Stupidest real estate question ever

7 Replies

I'm still looking for my first deal, but my agent said that "up here, nobody uses letters of intent for multifamily or student housing." So, If property X produces income Y and "needs nothing" and you offer XXX dollars and they say "yes," how do you protect yourself if DUE DILIGENCE and INSPECTION shows the actual numbers/value/physical property differ from the description? I'm looking at a student house now that is listed at a fair price with good financials, but if I make a reasonable offer and it's accepted, what are my "outs" without a letter of intent if the existing leases are not as promised, or the furnace is indeed not operable, or roof is bad, or foundation is bad..etc? I am unable to get due diligence started without a contract. Do contracts typically give you a way out if the inspection reveals items that would seriously reduce the value? Do you have your attorney put provisions in the contract for allowances for anything that needs to be brought up to code or to better working condition? So the stupid question really is, how do you offer at a price that works if you don't know what works until you've done your due diligence but you can't do the due diligence until you've made an offer?

I think perhaps you need a better agent, I have never dealt with a scenario like this before but perhaps some incite into a deal I recently backed out of. We offered on a 4 unit and the home inspection revealed serious problems we had no trouble backing out of the deal and receiving our earnest money back. We used a certified home inspector who gave a very detailed report that we forwarded to the seller and they had no argument. Perhaps simply having the deal contingent on a home inspection would work?

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You ban put in all kinds of 'weasel clauses', that will allow you to get out of the deal - some more honest than others.

You make the contract 'subject to' : inspection, partner's approval, verification of numbers etc.

@Andrew S. You're overthinking things.

And LOI is non-binding, and in most states is merely an agreement to enter into good-faith negotiations for a property. The offer price is an LOI is what you're willing to pay based in what you know at the time you submit it. After DD, you may or may not adjust that price based on what you find. If agreed by the seller, that becomes the contract price.

Without an LOI, it's no different that a contract on a personal home. You make an offer, they accept, you escrow earnest money, then you have an inspection period to review the financials and the physical property. If the price needs adjustment, adjust it. The seller agrees, you "go hard" (lose the earnest money out you back out), and eventually close.

In short, with or without an LOI, the contract should always have a DD period with a way out for you if things aren't as presented or you discover a insurmountable problem.

Every offer to purchase I have done through a realtor has clause for a time to do inspections.  Have the realtor show you his standard offer contract.

Your agent may have misunderstood.  The contract should state clearly what contingencies are included.  Those are your due diligence i.e pest inspection, contractor inspection your physical inspection, roof etc.  What ever physical concerns you have.  You should get a rent roll, a copy of the leases, P&L for the past few years.

I am not familiar with New York but many states require "disclosure statements" by the owner stating any know deficiencies in the property, i.e. mold, roof leaks, insurance claims.

An estoppel will give you lots of the information you seek and you can make it a part of the contract.  Go here for what information it provides http://www.redfin.com/definition/estoppel-certificate

Thank you everyone, that does help. I would have subject to clauses in the contract written in. A prior inspection showed some issues, but that was 6 months ago or more and the house has been on the market for at least that long so it will need another one. I'll keep you posted.

This has already been said, but I wanted to chime in. My first reaction is that most likely the agent you are working with is not as experienced in this type of transaction as they probably should be. It sounds like a little "fear of the unknown" on the part of the agent. Irregardless, generally a LOI is more common on deals where the contract is to be created by an attorney due to complexities. This type of contract is more expensive (sometimes much more), so the LOI is used as a way to come to a general "meeting of the minds" to summarize the terms and conditions to which both parties are inclined to agree. It is also common that a LOI is not binding.

You CAN, in a lot of cases, use the local Realtor board boiler plate contract and add an addendum that clarifies or adjusts the verbiage.  The boiler plate contract is usually geared toward 1-4 family.  If you are looking at a commercial property, creating an addendum can become a real headache since in commercial deals, many more of the details become negotiating points.  (ie. seller pays this or buyer pays this as spelled out in the generic contract might be exactly opposite of what you and the seller agree to.)

With all of this said, it is wise and realistic to write in contingencies that allow you time to do your due diligence. I don't know how large or complex your deal is. If it is larger and more complex, then I would still push more toward a LOI because it is SO much simpler to edit and adjust the major points, then let the attorneys clean it up if/when things start looking like it might be agreeable to all.

One last point, for this type of deal, you might be ahead of the game by looking around for another agent that is more in sync with you and your approach.  If you are looking at 1-4 unit properties mostly, then the agent's approach is pretty common.  If you are looking at larger properties, I would start interviewing.

In the name of full disclosure, I am licensed as a broker in NY.  I am not soliciting business, I don't have enough hours in my day as it is!  Best of luck to you.

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