Saying ”I Do”?

The Smoke Out Strategy Behind the Real Estate Offer Letter From the Seller’s Perspective.

The decision to purchase a parcel of land, home, or business is an important decision at any age or price point; as it is the beginning of a new “relationship” in an individual’s life-one that must be financed, managed, maintained, utilized and monetized in one way or another.   

Offer letters can be a powerful tool for either the buyer to express his/her level of interest to the seller, or, in the alternative, to help the seller “smoke out” the whether or not the buyer has a bona fide intention to actually go through with the sale of the property. There are two basic approaches: The EOI and the LIO.

An Expression of Interest Letter (known as an EOIL) or a Letter of Intent (known as an LOI) represents an indication to the seller of the serious interest on the part of the buyer.  Its primary purpose is to show the seller the range of valuation that a buyer is willing to pay and show the advisory firm the serious intent of the buyer to pursue the opportunity through to a formal offer.

EOI’s are usually submitted in the form of a letter or a summary document, and in addition to the range of valuation, may include details on the proposed timing of the transaction, the synergies the buyer sees, the deal structure, and any other items that would help the seller to decide if this buyer represents a good fit and is worth pursuing further in the diligence process.  EOI’s are non-binding.  It should be noted that EOI’s are not required prior to submitting an offer and depending on the size of the transaction and how the advisory firm is managing it, EOI’s may not be a required part of the process.

An LOI is often a slightly more formal document that typically outlines the primary points of the proposed offer, including the specific terms, deal structure (cash, stock, earn-out, vendor take-back, etc.) and the proposed timing. They signify the buyer’s desire to enter into an exclusive period to complete the transaction subject to additional due diligence and fulfillment of certain conditions.

Letters of intent are helpful because they outline the principal terms of the deal early in transaction process and are signed by all parties as a general agreement to key items such as the price and terms of a transaction.

Even though they are non-binding, and do not hold the buyer “hostage” to the sale, they are an incredibly valuable precursor to the sale and signing of a final, “definitive agreement” containing all the terms of the transaction, because they force the buyer to take the next step of commitment. 

Many Many times, buyers will put a “bid” in for a property with the agent, without even really thinking about whether or not they can actually go through with sale-just to put a pin in it and create optionality-especially if the property is in demand. Quite often when you require a prospective buyer to sign a Letters Of Intent -they will have what I call “ come Jesus moment”, and psychologically they move out of the dream state and into the reality of the situation at hand.

I always counsel my sellers and buyers to sign these documents to help move the process forward; because they allow both parties to agree on the price and fundamental deal structure early in the process so that neither side wastes time pursuing an opportunity where the value and terms would be unacceptable to one side or the other. 

New Yorkers and their commitment issues!