Evaluating Study Periods

Buyers love them; sellers not so much. What are they? Study periods. For better or worse, they are all but unavoidable in our business and can often come as a surprise to sellers who are expecting a suitcase full of cash and a quick close. Today, many commercial contracts look an awful lot like free options that include relatively small, fully refundable deposits and extended study periods where the buyer can walk away for any reason—or no reason at all. As a buyer, you love it.

As a seller, it can put you in an uncomfortable limbo where the property is tied up, the odds of an eventual closing are uncertain, and the final answer is delayed. For the same reason, no broker is excited about a property going under contract until the study period is over because too much can (and does) go wrong to kill a deal.

Buyer’s Perspective on Study Periods
The needs of the buyer drive the usage and length of these study periods, which are an opportunity for a buyer to more closely inspect the physical condition of the property, verify and/or clarify legal and zoning issues, secure financing, find a tenant and plan a renovation. Generally, the more question marks and uncertainty surround a deal, the longer the study period will be. Historic rehab properties and land often require the longest study periods, which can stretch from 6 months to a year. On the other hand, the cleanest deals see the shortest study periods.

Buyers often say that they can only achieve a certain price with adequate time to study the deal. The buyer will sometimes be willing to reduce or eliminate the study period but only with a significant price reduction or some other significant concession from the seller. For example, an auction scenario can provide that quick, certain close with no strings attached, but the trade-off for the seller is typically reflected in a lower auction price. The best price is often achieved by giving the buyer adequate time to do their homework.

Bottom Line: If you think you need a study period, ask for it in your offer. If you definitely need one, insist on it. Either way, don’t make it longer than necessary because the offer will appear weaker in the eyes of the seller as the study period extends.

Seller’s Perspective on Study Periods
After reading the contract, many owners will immediately see the worst-case scenario for a study period and say, “So, they get to tie it up for four months and can walk away up until the very last moment leaving me with little to nothing to show for it?”

Essentially: Yes. It’s not ideal, but yes. So, why does a seller take this deal? Why don’t they just counter with a large, nonrefundable deposit and close in 30 to 45 days? They could. If the property is a new listing and garnering significant interest, maybe you can afford to do that and live with it if this particular buyer walks. But what if you’ve been on the market for a year or more without a deal in sight? You might wish the offer was all cash and closed yesterday, but you’ve got to consider the offer in front of you. The negotiation from there often involves how long the study period will be and if any of the deposit will be nonrefundable.

Bottom Line: A study period may be necessary to get the price that you want, but make sure that you fully understand and accept all possible outcomes for agreeing to one.

Seller Tip: Assessing the “Skin in the Game”
With a long study period and fully refundable deposit adding up to very little skin in the game, the offer itself does very little to demonstrate a buyer’s seriousness. Instead, the seller and their broker are left to assess the buyer’s seriousness and sincerity independently by their actions and their reputation: Is this buyer real? Are they asking the right questions and taking the right steps forward? Does this buyer seem like the kind of person or group that would intentionally waste time?

This question is the big one. Even for a serious buyer, not every contract ends up with a sale for any number of reasons, but they always move forward with their due diligence in good faith. Occasionally, some parties seem to be tying up a property only to leisurely play with the idea of buying it. Often, the only real “skin” that a buyer has in the game is their own time, energy and resources spent in conducting their due diligence and trying to make the deal work, so bet on a buyer that seems to value their own time.

How Study Periods Play Out
So, you’ve agreed to a 90-day contingency period with a fully refundable deposit, what are the possible outcomes?
1. Due diligence goes well. The buyer moves forward and closes on time at the agreed upon price. Everyone high fives.
2. Issues arise during the study period or maybe the buyer just doesn’t like the deal anymore. The buyer terminates the contract on day 89 and gets their deposit back. Seller and broker are back at square one.
3. The buyer is willing to deal with or take on some of the problems that came up during the study period, but they want more time to work those issues and/or a reduction in the purchase price.

While study periods can be a test of a seller’s patience, they are often crucial for the buyer to answer lingering questions or resolve any outstanding issues that will give them, their investors and their lenders the confidence to move forward with the purchase. If the seller’s ultimate goal is to get the property sold, study periods are a well-traveled step along that path.

by Billy Hansen