century business cycles have run an unceasing round. They have persisted through vast economic and social changes; they have withstood countless experiments in industry, agriculture, banking, industrial relations, and public policy; they have confounded forecasters without number, belied repeated prophecies of a "new era of prosperity" and outlived repeated forebodings of "chronic depression."

Over the years, I have witnessed some sellers take a hardline approach to pricing and turn down offers from qualified buyers that would normally be considered very good. Understanding the business cycle is very important. Selling into strength always maximizes price but once the cycle has turned down or started down, pricing will need to be re-examined, if continuing to hold the hotel investment is not an option or the desired option. Being the sole seller at the mountaintop waiting for buyers to climb to your level might not always be the best strategy.

In any business and political climate, it is a good idea for hotel owners to continually examine their short/long-term goals, debt structure, exit strategies and their tolerance for volatility. On the flip side, buyers that have a longer-term investment horizon or are more risk tolerant are willing to deploy capital in turbulent times.

To increase the chances of a successful and smooth closing, buyers should always conduct thorough due diligence, secure financing in a timely manner, be understanding of the seller’s existing hotel operations and avoid disruptions among existing employees. It is best for sellers to have all available due diligence documents available to their broker and ready to be sent to the buyer prior to the purchase and sale agreement being executed. These items should include, but not be limited to, annual and current year-to-date income statements, historical tax returns, existing title policy, survey, hotel statistics reports and most recent and historical STR reports.

By providing the buyer with all the appropriate due diligence documents promptly, the closing timeline can sometimes be shortened and in some cases, help mitigate any request for a due diligence extension. Potential issues can also be addressed early in the process if both seller and buyer are respectfully cooperating with each other and with the hotel broker facilitating the transaction.

One never knows, in the future, the buyer and seller might be sitting across from each other in opposite roles, so best to treat each other fairly and professionally at all times.

 

For more information, visit http://www.mumfordcompany.com.

 

Provided by George Arvanitis, managing director-Midwest, Mumford Company