Apartment Investing – Letter Of Intent Or Offer To Purchase?

“Everybody is born with an equal chance to become just as unequal as he or she possibly can.” — Anonymous

Which is better, a Letter of Intent or Purchase Offer? This is a frequent question for apartment investors looking to make a purchase. Before we get too far, here is my quick definition of the two documents:

1. Purchase Offer, or Purchase Agreement – A legal document that describes the price, terms, contingencies, and other details of how a buyer would be willing to purchase a piece of real estate.

2. Letter of Intent (LOI) – A preliminary document outlining the price, terms, and other transaction details that a buyer would be be interested in purchasing a piece of real estate.

A Letter of Intent is usually used in the beginning stages of a negotiation to get “good idea” of what the buyer and seller are each after. It is not required, and quite frankly, is not used in most transactions. However, a LOI is a good document to use – especially if you are looking to purchase a property for substantially less than the listing price.

Let's look at when the best time to use Offer to Purchase. Remember, this is the formal offer, and is legally binding once signed by both parties.

Once you have an idea as to the big picture items of the deal, it is time to get to the small items. Funny thing is in most purchase agreements nothing is small. In the Purchase Agreement we talk about things like:

1. Possession Date

2. Contingencies

3. Financing

4. Inspections of the property, leases, and other documents

5. What happens if we close on time?

6. What happens if we do not close on time?

7. Rent credits, prorations, etc.

And much more…

Of course all of these items are important, and these are the details you should be thinking about before you make the Offer to Purchase. Why?

More than likely you and the seller will not agree on everything. That is to be expected, so many of the items above, as well as other items, will need to be discussed and worked out. So what should you do?

Build a list of things that you will be addressing in the Purchase Offer and decide how you want each of them handled. Now you will not be able to cover EVERY scenario but you will be much further ahead (and prepared) when it comes to crunch time.

What do you do then?

Present the offer to the seller. Make sure you have an ending day and time for your offer to expire. You do NOT want the seller thinking this over for too long.

Secret: Time is NEVER on your side when you are buying.

Never forget that. Keep in mind that if you are looking to explore the viability of a purchase, a good starting point is the LOI. Once you get beyond the “overview” of what you and the seller are looking for, detail everything out in the purchase contract, and keep all of the above in mind when doing so.