How ironclad is a letter of intent?

How ironclad is a letter of intent?

Real Estate Broker · Pasco, WA · Member since 2013 · 126 posts · 53 votes

There is a mobile home park I've wanted to look into for several months. I stopped by and talked with the owner today. I had done business with her years ago and she is friendly. When I asked, she said that she had signed a Letter of Intent with a large company last week and they were sending someone out Monday. 

The park seems to be sub-optimally managed. She said she hasn't sold for years because she can't find the time to organize her information (rent rolls, expenses) etc. 

I have a feeling this company is going to get a pretty low price because she does not have her act together. I would not mind paying fair market value based on NOI or even a little more because I know better management will bring much higher profits and I plan to repurpose some of the land, which is frontage on a very busy commercial strip, to commercial.

I'm resisting beating myself up for not walking in months ago. I don't find much use for wallowing in regret. All I can do is learn and move forward and act faster in the future. 

She has owned it for 40 years, managed it haphazardly and probably doesn't have a clear idea of current and potential value. She also mentioned she expenses as much off her personal expenses as she can on the park and needs to weed that out. The office itself is disarray so I can only imagine the books. 

I know a few bright CPA's and bookkeepers. One in particular who is very experienced in commercial property would be able to go in, for a fee and figure this thing out and emerge with a clear and fair picture of NOI.

But what I'm wondering is if the LOI is impenetrable? Can she entertain another offer? Does the buyer have equitable rights? What if they use her disorganization as a way to take advantage of her and obtain a clearly unfair price? What is her recourse and rights in that case?

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y

@Michael Bracken  well quite Frankly the thing I loved more than anything in my career was being a logger.

more than building homes .. lending money  buying court house steps.

think about it. your out in the woods.. NO hold over owners you just bought here home on the court house steps.. NO tenants..  ( nuff said about that).. no city  crap  ( like building new homes.)

no borrowers failing to pay.

Just you and the woods .. you harvest do a killer replant and next generation does it all over again.

I look at some of the hillsides I remember when I first came to ORegon that were clear cut. I drive by them today and they are full blown forests again.. renewable resource.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Michael Bracken  well quite Frankly the thing I loved more than anything in my career was being a logger.

    more than building homes .. lending money  buying court house steps.

    think about it. your out in the woods.. NO hold over owners you just bought here home on the court house steps.. NO tenants..  ( nuff said about that).. no city  crap  ( like building new homes.)

    no borrowers failing to pay.

    Just you and the woods .. you harvest do a killer replant and next generation does it all over again.

    I look at some of the hillsides I remember when I first came to ORegon that were clear cut. I drive by them today and they are full blown forests again.. renewable resource.

  • Investor · Garland, TX · Member since 2015 · 110 posts · 43 votes
    9y

    Maybe that's what I'll do. Quite poetic. I can smell the trees.

  • Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    9y

    @Jay Hinrichs LOI and Contract are different for a reason. Even if you have spent 90% of the asking price while still in the LOI/Negotiation stage the seller has no obligation to close. Even with contracts you need to be careful. I'll give you an example from one of my recent transactions:

    Purchase contract for a banquet hall. Purchase price negotiated at $600,000. The property appraised at $1,000,000. (I represented the buyer)

    Contingencies in the contract:

    Appraisal within 30 days: Contingency met - property appraised above contracted price! (Cost paid by buyer)

    Environmental within 15 days: Contingency met in time. (Cost paid by buyer)

    Inspection within 30 days: Contingency met in time (cost paid by buyer)

    Financing approval 120 days: Unfortunately the underwriter took a vacation and needed 2 more days to issue the approval, the underwriter called the seller to explain and assured him that the formal approval would be issued in 2 days. The seller refused and since contingencies were not met he voided the contract.

    Remedy: The contract should have stated that the contingencies could only be waived by the buyer in writing. Since this was not in the contract, the buyer not only lost the earnest money deposit and everything he had spent but the contract itself! 

    Unless you have an ironclad contract covering all bases do not be too sure, regardless of what you have invested in the deal!

  • Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y

    Wouldn't a buyer always want an ironclad letter of intent to tie up a property?

  • Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y
    Originally posted by @Jay Hinrichs:

    it certainly depends on the language in the LOI.. as @Michael Bracken stated some are vague and not really more than an intro letter ... others can be binding.. I am buying a 180 lot developemtn right now and started with an LOI that the owner can't go around .....

    like all things depends on contract.

    Jay,

    Would you mind sharing your air right LOI with me? I'm working on a deal and would like to tie it up to prevent sellers from shopping my offer.

    Thx.

  • Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    9y

    @Jon Q. LOI does not tie up the property, a contract does.

  • Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    9y

    Take the boot camp from mobilehomeuniversity dot com or at least buy the 30 day DD course it comes with a contract suitable for commercial / MHP.

    Medium sized MF sales on up use LOIs but its common for MHP sales that the buyer sends in a full contract skipping the LOI. See the contract included in the 30 day DD kit. The LOI is sort of a waste of time. Just send in a contract with a xerox of the earnest money check that isn;'t signed. A show of seriousness. Also attach your Proof Of Funds for the FULL down payment amount. If you don't have the full amount your offer is very weak.

    Important issues:  when does the DD date start? When does it end thus your earnest money go hard?  In commercial its MUCH more important to have verbage in the contract that governs the loss of earnest money since its typically $10k per $200k of purchase price.  IE a $1M park needs $50k earnest money etc..  Which is all negotiatable in the contract.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Priyanshu Adathakkar I need to back track here.. the LOI is a temporary document.. and we only use it if we need some time to write the contract.. we go to contract ASAP.. its not something I do very often maybe once ever 5 years other wise we just write contracts.. but we did use one last year on a big project.. reason is there were national builders competing with us and everyone was doing the same thing and the sellers are a big familial group. so we wanted to get our foot in the door asap.

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Unfortunately this debate can't be accurately debated unless you have seen if the specific LoI meets the requirements for a binding bilateral contract. Jon, the main reason a potential buyer would not want to make a LoI binding is then he would be obligated to a agreement he may want to alter or revoke. The best case scenario for the buyer giving a LoI that convinces an inexperienced seller that it is binding but it legally doesn't form a valid contract. I suspect that is what is going on here.
  • Real Estate Broker · Pasco, WA · Member since 2013 · 126 posts · 53 votes
    9y

    @Curt Smith Thank you very much for that tip. I am checking their stuff out right now. 

    @Steve B. I agree that is likely what is going on and I am going to get to the bottom of it. I do not see this would-be buyer binding themselves in anything too sticky when they first approached seller two weeks ago and have yet to step foot on site. 

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    if that's the case it pretty much assures that it isn't legally binding.

  • Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
    9y

    @David Fritch please, please, please, do not leave this subject thinking that you can go off and do LOI with no recourse.

    @Priyanshu Adathakkar is correct for the most part but there are huge red flags that you should consider before going into a LOI.

    1. Just because I LOI is non-binding, even if it has non-binding language, doesn't mean you won't end up in court.

    2. There is a good-faith judgment that all LOIs are based on. Which means, if I could prove in court that you did not negotiate in good faith with me, you could still be liable for cost and damages from the LOI you did with me. This is true, talk to an attorney.

    I've been investing for a little more than 13 years now and I treat LOIs the same as contracts because anything you put on paper could end up in court or mediation. 

    So get good advice, get a good attorney on your team, proceed carefully when putting anything on paper.

    About the person, you're buying from specifically. She should talk to a knowledgeable attorney to fully understand what her options are and how "non-binding" is the LOI she signed. This is what I would recommend you tell her.

    I hope this helps.

    Good luck.

    Stephen

  • Real Estate Broker · Pasco, WA · Member since 2013 · 126 posts · 53 votes
    9y

    @steven stokes Taking  your good advice to heart has led to an interesting development, I called my attorney and it turns out that he has represented the sellers for years. I will have to use a different attorney of course because he cannot advicate for both parties. But at least they will get Good Counsel and their attorney is now aware that another buyer is interested.

  • Lowell, MA · Member since 2014 · 260 posts · 99 votes
    9y
    I would not give it a second thought. Letter intent is not a binding contract.
  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    Pretty sure never having never stepped on the property and spoken face to face is going to obviate any "good faith" arguments from a disgruntled  plaintiff.  Again I doubt the LoI meets the prima-facie requirements for a contract and thus as Robert just pointed out, it won't be binding and despite possible threats won't be brought to court. I wouldn't waste money on an attorney

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    Steven can you post us a link to any RE related LoI in history that doesn't meet the basic requirements of a contract that has ever been successfully adjudicated?

  • Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
    9y

    @Steven Stokes I have been using LOIs for years now, never had problem walking away, I tried enforcing an LOI on an investors behalf about two years ago and was advised by the attorney of the local board that it was not enforceable. As Steve B said above, would love to see a case where an LOI was held enforceable by a court of law.

  • Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
    9y

    @Steve B. I do not claim to be an attorney. But I have worked with many different LOIs for a long time. I would say at least once a month and sometimes once a week. 

    To say, "it won't be binding and despite possible threats won't be brought to court. I wouldn't waste money on an attorney" I seriously don't believe is wise advice, especially considering neither one of us, I'm assuming, are attorneys. 

    If you do not believe people can be sued for "non-binding" LOIs I would refer you to the Supreme Court of Delaware Case of approved recovery of "benefit of the bargain" damages between two companies in a mergers and acquisitions deal in SIGA Technologies, Inc v. PharmAthene, Inc. on Non-binding Letter of Intent.

    In this case, there was a non-binding letter of intent and because the plaintiff sued on the grounds that the potential buyer did not act in good faith and cost them time and money, they sued for damages and won.

    So to say, oh it's not binding don't worry is obviously not totally true.  

    It doesn't cost very much for an attorney to review a letter of intent and even less if it's just a quick question.

    But like I said, I am not an attorney. This is only my opinion. In my opinion, you should talk to an attorney who is more likely to know the truth.

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    Steven now you are just quoting famous case law you googled.  Even I'm familiar with that case from basic contracts class.  

      I specifically said RE LoI that doesnt meet with the requirements of a contract.  You are referring to a case involving detrimental reliance and reasonable expectations.  This is a very different situation then what is presented here.  There is clearly no detrimental reliance based iin reasonable expectations here as stated 

  • Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
    9y

    @Priyanshu Adathakkar I have also worked with LOIs for years. I buy businesses as investments now and was a business broker for some years and also invest in real estate. But I am not an attorney. 

    I am providing you reference material. You will notice they are all websites from lawyers trained in the law.

    http://www.mcmillanmetro.com/articles/beware-of-th...

    http://bdjalaw.com/nonbinding-letter-of-intent-fac...

    http://www.wqw.legal/single-post/2016/11/07/Can-a-...

    http://corporate.findlaw.com/business-operations/c...

    http://www.gsblaw.com/northwest-land-law-forum/let...

  • Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
    9y

    @Steve B. I really don't mean to get into a pissing match with you or anyone. I'm just offering my friendly opinion. 

    As to your point, I really don't see how a court would say, "oh this is real estate so there are no reasonable expectations for anything, and so it doesn't count." lol

    But once again, I am not a lawyer. But from everything I've read from legal websites. I think anyone should be cautious when signing anything. 

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    I'm not trying to piss on anyone,  I don't think you are being unreasonable  or I would be more acerbic.  I'm not known around here for having much tact or decorum.

    As a wholesaler I'm sure you are sick of people Renegeing on agreements you make in good faith.  I can empathize with that.  

  • Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
    9y

    @Steve B. @Priyanshu Adathakkar This has been a good discussion. To be honest, I think contracts, purchase agreements, LOIs, etc. are all BS. It really comes down to knowing who you are dealing with. If you're dealing with someone who is above board then all you need is a handshake but with some people all the contracts in the world won't help you. And if a person wants to sue you, they don't need a letter of intent to sue you. They only need an attorney willing to take their money. 

    That's real life. 

    Thanks for the discussion.

  • Contractor · Miami, FL · Member since 2015 · 113 posts · 11 votes
    9y

    I do email of intent first.  It has price, contingencies, and time to close.  If seller agrees then I sign purchase/sell binding agreement.  Some times I would ask for option.  So I can see what I can/want to do with property 

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