CREPN #165 – Letter of Intent & Purchase Sale Agreement with Vinney Chopra
The Letter of Intent and the Purchase Sale Agreement are significant steps towards closing your multifamily purchase.
When you find a multifamily property, you run the numbers. If the numbers show promise, it’s time to engage the seller to see if you can put the deal together. The initial non binding offer used by buyers is a Letter of Intent. If you and the Seller find agreement in principle, you will formalize the offer with a Purchase Sale Agreement.
Letter of Intent
The Letter of Intent is a non binding presentation to the seller that spells out the framework of your offer, your intent to purchase the Seller’s apartment building. This should be addressed to the selling broker, not the Seller. To see a sample Cover Letter & LOI used by Vinney, click here.
The Cover letter should summarize your intentions. It should also include any relevant experience you or your team has closing on Multifamily Properties, to give the buyer confidence you will close if they accept your offer.
The Letter of Intent is not binding, so it does not require legal review, but should contain::
- Property details, address, number of units.
- Identify that your offer is based off of the numbers provided by the selling broker.
- General terms & conditions to purchase by your company or assign:
- Purchase Price
- Estimated requirement for Capital Expenses
- Earnest money, Vinney recommends at least 1% of the sale price.
- Timeline to complete the purchase:
- Due Diligence timeline
- Inspection Period
- Extensions if needed and conditions to extend
- Closing period
- Financing period:
- Lender approval letter
- Down payment funds
- Readiness of Property, including occupancy percentage required.
- Inspection documents required from the Seller:
- Rental Agreements
- Phase I Environmental Assessment
Because you will be offering less than selling price offered, it is to be expected that the Seller will either reject or counter your initial Letter of Intent. After some back and forth, if you are able to reach agreement in principle with the Seller, you need to put the property under contract. This is accomplished using a Purchase Sale Agreement.
Purchase Sale Agreement
The Purchase Sale Agreement is a legal, binding agreement. The PSA includes all of the items in the LOI and spells out all the legal performance requirements for both you and the Seller. Each property is unique and requires that you have your attorney prepare and review to protect you.
Vinney advises that you communicate early and often with the Seller during the Due Diligence period to avoid any surprises. He suggest that your compose a Repair Letter as soon as you know the condition and any additional capital expenses that you were not aware of prior to your offer.
Similar communication regarding the financing should be made to keep the Seller in the loop. When you do this, the Seller is more likely to credit you additional funds to fix the problem, or accommodate the time needed to obtain financing to keep the sale on track to close.