Real Estate Articles
Writing a Letter of Intent for Property Purchase
Written by Brent Pace for Gaebler Ventures
As you begin to negotiate a real estate transaction, a first step toward closing is signing a letter of intent (LOI). In this article we look at the anatomy of an LOI, and consider the points that ought to be addressed therein.
When you begin to scour the market for real estate deals, you will find a number of properties for sale and lease.
As you start to negotiate a transaction, both sides will want to enter into a letter of intent (LOI). This letter is non-binding, but it helps get the main negotiating terms on the table and agreed upon in principle so that the deal can go smoothly. Here are a few important things that ought to be addressed in any LOI:
1. Buyer / Seller. The LOI should address specifically who each of these parties are, including the names of any legal entities (LLCs, etc) involved.
2. Physical Description. A description of the property for sale or lease including the address, square footage, general description of improvements, and acreage as applicable.
3. Purchase Price. A general purchase price including the terms of payment should be addressed.
4. Time Frame. Items that should be handled within the allotted time include:
a. Delivery of documents. The buyer will need to review a number of important documents including leases, etc.
b. Purchase and sale agreement (PSA). The time frame to negotiate the final agreement should be established. If a deal is not reached at the end of the specified time frame then the LOI will expire.
5. Due Diligence. A list of items required for due diligence should be supplied including access to accounting and construction information related to the property. Many sellers now create a virtual "war room" online to provide easy access to documents for due diligence.
6. Financing Contingency. This section documents whether or not your offer is contingent on your securing financing for the property.
7. Escrow Costs and Pro-rations. These items help you figure out what to do in the event of a sale that is not on the first or last day of a month. Rents and payments will have to be pro-rated on an agreed upon basis.
8. Broker Fees. Your broker, who will likely help you compile your LOI, will be sure to include this line in order to get paid. There may be a broker on both sides, and the seller will gladly pay his but will not want to pay yours. You may use the seller's broker as your broker as well if you like. The fee may be a percentage or a fixed cost fee depending on the size and complexity of the project.
9. Closing Date. The letter of intent should contemplate a date certain by which the parties would like to close the transaction.
10. Non-binding Language. The letter should close with a statement that specifically states that the letter of intent is in fact non-binding. This means that you can walk away from the deal if you get cold feet in the end. The purchase and sale agreement is the document that you will find difficult to walk away from after signing.
All of the ten items above are important when negotiating for the purchase of a property. Remember, the LOI is just to negotiate and outline basic terms for the sale. There are still a number of smaller items to be negotiated later. So don't sweat the small stuff and get the letter of intent signed quickly so that you can enter into negotiations in earnest and get down to the real details of the deal.
Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.
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