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.”
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:
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:
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:
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.
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.
Disclaimer:
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.