This is the last installation of the four-part series and covers the issue of the buying process itself. The process varies depending on location, agent and parties involved. My intention here is to give you an idea of what can happen and what to expect. Your agent will help fine tune the process from here.
- What are the steps in the process of buying a B&B?
Laws across the country will make a difference to this issue. Once you find the B&B property you want to buy here’s what generally happens.
The steps in Colorado are offer, counter-offer, offer, counter-offer, etc. We don’t have, though people sometimes still work this way, offer, counter-offer, counter-counter-offer, counter-counter-counter-offer, etc. It may seem like semantics but it’s really an effort to keep the contract clean and clear.
The earnest money is an important part of an offer, and in my experience the earnest money you offer should be high enough in your original offer to show your interest and commitment to the purchase. Some Sellers will ask for what feels like an obscenely high earnest money, and your broker may suggest an insultingly low earnest money to protect you. But if the Seller perceives you aren’t serious, as illustrated by the amount of money you put down here, they’ll not accept your offer. I don’t call that protecting your interests when that happens. Make sure the money is deposited into an escrow account, not the Seller’s pocket.
- Loan application
Sometimes it’s prudent to actually start this process before you even start looking for your B&B. If you find a lender who will provide a loan in a far-reaching area it’s smart to get your loan under way sooner than later. The challenge is finding that kind of lender. In my experience, local lenders are the easiest to work with which means you can’t really find a lender until you find at least your town or area, if not your B&B.
- Due diligence
This is where you conduct inspections of the building and improvements, the books and numbers, zoning and licensing, and all other issues that apply. Have professionals available to help with this analysis and research. When the Seller provides their books and P&Ls having an accountant or consultant review them with you will help you find the strengths and weaknesses of the business.
Verify all claims of business operation are as presented. Will the zoning and licensing indeed transfer with the sale, or do you have to start over? Does the zoning allow for the business as you are buying? I’ve seen innkeepers sell their inn with a wedding and special events sideline that weren’t allowed. Is the parking as required by the zoning? Signage? Are the well and septic system sized for the business you are buying?
Then there’s the issue of the changes you want to make to the structure(s) and business. Can they legally be made, or what do you have to do to make the changes? Can they physically and feasibly be made? I knew a Buyer who had magnificent plans for taking a top floor area and turning it into civil owner’s quarters. Well, he didn’t check it out with a building engineer before he bought the inn, and found out after the closing that it was both physically and financially “impossible” to do. That changed his whole attitude about his new inn.
Avoid problems by conducting a thorough due diligence. Know what you are buying.
Appraisals are ordered by the bank, paid for by you (or the Seller if you can negotiate that), and owned by the bank. Finding an appraiser with B&B experience is challenging, but they are out there. Hopefully one is on your bank’s approved list of appraisers, or your bank will be willing to add a B&B Appraiser you find to their approved list. It makes a difference to the results.
- Title reviews
Don’t take it for granted the title company will know what it’s doing or be accurate. Take a close look, or hire an attorney to do that for you, at the inn’s title work. Are there recorded easements you didn’t know about (and did you check for unrecorded easements in your due diligence phase)? How will those easements impact your plans?
Is the party you are under contract with the same person who owns the building you want to buy? I’ve seen the two names not match; that was an interesting closing. Does the legal description fit what you were told or understand to be what you are buying?
- Close the deal
You, your agent, and sometimes your lender, appear at the designated closing location. You have your down payment in a form acceptable to the lender, your ID, and your paperwork about the inn and the loan. When the signing has happened, the money transferred, and you are in possession of the inn’s keys, you are the proud owner of your beautiful new B&B.
There may be other steps, but this at least gives you a start on understanding what your agent will say.
You and your agent will form a team. It’s important to be open in your thoughts and communications with your agent. The more they know about you, your situation, and your dreams, the better they can help you reach your goal of buying your ideal B&B. Part of the task your team must tackle is to learn and understand the B&B zoning restrictions that will affect your purchase. If your agent finds a house that seems to be an ideal configuration, style, or location for a B&B, don’t get too excited until you confirm that the zoning will allow you to create the business you dream of. Even if the property is an active B&B, double check that it’s zoned for and licensed as a B&B — some inns are operating illegally!
One buyer I know bought a house that seemed to be great because of its size and earlier renovations adding a bath for each bedroom. It had been an assisted living home for years so it seemed likely, according to their agent, that it would be readily zoned for a B&B. They discovered after closing the deal that neighbors were upset about the new B&B and zoning would never get changed, they would never legally turn that property into a B&B. Bad teamwork, I’d say.
I’ve talked to many an innkeeper who was selling a B&B that wasn’t zoned or licensed as a B&B. They were confident the new owner wouldn’t have problems with the neighbors or government entity (city or county planning and zoning). They also refused to go through the hoops of changing the zoning before the sale because it was too difficult or too much work. Be very careful in such situations. The very act of changing zoning could bring enough attention to close the business. You don’t want that to happen after you buy the B&B!
My final comment about working with an agent is that I think you want to be careful about relying on the listing agent to take care of you. Generally, the listing agent works for the seller. Their fiduciary responsibility is to that client, not to you. They may be fair and honest with you, but they generally won’t work as hard for you as your own agent would. I think it’s a much better situation for you as the buyer to have your own agent, rather than use the seller’s agent, because there is so much detail to be aware of that you want someone on your team looking out for your best interests.
It’s been my bias since before I became a Realtor to use a Buyer’s Agent. That option has been readily available in Colorado for many years. I have found that other states don’t use Buyer Agency nearly as much and have very different attitudes about that business relationship. Clearly you have to go with the local approach to real estate, but do look into it and push for it as much as you can. That business relationship gives you the best service, in my opinion.
Now you have a start on questions to ask your agent. Some of the questions are interview questions to help you decide who to hire, and some are to help you through the process. Questions should arise as you proceed; ask them so you stay on track. And have fun. This is an important part of the process, and the energy you get from this process will reflect in your inn operations. Make it a positive energy.
You can learn more about researching your B&B purchase from my Buying Series ebook collection