SS135: What is an LOI in Real Estate

SS135: What is an LOI in Real Estate

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What is an LOI in Real Estate. A letter of intent (LOI), is a document that is utilized in the early stages of a commercial real estate sale. In this episode, Charles discusses what a LOI is, and how is it used in commercial real estate transactions.

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Talking Points:

TALKING POINTS

  •       What is the LOI?

o   A LOI or the letter of intent, is a preliminary agreement between two or more parties that intend to engage in a business transaction.

o   The letter of intent is used when purchasing commercial properties to show the buyer’s intent

o   The goal of the LOI is to begin the conversation with the seller; it starts the process and the negotiations

o   It is used prior to a contract – many investors make dozens and dozens of offers prior to purchasing – the goal here is to avoid unnecessary legal fees for each offer

o   The LOI is a short document; usually 2-4 pages – usually non-binding (cannot be enforced by law)

o   The LOI includes only the important details

o   The PSA or Purchase and Sale Agreement is the document that contains ALL the details

  •       The LOI will include:

o   Property address and property name (if applicable)

o   Property tax identification number

o   Legal description of the property

o   Proposed purchase price

o   Proposed earnest money deposit amount

o   Details of the capital stack – how much the buyer is bringing in cash to closing, proposed mortgage amount and rate, or the proposed seller financing details

o   Due diligence and inspection timeframes

o   Deadline for receiving all books and records

o   If the LOI is accepted, who will be drafting the PSA?

o   Closing date

o   Expiration date for acceptance of the LOI

o   You want to make sure that any requests out of the ordinary are included in the LOI – you are proposing seller financing (terms and rate) – you want the seller to cover certain closing costs or a portion of them – you do not want to owner to seek other offers for a certain timeframe – you want to assume their mortgage – you want the owner to make certain renovations prior to closing etc.

o   The purchaser should be an LLC with little or no assets – however, you will close in a property-specific LLC

o   If you are looking for Letter of Intent templates; you can download them for free from: https://www.syndicationsuperstars.com/free-letter-of-intent-template/

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is an LOI in real estate.

Charles:
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Charles:
So what is the LOI? An LOI or the letter of intent is a preliminary agreement between two or more parties that intend to engage in a business transaction.

Charles:
The letter of intent is used when purchasing commercial properties to show the buyer’s intent. The goal of the LOI is to begin the conversation with the seller, and it starts the process and the negotiations. It is used prior to a contract. Many investors make dozens and dozens of offers prior to purchasing. The goal here is to avoid unnecessary legal fees for each offer. Now the LOI is a short document, usually two to four pages, and usually non-binding, meaning it cannot be enforced by law. The LOI includes only the important details of the deal. Now, the PSA or the purchase and sale agreement is a document that contains all the details and that comes after the loi and that is legally binding. Now, the OI will include a number of specific details, including the property address and the property name, if applicable, property tax identification number, the legal description of the property, the proposed purchase price, the proposed earnest money deposit amount, details of the capital stack, so how much the buyer is bringing in cash to the closing, the proposed mortgage amount and rate, or the proposed seller financing details.

Charles:
It’ll include due diligence and inspection timeframes and deadline for receiving all the records, books, and any other details during the due diligence period that the buyer will need from the seller if the LOI is accepted, who will be drafting the purchase and sale agreement, the proposed closing date, the expiration date for acceptance to the letter of intent. Now, you also wanna make sure that any requests outta the ordinary are included in the loi. So you are proposing seller financing. What are the terms? The rates? You want the seller to cover certain closing costs or a portion of them. You do not want this owner to seek any other offers for a certain timeframe. You want to assume their mortgage. You want the owner to make certain renovations prior to closing. Now, any of these terms are gonna be major parts of the deal and they have to be included in the loi.

Charles:
One of the other things too is that the purchaser should be an llc. So when you’re filling out your loi most people could do it under their own name. The thing though is that with real estate investment companies, what normally will happen is they’ll put on the LOI, an LLC that has little or no assets. So if there’s any type of issue they avoid, they minimize their legal exposure. Now, however, when you do close on the property, it’ll be in your LOI as well that you’re gonna close into a property specific llc. So you might have something that says like birchstone Acquisitions LLC would be who is gonna be the buyer. And then you also put in there that’s gonna close into a property specific llc. So 123 Main Street llc, which won’t be formed until you’re having a signed LOI and a signed purchase and sale agreement. Now, if you’re looking for letter of intent templates, you can download them for free from: https://www.syndicationsuperstars.com/free-letter-of-intent-template/. And I appreciate you listening. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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