How to Invest in Commercial Real Estate

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Episode #010 - How to Make Your FIRST Offer on a Commercial Real Estate Property | LOI Review

by Criterion, Braden Cheek, Brian Duck
January 8th 2021
00:16:57
Description

Wondering how to make your first offer on that Commercial Real Estate Property you have been interested in? Well in today's episode we have Brian Duck and Braden Cheek from The Criterion Fund, and ... More

You can't just say, Hey, can you not sell that for me? I'm interested at five million. Um just give me a month. Nobody's going to do that. You need some sort of commitment and a letter of intent Gets that 1st step. Yeah. All right guys, hey, what's up? Welcome back to how to invest in commercial real estate. This is episode 10 and my name is Brendan chic with the criterion fund. I'm joined by my co host, brian Duck and Joel Thompson, what is up, Welcome back, what's going on guys? Um today we're going to dive into um a letter of intent. So, you know, you've been interested in properties, your underwriting them. You know, we're digging in and we're ready to make an offer. You know, what do we do now? Yeah, I mean, this is an intimidating first step for new investors as they have done some research. They think they found a good deal. But having the courage to go ahead and put that first L. Y. Out there sometimes it's tough. Yeah, but you know, the L. O. I. Is just a nonbinding word document that gets your interest to purchase uh out there in front of that seller, let them let them know.

So people shouldn't be too afraid to do it because it's nonbinding. If they mess something up, it can it can be changed, is that right? I mean, yeah, it's not like a contract. Yeah, I mean, it's literally a word document, guys. So we're talking about a word document. It's nonbinding. You're going to sign it, but it's it's not a binding contract. And the general idea is you're talking to the broker, you're building this relationship with them. You know, this isn't just a surprise. A broker gets, you're asking questions, your underwriting it and you think you're getting close right, you think you're ready to offer, and that's when this document comes into play. So, generally, will the broker that you're working with, will will he know all the maybe not all the details, but generally he'll he'll know it's not like you've talked about a price and you're gonna go away under that, he pretty well knows what price and what details you're gonna offer. Yeah, Joel, you may add on the end on this, but I would think, you know, when I'm about to offer on the property, I'm calling the broker regularly asking him, you know, where he thinks it's gonna trade, where the market is expecting it to trade, how much interest he's got on that property sandwich competition I have.

And then, you know, he may not know exactly where I'm going to come in, but there's probably a rough ballpark. And then, you know, when he sees the letter of intent that's made probably when he sees the purchase price of the full time. Absolutely. So, you know, submitting the L. O. I is a little bit of a little bit of a game, it's gamesmanship because you're trying to set up that broker for the offer that isn't going to meet the seller's expectations. So there's a little bit of a game shit going on there. You're trying to find out from the seller how much interest is in the property where the seller's expectations are, is the cell are going to be flexible on his price. Uh, and then you're gonna want to come in lower on your letter of intent, not only to see how much flexibility the seller has, uh, but also just give yourself some negotiating room. Yeah, another big point I would think, um, would be free negotiating. Um, you know, there may be this misconception that, you know, each side has these super expensive attorney teams and their negotiating on this, uh, this on your behalf. But attorneys are super expensive. I mean just one could bill you, you know, 400 to $1000 an hour, depending on how good or what part of the country you're in in a letter of intent is free negotiation because that's just you bouncing ideas, bouncing offers off of the person.

Hopefully at the end of the letter of intent, you've come to an agreement on most of the important terms and then you just hand this to your attorney and say, hey, we came up with the most important terms. Can you write this up in contract please? And they'll be like, yeah, sure before a letter of intent brokers don't necessarily appreciator or behave this way where you can say, hey, ask your, ask your seller if he's going to accept this price and then go back and forth verbally. Does that happen very much? Or this is pretty much how you want to make your first off. There might be some, a little bit of that. Just finding out the information like you guys said, But pretty much this is how the negotiations happen. Yeah. You don't want to do too much verbally, even though you're trying to, you're trying to feel where this first offer needs to go. You know, making the first offer could put you at somewhat of a disadvantage. So you're, you're trying to gauge where you think you can get in and then the purchase price you're putting on this L. O. I, you know, it's probably on the lower side of what you want. It's a negotiation. Um, it's just, it's, it's important that you always have something written down, even though it's, it's nonbinding right.

You want some sort of, hey, you know, we just talked about this. You're gonna need to give this to your attorney to prepare the contract. You're gonna need it to give it to your investors to maybe show them, you have a deal locked up. You may have to give it to a bank to show them, um, that you're, you've got this deal locked up? Because You know, you can't just say, Hey, can you not sell that for me, I'm interested at five million. Um, just give me a month, nobody's going to do that. You need some sort of commitment and a letter of intent Gets that 1st step. So for beginners that are unsure of themselves, is there is there a chance that you could submit an L. A. Y. And you're not convinced yet you're going to purchase the property? Absolutely. Absolutely. So what would be the benefits of submitting an L. Y. When you're not yet convinced? Gauging, gauging the market, Gauging how much competition is they're gauging how, you know, realistic the seller is to your buying expectations. You've got expectations when you're offering on a property of where you think you can buy it at, You know what what purchase price makes your returns work. You know how realistic they are on the physical condition or the financial condition of the property?

You may be on two different pages. I think it buys you time to be because you you still are probably going through the due diligence and you don't want to spend all the time and effort if the seller isn't reasonable on price or isn't where you need them to be. So for me, the yellow, I buys me time uh to continue my due diligence and lets me know that okay, the time I'm gonna spend uh is worth it because we're on the same page regarding price. So I'm not always convinced when I submit the yellow I but submitting the L. O. I will let me understand where the sellers at and if it's it's a reasonable price. Yeah, I mean, tanner just pull up the word doc real quick. It's it's not complicated guys, you can see, you know, we'll pop in a logo by the way, we're going to give this away. Um So if you need an L. A. Where you want to look at this, just go to invest, how to invest in CRE dot com, plug in your email, free download, We'll give it away, feel free to use it. Um I mean, it's a word document, you'll see it when you get it, you plug in who it's going to, how you're sending it to them. You know, it says, hey, it's a letter of intent on this property.

We're putting in a purchase price, we're putting in how long it's gonna take us um to buy that property, How much earnest money we're gonna put up and we can do a deep dive into earnest money. But in earnest money check is essentially just this small refundable commitment that goes to a title company that just says I have the wherewithal and the means to buy this property says you're serious. Yeah, another key component is the due diligence period. So the L. A Y it defines price, it defines earnest money and the other two really big things that defines is how long do you get to tie this up in a contract, uh and do your due diligence and still have a chance to get out with your earnest money being refundable. That's called the due diligence period. That's, that's probably one of the keys of an L. A Y. And usually industry standard is a 30 day look In a 30 day close. So 30 days to evaluate it. Why is there only 30 days? Well, you know, obviously the seller doesn't want to give you infinite time. He wants to know as soon as possible.

Are you a buyer or not? And so, uh, you know, but you need time to do your property condition report, maybe an appraisal survey things that let you know that, hey, this is what I do the least reviews. This is a property that That I've inspected and I want to proceed on. So that's the 30 days. Yeah. And a quick tip of advice is um, you know, you've got to craft this. Uh you know, you need to have experience. You know, sellers are not just going to give you a free look at a property. They know you can't afford, you know, if if you're looking at this $50 million class, a apartment complex in an amazing market and you have no experience. You have no website, you have no investors, you have no credit. They're gonna, they're gonna laugh. They're not even going to respond to your letter of intent. So let's first make sure we're dealing in the realm of possibility and then, second of all get a website, highlight your experiences, get, get some lenders, um, you know, get some rough preapprovals and get some people around you to where you can go to this broker and say, hey, you know, I may not have all the experience, but look what I have, I have the wherewithal to buy this property.

I'm serious, I'm not going to waste your time and and give them some commitment, because at the end of the day, they want to sell their property and they just don't want to waste their time. That's right. And I remember when we first started, we had what I'll call professional lookers, they were submitting L. A. Wise and and going through due diligence and and wasting time, but they really didn't have any intention of buying the property. And, and I wasted a lot of my time as a seller dealing with those guys. So definitely you want to, you want to present yourself as someone that can get the deal closed and that way your L. A. Y gets taken seriously. Yeah, I would say from, you know, a broker's perspective, or maybe a seller's perspective, um you know, if you've got a really hot asset that you're taking to market and you're trying to sell, you may feel a dozen or 15 different letters of intent. You may, it may be very attractive, there may be people bidding against each other And then you may do what's called a best and final, and, and that just says, Hey, we've got a lot of offers, guys, we've got a lot of interest, um, we're gonna extend or put a final date on the, when we're going to stop accepting letters of intent and we need your best and final offer by, you know, this Friday the 27th.

And at that day we're going to pick the best offer. Typically they only take the top three or four to that best and final round. That's a good point. Yeah, So, and it may, it may be the highest price. It may be the best closer someone that the broker has worked with and they know it is going to close on a deal. That's another really good point. It's, it's not always the price that gets you the deal. I mean, it could be terms And it could be the fact that you've bought in, you know, 20 of those assets in that market over the past year or two. They know you're going to close on it. You don't re trade or renegotiate the terms, you don't back out of the contract. That credibility that we mentioned earlier goes a long way when you're bidding on properties. Yeah, definitely. Um, So just kind of going back to the L A y real quick. We'll scroll through, um, you know, there's a few more points on where the title company is going to be, you know, kind of industry standards is buyer is picking where the title company is. Um And then it goes through on on who's providing what. But the general idea of the letter of intent is that it's it's the most important points for you as a buyer The most, you know, important 10, 12, 15.

You know, I don't know how many points we have on here. We have 14. Okay, so our most important 14 points to say, Hey, here's the price. Here's how long we're going to look at it. Here's who's gonna provide what in the timeline, here's the fees we want, here's the closing timeline, all of that. And then if the seller is like, Okay, yeah, all this works for me. They're gonna sign that letter of intent. It's not binding, it's not a contract. We can't take that to the bank or title company or lender. But what we can do is we take that sign letter of intent. We give it to our attorney and we craft a P. S. A. Or a purchase and sale agreement or a contract. It's pretty simple. Yeah. Signed L. Y. Gives both sides confidence to start spending money on the purchase and sale agreement. Yeah. Because you generally agree another point I'll make on the L. A. Y. Is that this is a pretty simple one. And I have used a form just like this to buy, you know, tens of millions of dollars of commercial real estate. So you don't have to have a complicated one. There are complicated L. O. Is out there that that go over who pays for everything and what documents are going to need to be submitted um you know, as a seller, I don't love seeing otherwise like that because they're they're trying to lock in too soon.

All of those points really good point. So you're welcome to use a complicated one and and maybe that saves you a little bit of time on the contract, on the person's sale agreement fighting over those things. But for me if you're gonna be submitting a lot of what you should be doing, uh you should be testing a lot of sellers seeing who is more flexible on price, I would keep it simple just like this, this this has been very successful for us. Yeah. Yeah, I I would agree. I think that's a great point. Um simple is better when it comes to this when you get an L. Y. That's you know, 10 15 pages you negotiating on on stupid points that are irrelevant at this point because you haven't decided on the purchase price or you know, the inspection timeline a lot quicker and price and some of these these things are the most important things anyway. So. Exactly. And they're gonna put on there, you know three or four most important points as well and you know negotiate back and forth. But you know this is a good framework and and again, we're giving it away, just go to invest dot how to invest in CRE dot com, type in your email is free download and and change it up.

I mean, put your logo in there, put your few important points on. But we've gotten big deals, small deals with this low. I I mean, it doesn't really change much. Yeah, I would encourage people that are thinking about getting in the game, download this from us, get it for free and uh start start looking at deals and and even send one in uh you know, just break the ice a little bit because it'll be a little nerve wracking putting an L Y. For a property. But it's nonbinding. It's just a learning experience. And sometimes you put a low elo i out there and the seller is like no or doesn't even respond, but you're on their radar. Someone that might be interested in. What happens over time is that sellers get more and more flexible. So if it's not selling, if it's not selling, I've had brokers tell me, no, I leave the yellow eye out there and then to three months later they have maybe they got it under contract and someone failed to close. Uh and then they go back through, well who who always interested before and they reach back out to me and they said, hey, is as your offer still good.

Are you still interested? And sometimes I am so interested. Sometimes I've moved on and I'm buying another deal. Uh but you this game is a numbers game and you've got to be uh slinging L. O. I. S preferably on the low end not maybe disrespectful but testing sellers and the worst they can say is no. And then you just say, hey hey broker, I'm sorry this is gonna be a low elo I I'm I'm just working really hard to get a good deal and I understand it for seller doesn't take it. So there's nothing wrong with doing that. And I wouldn't feel self conscious about it Brian and I have this past year probably did that on $50 million coronavirus hit and we're like, man, this asset class is getting pummeled. We believe in it that it will come back in a good enough market in good enough location. And we slung Elouise on gorgeous properties for super cheap. And it wasn't insulting. We would, we would have bought them, we would have committed to our purchase price, right? But they were just too low for the seller to take. And and two goals point you've got to be out there, not only underwriting the deals like we mentioned, but you've got to be offering on deals and this free L.

O. I will get you instant credibility. I've seen this used for lease deals from a tenant from 1000 square feet to you know bigger 20,000 square feet. You can use it for property purchases or sales. I mean it's it's super flexible and you add in those few points when one last point for for beginners because we're trying to get them motivated to take the step is what if you you found a property that you thought was good and you put a low la out there and for some reason the seller is interested in, they're gonna take it. But you don't have the ability to close. That's okay because if it's a good l y if it's at a good price that's valuable to somebody, maybe it's valuable to us. Uh you bring you bring me the deal and say hey joe I think this is under market partner with me on this deal. Uh So you can partner or you can just sell the contract right? You can sell that y or or even take it all the way to contract and sell that to a a real estate owner in your in your market. So there's some value to uh to finding that deal and getting that cellar to a good prize.

Absolutely. Absolutely. Well um you know the L. O. I. Is the big first step in offering. You know it's it's one of the documents that people are like, you know oh my gosh I don't know how to create it. Where do I get one, whatever we're gonna give you ours free invest, how to invest in Syria dot com, download it. Let us know what you think. Um And hopefully somebody starts buying some properties with it. Alright guys, well I think that wraps it up for episode 10. Um thanks for listening, watching, make sure to like and subscribe and we'll see in a few days. Thanks Yeah.

Episode #010 - How to Make Your FIRST Offer on a Commercial Real Estate Property | LOI Review
Episode #010 - How to Make Your FIRST Offer on a Commercial Real Estate Property | LOI Review
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