Negotiate informally before submitting LOI?

Question

When negotiating key terms for a commercial multi-family purchase, is it customary to have informal communication back-and-forth before submitting a Letter of Intent? Or is it more normal to do all initial negotiations through LOIs?

This question came to me as I listened to Jeff Greenberg on podcast 115.

Mark Nolan · Answer

From a self-directed solo 401k investment perspective, because the self-employed business owner serves as the trustee of the solo 401k, you don't need to submit the purchase documents to a custodian for signature.

Adam Hershman · Answer

Hey Stephen,

I can tell you that a lot of transactions done in self-directed IRAs are conducted by informal discussion first. Essentially because the custodian has to sign all the paperwork as the technical owner, and it would be a huge pain to have us sign LOIs every time something changed, most clients will use informal negotiation to at least get close before submitting a formal offer.

So I don't see why you wouldn't be able to use this strategy outside of an IRA, but they kill will be if the seller and their agent are willing to work with you informally. My guess is if they are motivated and haven't had a lot of interest, they will be more open to it. If they already have LOI or offers in on the property, I would assume they would be less inclined to negotiate in this manner.

Just my opinion

Adam

Joel Owens · Answer

Highly motivated is a buzzword.

You could submit a low ball non-binding LOI to see what highly motivated means!

Stephen Lassiter · Answer

Thanks, @Joel Owens and @Roy N.

In this case, the email conversation was initiated by the agent 4 or 5 days after I had viewed the property, trying to see if I was still interested. I was never serious about this property but thought I'd respond to the email to see how motivated the seller was... because in every email the agent kept saying in all caps, the seller is HIGHLY MOTIVATED. But it didn't seem like the agent was willing to reveal anything until I put in an offer.

Anyhow, it's good to know when I am ready to get serious that it's not necessary to waste time with LOIs and offers until we've had some informal conversations on the key terms.

Roy N. · Answer

@Stephen Lassiter

We will often have an informal dance with the vendor (via our broker) to learn more about the property, the vendor's reason(s) for selling, etc before we submit an LoI.  Doing this allows our LoIs to be much better targeted and/or saves everyone time by letting us know a more formal diligence would be for nought.

Joel Owens · Answer

Well you are coming off as a newbie.......... : ) lol

Get the agent on the phone. The seller might have instructed the agent not to respond to anything unless it is in writing to avoid tire kickers.

First thing is are you paying ALL CASH. If not are you buying directly just yourself with some money down and get a loan for the rest?? If you are not buying alone is this a partnership or are you trying to do something more complex such as a syndicate??

Are you a local investor to the property?? More important in smaller size properties. If you are syndicating or doing a group is it instate investors, out of state, out of the country or a mix of various??

The potential successful outcome depends on a ton of metrics from a sellers perspective and who the buyer is and what they are trying to do along with a track record.

Stephen Lassiter · Answer

@Joel Owens I don't have a deal right now, but I'd be looking at less than 20 units. Was just wondering because I looked at a property and was emailing the seller's agent trying to find out what the seller was willing to do, and the agent just kept asking me to make an offer. I've never purchased a commercial property, so I just wanted to know what was normal so I'm not doing the wrong thing and coming off as a newbie. :)

Joel Owens · Answer

Stephen it depends on the sophistication of the seller and level of the property. Are we talking 20,50,100 unit property??

I generally talk with the seller or agent before presenting the LOI to glean information on what the hot buttons are and what makes a possible win-win solution. Submitting an LOI without getting a back story is often a waste of time. The seller will see it as just throwing junk out there to see what sticks. Having the personal touch showing CONCENTRATION and FOCUS on their property is key.