We spoke before about how to find deals. We’ve also discussed at length about how to evaluate deals. Once you’ve done that about 100 times, you will finally be ready to make your offer. Make sure it meets the Expense Ratio rule, then strike!
Now is the time to start building rapport with the seller. This part is absolutely key to getting the deal done and it’ll take a whole post, so I’ll be brief here. Take them out to lunch for a meeting. You buy. Your meeting is 90% small talk and at the end you talk money and terms. At this point everything is verbal and not legally binding.
Hopefully you were both able to end the meeting with a smile and you will have said something like, “I’ll get it down on paper and get it to you within 2 days.” A deadline is very important, but having it on paper is even more important. It’s easy to ‘forget’ what you said during a lunch meeting but when it is on paper it becomes real, even if that paper isn’t legally binding either.
Wait, not legally binding? Why would I bother with that?
You bother with that in order to get things written down. It’s so much easier to refer to this document later than claim you remember the seller said something or other two weeks ago. You will both sign this document and there is a mental commitment that comes with that.
I’ve mentioned my used car salesman tactic before but I’ll do so again: A few years back I was looking for an upgrade to a new(er) car and the salesman showed me the vehicle, but when we sat down in his office he turned me off. He immediately handed me a preprinted piece of paper that stated, ‘If we come to an agreement, I will purchase the vehicle.’ What a stupid thing to present to a buyer. That’s implied! Why would I ever sign something like that? It was just a sales tactic. One that failed, because I got up, thanked him for his time, and walked out as fast as I could.
The LOI is similar, so you have to do it in a non-sleazy way. More experienced owners expect to see an LOI because of its many benefits, but others will look it like the used car salesman. You will want to present it as simply a way to write down all the terms and price because memories fade. Once we have everything we both want, we take it to the attorney for a quick write up and we don’t have to fight back and forth through lawyers to get it done.
Elements of the LOI
- Cover letter – If you haven’t been able to meet with the seller as I recommend, you need to build that rapport with a one-page cover letter telling the seller who you are, why you like the property, and any assumptions you have made to come up with the price and terms.
- Property Address
- Due Diligence Documents – we talked about this previously. I give the seller 14 days to produce them or I can back out.
- Inspection Contingency – I recommend to have a 30 day time frame that starts when all the due diligence documents are received. I don’t see this done often, but sellers frequently are slow to produce documents and you don’t want to pay thousands for an inspection if the documents convince you to back out.
- Financing Contingency – put down exactly the terms you want from the bank you want. You can always relax the terms later but this gives you an out if the bank comes back with terrible terms, but you technically did get financing and would have to go through with the purchase otherwise.
- Purchase Price – This is put down low if the price is far off from what the seller wanted, but it is at the top if it’s at or near. The seller should see their most important items first on the LOI.
- Closing Date – Make sure to give yourself plenty of time as it usually takes longer than you think. I recommend 90 days for an apartment. This can always be moved up and everybody is very pleased if this happens. Try to make it later and it’s like the sky is falling.
- Credits at Closing – Security deposits are implied in some areas, but I like to have it written down. These deposits need to go to you at closing. I always ask for rents that are collected or due, which I don’t see much. This encourages sellers to continue collecting rent on the month of closing. If the argue, you can relax it or you can tell them that it is the duty of a landlord to collect rent.
- Occupancy – write down the minimum occupancy on the date of closing. Sellers will sometimes just let the property coast and not lease until closing. This will encourage them to continue to manage the property well.
- Earnest Money Deposit – Consider doing more than typical for your area. This strengthens your offer. It seems like every commercial property in my area has a deposit of $5,000. I double it.
- Assignment – Allows you to assign the deal to some other entity. An experienced seller won’t have a problem. Some newer ones need to have this explained because they think you are trying to wholesale. Sometimes your strategy might change and you need a different company to purchase it. This makes it easy.
- Period of Acceptance – Gives the seller a deadline to agree to these terms. Again, this is not binding anyway, but if the seller misses the deadline you have a good idea the deal won’t work and you can start looking elsewhere.
- Nonbinding Intent – A statement that this isn’t legally binding.
It might seem like a lot of work to go through for something that needs to essentially be rewritten into an actual agreement. This gives you a framework to start negotiating and you can modify it repeatedly with the seller prior (or even after) signing. This will save you both lots of money as the attorney just has to write it up and not deal with negotiating and revisions at their huge hourly rate. The first time you write one of these up, though, run it by your attorney as your local rules and laws will vary. Great luck!