First LOI

[Masroor Ahmed]

Hey BP folks - I'm a new investor and need some help getting over the challenge of getting deal number one.

While there's a ton written about due diligence check lists / process, I'd like some advice on pre-LOI diligence and getting comfortable enough to make an offer. How much leg work do you do before putting in an offer? Here are a few things I've hit on, but feeling nervous about putting in an LOI:

- research on surround area, demographics, businesses, general outlook

- walk through of building, saw 2 units of 8 with listing agent. Then drove by a couple times myself

- in the walk through, i evaluated as much as I could about the condition of the bldg, windows, age of appliances, common areas, water damage, etc.

- I'm a finance person, so I've evaluated the heck out of the math and varied scenarios

What am I missing? Adding to my caution, the property has been on the market for 3-4 months and the listing agent told me last week that they haven't seen any offers.  I even casually told him that the math doesn't work for me until i'm at a ~30% discount to current asking price.  Knowing that, he's still asking me to put in what I feel is a fair offer.  It probably doesn't matter, but my thought is he's either asking for an offer so he can claim at least one offer for his client (even if 30% lower than ask) or he really thinks the seller would consider this (I'm probably over thinking this last bit)...

Help =)

[Mark Mosch]

The big issue is to make sure you have a professional inspector walk the property after the offer and then you can adjust the offer based on what you find.  Don't be afraid to write an offer, but make sure to have a contingency in there - give yourself 30 days - for a full physical inspection by an inspection company.  Then, your offer is contingent on your inspection not finding anything of concern.  If you do find something, it's totally appropriate to ask for a price adjustment based on those findings - or to ask the seller to fix prior to closing (the fix of course needing to be approved by you prior to close).  Hope that helps.

[Masroor Ahmed]

Thanks @Mark Mosch , That's helpful...I have a solid LOI draft ready to go which is quite thorough with these contingencies (and includes inspection by 3rd party). I suppose then, with a solid LOI, I have contingencies for significant items I may miss during my superficial/initial evaluation. They way I look at it, there are certain major risks when buying a property and from pre-LOI evaluation to formal due diligence, I'm checking off those risk items along the way. I need to get comfortable with macro items (location, demographics, etc) before LOI, then the bigger building specific items, (say the roof is falling apart, etc.) won't come out until we've agree on an LOI and I'm diligence.... Just nervous I guess.

[Mark Mosch]

Sounds like you got it covered.  Pull the trigger and once you get into it, just stay alert and flexible and don't get bulldozed into accepting things that you are concerned about.  However, nothing can happen until you get started!

[Will Barnard]

Studying and knowing the market conditions in the area you choose to invest is step one and a crucial one. You should have a full understanding of that specific market before making offers.

From there, don't let fear stop you from writing LOI's, you have a legal out with your contingencies and an LOI is not legally binding. Only until you get to contract with your EMD into escrow do you have a legal contract. Aside from your contingencies, your LOI should also include what you expect from seller, documents in specific periods of time, clear title, survey, disclosures, insurance claims, property condition reports, etc.

[Masroor Ahmed]

Thanks @Will Barnard ...at this point, I think its just fear that's probably holding me back. I've got all that in the LOI, thanks to a friend who's been in the business for some time. Just have this lingering thought that I could be doing more pre-LOI, but I've probably exhausted that analysis. I'm very aware of the paralysis by analysis and want to avoid it, but not because I'm being impatient...sometimes its hard to tell the difference (speaking from other investment/finance decisions outside of RE).

[Wayne Brooks]

On an 8 unit building, I wouldn't be using a LOI, but a purchase contract instead. You have the same contingencies and requirements, but generally the LOI is not binding, and the seller can back out at any time.

[Will Barnard]

Originally posted by @Wayne Brooks:

On an 8 unit building, I wouldn't be using a LOI, but a purchase contract instead. You have the same contingencies and requirements, but generally the LOI is not binding, and the seller can back out at any time.

It is standard practice to submit an LOI on commercial properties rather than a purchase contract. A lot goes into contracts on commercial and it is a waste of legal fees to draft all of that before even knowing if you have a deal or not. That is the entire reason for LOI's and quite frankly, it should be done on residential too (but that is a topic for another day). While the LOI is not legal binding and does not protect you from someone else getting the deal, it puts all your terms in writing to the seller and then they choose the party they feel is bet based on the LOI's they have received. At that point, you go to contract and spend the money on legal.

Back to fear, DO NOT let fear stop you. The rich act in spite of fear while others allow fear to stop them. Do not fall into that trap. The only thing to fear is fear itself!

[Mike B.]

One thing you can add is checking out the specific competitors to the property. I know people have mentioned knowing the market, but actually go in and shop the comps as if you were going to rent from them. Its always good to be able to make that comparison with fixtures, appliances, cabinets, etc.  This will help you to know several things: 1. are the rental rates of the property you are looking at in line, or over/under. This will help your financial model be more accurate. 2. How is the competition running their site and how is that site's curb appeal (with their current tenants)? You might need to adjust income in your financial model or need to make changes to your deal site which takes more capital. And 3. Knowing the level of interior finish of the competition will help you flesh out your capital budget, which will also ultimately affect how much you can pay for the deal.

As far as being fearful of submitting the LOI, don't worry that you caught every little thing on your tour. That is why there is a Due Diligence period. And after a few of these, you will start to become more comfortable with what numbers your financial model will need, so even if you find minor items on your Due Diligence you won't need to re-trade on the price since you have already accounted for them. Once that happens a couple of times, Brokers will remember you as someone who can commit when they make an offer and you will get preferential treatment.

[Masroor Ahmed]

@Will Barnard completely agree on LOI comments. Much easier to negociate key terms in simple english and allow the contract to be the fully detailed language.

@Mike B. admiittedly i haven't done this. Most of my market research has been on understanding demographic trends in this suburb and adjacent burbs and looking searching for comps online.  I'll probably do this asap.

[Will Barnard]

Part of my comments regarding knowing your market includes doing some precise rental analysis comparisons. @Mike B. Was very precise In his explanation and I could not agree more. Going into comps units to not just get rental rates, but see the units is essential!

[Masroor Ahmed]

Got it. Making appointments to see places in a couple days.

[Travis Hunter]

Like to hear how this worked out?