When you purchase a land and its business, you must create a purchase sale agreement (PSA).
What does this PSA need to contain to satisfy lenders, appraisers and attorneys?
Purchase Sale Agreements must have:
- The correct name of the buyer and the seller. This may seem obvious, but often individuals make offers on purchases. However, their business will ultimately be buying the property and taking out the loan. So the buyer should be the business and not the individual. But don’t worry. This occurs so often that the parties typically amend the PSA later (see below).
- The purchase price. The appraiser and the lenders (and the SBA if this is an SBA guaranteed loan) need to know how much you have agreed to pay for the property and/or business. This number will affect the amount of the loan. In addition, if an appraisal shows the value of the property to be less than the PSA, everybody will have to go back to the drawing board to renegotiate.
- The date the purchase sale agreement expires. As a buyer, give yourself enough time to secure financing and to close the deal. Simple undeveloped real estate can close more quickly than buildings and businesses that require more complex appraisals and due diligence.
When you need to make changes…
A PSA is the first start of the purchase and getting financing. They are rarely perfect. It’s fairly straightforward to make changes to satisfy all of the parties. Here’s a few that occur often.
• Assigning the Loan: If the original PSA shows the buyer (a person, not a business), then you will need to amend the PSA. This amendment is called an “assignment” and assigns the loan and the buying of the property from the individual to the business or the borrowing entity.
• Price Breakdown: Many times, lenders and attorneys want the purchase price to be broken down. How much is the land worth? What is the value of furniture, fixtures and equipment? What about inventory? Lenders often have preferences about price breakdowns or allocations, so this is another area that is often amended later in the underwriting process.
• Extending the PSA: Certain components during underwriting can delay the loan and the closing. These include lack of a survey, difficulties obtaining documents from buyers and sellers and even discoveries of issues during the environmental site assessment. When these bumps in the road occur, the buyer and seller need to agree to extend the PSA just a bit.
If you would like to discuss financing your future business plans, feel free to contact our team. We can conduct a business evaluation, reach out to our lenders, offer advice on bidding and secure financing for you. An initial business evaluation is complimentary. We have a network of lenders for acquisitions, refinances and construction projects.
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