Key Terms For A Letter Of Intent
When buying property, to submit the most serious offer, it’s best to submit a formal Letter of Intent. There are several components that go into this process, and you’ll want to do research to be prepared for this stage. A well-presented Letter of Intent can set the tone for negotiations and potentially lead to a successful acquisition.
In the following points, we’ll look at how to submit a good offer and why submitting it in written form can be advantageous.
The Value of a Letter of Intent
I always advocate for submitting your offer in writing, as it demonstrates that you are serious and have put considerable thought into the transaction. Written offers typically take the form of a Letter of Intent (LOI), which outlines the basic terms of the deal but is non-binding. One of the primary reasons for submitting an LOI is to request exclusivity during the contract negotiation process. By securing exclusivity, the buyer has time to perform due diligence and finalize the contract without the risk of the seller accepting other offers in the meantime. You can read more about the LOI process in my book, “The Insider’s Edge to Real Estate Investing.”
In some competitive markets, like New York City, LOIs are not as common because buyers and sellers typically go straight to contract. However, in less competitive or secondary markets, LOIs are more prevalent. For example, when buying undeveloped land that requires significant research or zoning approvals, an LOI becomes a practical tool for buyers who need time to assess the feasibility of the purchase.
Key Components of a Good Offer
There are several elements to include when drafting an LOI. When done well, they will ensure your offer is clear and well-defined. The following list shows the different parts to include:
1. Identification of the Property
Include the parcel number, address, and a detailed description of the property to avoid any misunderstandings. This ensures that both parties are clear about what is being sold.
2. Offer Price
The figure you include should be based on an analysis of comparable properties, current market conditions, and your financial goals. Submitting a competitive and realistic offer price shows that you are knowledgeable about market conditions.
3. Deposit
A deposit, or earnest money, is a sum of money that you commit upfront to show your interest in purchasing the property. The amount of the deposit is negotiable, and typically ranges between 1% and 5% of the purchase price. This deposit is usually held in escrow until closing.
4. Closing Period
The closing period is the time frame in which the sale will be completed. A typical commercial real estate closing can take anywhere from 30 to 90 days, depending on the complexity of the deal. Your offer should specify your preferred closing date and account for factors such as financing, inspections, and legal requirements.
5. Due Diligence Period
As a buyer, you will likely need time to inspect the property and assess its value before fully committing to the purchase. You can learn more about valuing a property in the episode, “Vetting Deals with Jesse Terry,” on my podcast “The Insider’s Edge to Real Estate Investing.” The due diligence period allows you to perform necessary checks, including environmental assessments, zoning reviews, and property condition inspections. During this period, your deposit may remain refundable. Once the due diligence period ends, your deposit typically becomes non-refundable.
6. Contingencies
Contingencies are conditions that must be met for the deal to proceed. Common contingencies include financing, inspection results, and seller obligations, such as delivering the property vacant or resolving outstanding issues like a certificate of occupancy. Contingencies protect you, as a buyer, and give you the ability to walk away from the deal if certain criteria are not met.
7. Financing Terms
You may hear the term “all-cash,” which means that the offer is not contingent on securing financing. As a buyer, you may sill seek financing, but the deal won’t depend on whether you can access it. This type of offer may be more attractive to sellers because it eliminates the risk of financing falling through, which can delay or derail the transaction.
Making an offer is both a strategic and thoughtful process. By submitting an LOI, you show the seller that you are interested and intend to move forward. Including components like price, deposit, closing period, and contingencies add clarity to your offer. Understanding the nuances of your target market and the specific property you are purchasing can help lead to a successful transaction.