LOI vs Contract

[Ryan Doyle]

Here is the setup...I have my eye on 2 parks in the same general area. I think both are over valued based on their asking price...but what park isn't?

I would like to make 3 offers as LOIs, to soften the blow of the much lower price I have to offer.

1. Offer for cash, very low. (I get a new loan.)
2. Offer to assume existing loan, low down payment & owner financing of the rest at 8% rate...a little higher than offer 1.
3. Offer to assume existing loan, slightly higher down payment & owner financing of the rest at 5% rate...a little higher than offer 2.

Or should I just send a contract with their current asking price until I get some solid numbers to work with and then negotiate the price and terms after we are under contract?

What sort of rates are people getting/using for owner financing...I'm not even sure what to ask for.

This will be my first deal...

[Jim Johnson]

I would never, ever use a letter of intent. If there are 3 deals on the table, and one is a LOI, the sellers or sellers agent will use your non binding letter to massage the real offers. I buy and sell parks, and I get letters of intent on the sell side. I might read them in passing, but I always tell the buyer to put it in a contract and from there we will talk.

I always ask why the seller is selling, and I explain I can write offers many ways depending on the sellers needs. Sometimes (in mobile home parks) they are addicted to the income and they JUMP at seller financing. I tell the truth to the agent, and I expect truth back. If they tell me to pound sand, I write the offer with the seller financing, and we go from there.

I try to get rough income and expense numbers. I do not need the books, but I like something rough that I can use later if we need to adjust the price. Remember parks value on CAP rates, and real income and expense numbers are very important in the final valuation. If you really understand howto present adjusted income and expenses down the road- in the inspection / objection time, you can receive nice adjustments. Frankly in the contract phase you do not know enough to do this well, and you do not want to do it twice. Next- and follow this carefully because it is really, really important. If your having any financing by a bank or owner- you want the highest interest rate you can get. Give the owner 10%- 11 is even better. So here is where lots of people are reading that a second time and wondering how much I drink... but here is the secrete. Interest rates are the basis you adjust CAP rates from. So- a park must cashflow, and debt service is built into the cash flow numbers. So in addition to making darn sure you have added actual and customary expenses to the expense sheet, you will add in debt service. If your interest rate is 7%- you will probably need a CAP rate of about 8.5 or 9 to have the park make some money after expenses and debt service... are you following this? If the interest rate is- 5... then your looking 6.5 or 7 CAP. Now- if the interest rate is 10- your at 11.5 or 12 CAP. Never talk about CAP rates until your in the final adjustment phase- inspection / objection time. If there is an agent involved all the better. Most agent have no clue how to value these animals- and every time they sit in the corner with wide eyes letting you do the talking, just hoping they do not look too foolish and they still get paid.

If this kind of negotiating is not in your wheel house, hire someone that knows it. If done right, the right person presenting the contract terms will save you 10s or 100s of thousands.

FYI- the seller makes the same monthly income with the higher or lower interest rates- but if you sell of refi- you will have margin on the principal side and on the interest side. Refi to a lower rate and your cashflow goes through the roof, sell with interest rates lower and you make CAP money up.

I do not refi, I hold my ground and give the old seller the interest. It is what I said I would do, and my ace in the hole down the road- is my refi at the end of the term or the selling CAP bump. Also- when you pay off the loan- just make double principal payment each month and the effective interest rate cuts in half- you will have plenty of cash flow on the higher CAP deal to do this.

good luck- and hire out what you do not know. If you have never done due diligence hire someone that really gets it... buying the wrong park at the least will cost you cash flow, and might bankrupt you. Mistakes on the buy side are not forgiving.