A letter of intent (LOI) is a letter that represents your intent to purchase the property and defines the primary terms of your offer. It is non-binding, meaning you are not legally bound to the terms you propose.
Overall, when submitting a letter of intent, come in with a strong offer that you’d be able to close at. Don’t over-offer, don’t provide your highest and best offer, and don’t submit an offer that you know will be rejected. Also, don’t get emotionally attached to the deal and sacrifice your underwriting when submitting an offer.
The purchase price offered is based on a price that allows you to achieve the goals of you and your investors. The purchase price is set after completing the entire underwriting process.
How will you finance your deal? For example, “Securing an 80% LTV Fannie Mae loan.”
Inspection Period/Due Diligence
When does the seller need to provide you with historical documentation? Generally, it is defined as a certain number of days after the execution of the purchase and sale agreement.
Here is the list of items we request from the seller in our letter of intent:
- Past three years' financials (in Excel format)
- Current rent roll (in Excel format)
- Copies of all tenant leases
- Copy of a blank lease agreement
- Copies of the current and past three years’ tax assessment and bills
- Current insurance binder or policy for property, casualty, liability, and insurance loss runs for the past three years
- List of salaries and wages for all employees on the property
- Copies of all maintenance records and warranties
- Trailing 12-month, non-operating, below-the-line expenses
- 12-month capital improvement budget (if any)
- Complete copies of all records, instruments, contracts, and agreements for the property
- Seller to provide the buyer with a list of all personal property to be conveyed with the property at closing
- An updated survey with ALTA specifications
- A current title policy
- A detailed list of all capital improvements (along with costs) made to the property over the past three years
- A copy of any plans and specifications relating to any planned or unfinished interior and/or exterior improvements to the property (if any)
- Copies of all service contracts
- Copies of the past three years’ utility bills
- Full general ledger (not just cash account related to bank deposits) and bank deposit statements for the past year (in Excel format)
- Schedule of write-offs (past 12 months) and explanation of write-off policy
- The aged receivable report, detailed by resident
- Historical occupancy report (past 12 months)
- Historical environmental reports
- Personal property list
- Breakdown of FBS income
- Such other non-confidential documents as the buyer may reasonably require, which are in the seller’s or its property manager’s possession
Also, state that the seller should provide you with access to the property for physical inspections.
When is the closing date? Generally, it is 60 to 90 days after the execution of the purchase and sale agreement.
When will the purchase and sale agreement be executed? Generally, this is defined as a certain number of days after the execution of the LOI.
Will you have the ability to extend the closing date? If so, how many extensions, and at what fee (if any)? For example:
- Closing is 60 days after execution of the purchase and sale agreement.
- The buyer has two 30-day extensions.
- Upon execution of the first extension: $400,000 non-refundable deposit
- Upon execution of the second extension: $600,000 non-refundable deposit
What will be your earnest deposit amount? The amount is up to you, but generally, it is between 1% and 2% of the purchase price.
Also, what are the terms of the earnest deposit? That is, when is the earnest deposit due and is it refundable or non-refundable?
For example, the earnest deposit may be due at the execution of the purchase and sale agreement. But you may offer a portion of the earnest deposit at the execution of the purchase and sale agreement and then another portion at the expiration of the inspection period. You may also offer an additional deposit to extend the closing date.
You may also stipulate that the earnest deposit is non-refundable subject to things like a clean environment, title, seller default, etc.
Outline whether the buyer or seller pays for title insurance. Does the buyer or seller pay for a new survey or recertification of the existing survey?
Outline whether the buyer or seller pays for the following:
- Brokerage commissions
- Costs to clear the title
- Escrow fees to the title company
- Recording the deed
- Attorney fees
What parties involved in the deal will receive a commission? Typically, it is the broker representing the seller. Who pays the commission? Typically, the seller pays the commissions.
Other Items We Include in Our Letters of Intent
- The buyer is allowed to assign the contract to a single-purpose entity.
- The seller shall continue normal operations and repairs and maintenance during the contract and will have all vacant units made ready at the time of closing.
- The buyer and seller shall work to complete the purchase and sale agreement within the first two weeks of executing the LOI.
- Once the purchase and sale agreement is executed, the seller shall not solicit, receive, or accept any offers.
I recommend speaking with a real estate broker and/or your property management company to learn what the generally accepted terms currently are in your market (refundable vs. non-refundable earnest deposit, earnest deposit amount, due diligence period, etc.).
About the Author:
Joe Fairless is the co-founder of Ashcroft Capital, a fully integrated multifamily investment firm with more than $2.7 billion in assets under management, and the founder of Best Ever CRE. His podcast, the Best Real Estate Investing Advice Ever Show, is the world's longest-running daily real estate podcast with more than 500,000 monthly downloads.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.