LOI before you can see financials?

Question

Is it common for a broker to ask for an LOI before they can send you over the financials?

H. Jack Miller · Answer

The recent CRE market has been irrational and yes I have seen that. In my mind this is pure insanity from all sides. A total waste of time from all sides.  We will see what the future bring, I am hoping some sanity comes back to the market.

Kim Meredith Hampton · Answer

@Juan De La Garza It wouldn’t surprise me at how crazy the market is, but no, you should be able to fill out an NDA and get financials, THEN you can decide if you want to submit an LOI or offer

Evan Polaski · Answer

@Juan De La Garza, there are two factors here:

a) what are you expecting out of the sellers financials that will effect value?  You will be researching your own rent levels, your own vacancy, your own landscaping budgets, your own repair estimates based on unit condition, etc.  You will get your own financing quotes, your own real estate taxes, and your own insurance quotes.  The only item I ever look at financials for is confirmation on who is paying utilities and what those are costing, if LL responsible, and even this can often be found with a quick call to the local utility and a question to the seller or listing agent about who's responsible for utilities.

b) re-trading a deal is only frowned upon if you are re-trading on the smallest discrepancy.  Material amounts discovered in due diligence is, in my mind, NOT considered re-trading, nor frowned upon.  I.e. if they told you the roof was brand new, and upon physical inspection, you discover that the roof on a shed is brand new, but the main building needs a full replacement to the tune of $50k, that is not retracing a deal.

To answer your question: for a relatively small multifamily (I would label this about 20 units or less), yes it is common to not get financials until LOI, and there is very limited information that can be derived from sellers financials that should effect value anyways, because how they operate is probably very different than how you will operate.

Jay Thomas · Answer

Yes, it is actually quite common for brokers to ask for a Letter of Intent (LOI) before sending over financials on a potential deal to safeguard confidential information. The LOI indicates your serious interest as a motivated buyer, streamlining the process by focusing the broker's attention on qualified parties. Importantly, the LOI isn't legally binding but serves as a preliminary document outlining your interest, potential purchase price, and contingencies, allowing for negotiation before finalizing a purchase agreement. If asked for an LOI, it's usually a reasonable request, and drafting a simple LOI outlining your offer and key terms is advisable if you're genuinely interested.If you're unsure about something in the LOI, consult with a real estate attorney before submitting it.

Robert Rixer · Answer

There's a lot of grifters and window shoppers out there. They just want to make sure that they only give financials to serious buyers. An LOI is non-binding. Usually we submit LOI's at the low end, subject to being raised once we have all the necessary financials. Sellers understand this and are almost always fine releasing financials.

They're not expecting a highly sharpened number on the first go, just a show of seriousness.

Gino Barbaro · Answer

@Juan De La Garza

I think the reality is it depends on the market and the market cycle. My problem with it is if I tell the broker my offer is 1 million, the price is fixed in the seller's mind that he or she is getting 1 million based on whatever knowledge you know.

If you get the financials after you put in your offer only to find out that the property is worth $750,000, much harder to reason with the seller.

I want to test drive the car before I put in a serious offer. My goal is to stick the number I write on my LOI.

Gino

Anthony Stephens · Answer

Although this post is 2 years old I think it may be helpful to point out that the thread seems to be discussing two different types of LOI (letter of Intent). The most commonly known is a non-binding offer from the buyer where the main points to agree upon (e.g. price, down payment, financing structure) are agreed upon before a more formal contract of sale is drafted. The other LOI discussed seems to refer to a lender's non-binding commitment to finance the deal. In residential multifamily,( ie. 1-4 units), you would more likely refer to a pre-approval. I hope this clarifies the use of this acronym in this otherwise very helpful thread.

Juan De La Garza · Answer

Firstly - thank you all for your valuable feedback on this.  I found out from the broker that the owner does not her to release financials anymore until after an LOI is submitted.  She also told me that the owner is from Mexico, he does not report everything and is earning more income than reported.  I am not quite sure what this means yet, but I was thinking more along the lines of @Evan Polaski and pretty much treating this like it is owned by a mom and pop where good records tend to not be kept. I am working on that now and have already booked a hotel and will be meeting onsite with a property manager on Tuesday.  I am hoping the office will allow us to look at the vacant units so I can get a good idea of how much is needed in repairs.  I'll keep updating on here. Thanks again for the feedback.

juan

Nick Belsky · Answer

@Juan De La Garza

Not uncommon, but not common either.  Most of the lenders I work with don't even issue LOIs as they are meaningless.  I am finding a lot of sellers don't even have proper financial docs prepped for the sale and that causes even more hiccups in the process.  Proof of Funds (PoF), Conditional Loan Agreements (CLA), Letter of Intent (LOI) are all attempts to show that some kind of financing has been investigated and is feasible, that's all.  If a listing agent is insisting on it, simply as them why.  I have several investors who absolutely won't make an offer unless they review the financials before hand.  If they agent won't provide them, they walk without blinking an eye.

Those that will make offers without financials, ask for a Due Diligence period and have verbiage where all pertinent financials, leases, rent rolls, etc... must be provided within "X" number of days.  They set it up so their EMD isn't due until after the financials are due...  They can walk away at any time without any losses.

Find what works for you and you are comfortable with.

Cheers!

Juan De La Garza · Answer

Thanks everyone for the feedback - my understanding is renegotiating the price again after due diligence is considered re-trading and is frowned upon - at least in Multifamily which is why I was trying to avoid it, but for this deal I’m being forced to operate that way.

LOI before you can see financials?

Most Popular Reply