real estate for beginners, real estate investing for beginners, advanced real estate investing

The letter of intent is simply a non-binding agreement between a buyer and a seller on a real estate deal where you basically just spell out all the major terms of an agreement before getting attorneys involved in drafting a purchase and sale agreement. I’m going to go over all of the major terms that should be in a letter of intent, if you can get an agreement on these terms, there's a very high likelihood that you'll get to a signed purchase and sale agreement. Anytime you're turning in an offer, whether you're the only person offering, or you're competing against others, the whole goal is to win over the seller. To win over the seller there are three things this letter of intent should accomplish. Most important, you're going to be abundantly clear this is a non-binding contract. And besides obviously turning in good price and terms, #1 - you want the letter of intent to be short and concise; #2 - you want to convey that you're someone who will be easy to work with, and #3 - you want to convey that you're willing and capable to close on this deal. Ideally, you want your letter of intent to fit on one page, no more than two pages. First, you want to reference the name and address of the property. Next, you're going to point out which party is going to draft the purchase contract once the letter of intent has been agreed to. Typically, it's the purchaser, who of course does the letter of intent, and typically does the purchase contract. However, on occasion, especially if the seller is a very large organization, they sometimes prefer to use their own template contract even though you submitted the letter of intent. If that is the case, I would just go along with it. You want to play in their ball field. Next, you should clearly state who the purchaser is. If you don’t already have an entity formed but know you're going to create one to complete the purchase, simply state that. And be clear that you will still be a principle of this entity. That way they know you’re not trying to trade the deal, that you are the actual buyer. Nex, you're going to list the seller’s name and/or entity. You can find the actual owner or entity name either on the county assessors’ site or you can check the deed in the public records. Next, you’ll include the purchase price, which is probably the most important part. And there's really no jazz to this. You simply put your offering price. Then you’ll explain how you intend to pay for the asset. Choices include cash, financing contingency, or not conditioned on financing. Let me explain conditioned on financing. That means you intend to get financing and if you don’t get approved then you can't buy the property. Not conditioned on financing means you're going to get financing, but you're confident that you’ll be approved. Cash means you’re actually paying cash. But in the multifamily world that can also mean they're probably getting financing, they're just not going to make the purchase conditioned on financing to the seller. All the seller really cares about is that the whole deal is not conditioned on financing. That’s the ideal thing they want to see. Now I’m not telling you to pay cash or make something not contingent on financing if you're not prepared for that. I’m just telling you in a perfect world, especially when you're competing with others, if it’s possible for you to do buy the property not conditioned on financing, that's what sellers really look for.  Next, you'll specify the deposit structure. Typically, there's an initial deposit, which is put in right after the purchase and sale agreement is executed, then there's a second deposit, which is usually after the inspection period expires. Once the inspection period expired, typically the initial deposit and the second deposit are now combined and are non-refundable. That means you're heading to closing. Each of those deposits are put in the escrow account within one to three days after that specific period is due. The elite investors that I’ve watched transact typically use deposits as a differentiator among the competition. Let me tell you what I mean. They know that sellers want to feel like you have enough skin in the game, i.e., deposit money. That you're not going to walk away. Elite investors know if they're going to move beyond due diligence to closing, they're already going to have to come up with 25-35% down to close on the deal. Next up is the inspection period. I highly encourage you to put calendar days. When I see business days it kind of gives that feeling of trying to cheat the system a little bit and it puts the seller on alert. So, if you want to be the most competitive, I would use calendar days on everything you do. You'll want to point out all the different tests and surveys that you plan to do on the property, but you're also going to point out that if you don't like what you see at your sole discretion you want to have an immediate refund of your deposit. Now the reason you want to use sole discretion words is that you want to point out that you have full control over the decision on whether or not you move forward. I see elite investors point out all the different due diligence documents that they're going to ask for in the purchase contract and that does two things. One it gives the seller a chance to review some of those documents and tell you whether or not they have them so that you're going into the deal with eyes wide open. And two, it gives the seller a heads up of what you're looking for so they can begin assembling documents right now. That way when a purchase and sale agreement is executed you've got everything you need on day one. If the seller doesn't have everything you asked for it’s not the end of the world. It just depends on which ones they don't have. Typically, a rent roll and at least one year of a P&L is the minimum to move forward. Next is the closing period, which is quoted as the number of days after the inspection period ends. On occasion, I will see investors put in an extension clause, which basically allows them a one-time opportunity, sometimes two times to extend the closing by a certain number of days for the right to extend. And typically they will put down an additional amount of deposit that also becomes non-refundable with the other deposits. Most of the time that extra deposit money goes towards the purchase price, but sometimes if investors want to be more competitive, they'll put it as a fee, which means it goes on top of the price. Finally, you’ll want to include a commission clause that simply points out who the broker is and which party is paying them. The majority of the time in investment sales there's usually just a listing broker which is typically paid by the seller. If there were also a buyer's broker involved or only a buyer's broker involved, maybe it was an off-market transaction and the broker brought you directly to the seller, then you'll need to specify whether it's the buyer or the seller paying that broker. If there's a buyer's broker involved, I always encourage the buyer to pay that buying agent because that makes you as the buyer look more attractive to the seller and the seller's agent. Then there is typically a miscellaneous paragraph at the bottom that often specifies that the parties are going to work hard to go from a signed letter of intent to a signed purchase agreement in a certain amount of time. I would put in a little blurb to the seller that says that they won't negotiate with other parties during the period between the letter of intent and contract and that this is a non-binding agreement. Unless you specify otherwise for that specific clause so they could still talk to other buyers but it's a very small world in the investment world and most sellers don't want to put their reputation on the line like that to bug you out by talking to others. Lastly, you'll include a signature and dateline for the buyer and seller. Once it's fully executed that document will go to your attorney to draft the purchase and sale agreement. There are many other unique things that need to be entered into the letter of intent like the seller is providing financing or maybe you're doing a loan assumption those should be entered in too. But for the most part, you're just trying to make the letter of intent as easy and attractive to the seller as possible so that they choose you.

 

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