We wanted to share what the next steps are once you’ve found a deal and are ready to put it under contract. This is a crucial step since this is where you can lose the seller if you don’t put the right pieces of information together to lock the deal up.
Once You’ve Found A Deal…
Once you’ve found a deal, you want to lock it up. When you have an accepted offer, the next step is putting the terms together with the seller. This is called a letter of intent or LOI. The LOI will go over some of the general terms of what the contract is going to look like. When you set up the contract and put everything together, the seller can sign it and you’re officially under contract. The LOI is crucial. You have to outline the seller’s name at the top and put your offering price in there.
You’ll also have to put in what your due diligence terms and timelines are. What type of reports are you going to be looking at under due diligence? And whether you’re looking at titles and maybe even some environmental reports. You basically want to include anything you need to review in order to feel comfortable purchasing the property. You will probably include historic financials and rent rolls, along with any information you might have already looked at before putting in the offer.
When They Have To Sign The Letter Of Intent…
The next thing you put in the LOI is what date the seller needs to sign it by. There are many components that have to be included within this letter of intent. You have to structure it correctly so that everybody is happy and everyone is in agreement. Once you both sign it you’re going to start putting the contract together. You may be putting the contract together for the seller, or sometimes the seller will work with you to put the contract together. You will need to work together to decide what is right for the both of you.
Once You Sign The Letter Of Intent…
Once you sign the letter of intent, you can put the full contract together with your attorney’s. After you put the initial copy together, you’ll send it to the seller or the seller will send it to you. Then it’s going to go into review with the two attorneys. They’re going to go back and forth, go through comments and really refine the contract to make sure it meets the obligations of both parties. You may need to compromise on some of the changes so that you can come to an agreement. Typically the attorney’s always want to change things with the contracts. You’re going to have to review them together, go back and forth a couple rounds until you finalize the contract.
Once it’s fully executed, and you’ve locked the deal in and you’re under contract, your next step is to start your due diligence. Going back a bit to when we discussed the letter of intent, it’s a good idea to outline a timeline for due diligence. This is actually a really good selling point when you put in the number of days that you’re going to perform your due diligence in. For example, if you put in 60 days or 30 days, those are two drastic differences in time. The shorter the number of days for due diligence that you provide, the more appealing your offer will be.
It’s Not Always About Price…
You have to keep in mind that it’s not always about the price when you’re submitting an offer to a seller. You have to think about the terms. The terms make a huge difference, so refine the them and make them competitive by offering shorter timelines. You can offer a shorter timeline for closing because after your due diligence, you’re going to have a timeline for closing. Therefore, you can shorten that timeline and make it tighter, if it’s possible depending on if you’re financing the deal through a bank or if you’re paying in cash.
That’s another alternative and another component of the letter of intent that can persuade the seller to go with you if you have very minimal contingencies and things that you have to clear before you can close. The person that has the least number of contingencies and the lowest number of barriers of entry to closing is going to win the deal, so you have to keep all these components in mind. Once you have everything together and in a really good place, then you’re going to have a lot of success. Remember, number one is the price of the property and number two is the terms. Those are the two things you can compete with.
Another Thing To Keep In Mind…
Another thing that you want to keep in mind is your earnest money deposit. That’s the other piece of the puzzle that goes into your letter of intent. Typically offering one percent is a good rule of thumb for the deposit you want to put on the property when you put the property under contract. Then you can also put a percentage of it to be hard money that is non refundable, or you can set it as an earnest money deposit.
From what I’ve found, submitting offers and deals depends on how competitive the deal is. There may be hard money that you have to put down and upfront which is nonrefundable money, but if the deal isn’t crazy competitive, which is really hard to come by these days, then you can typically get away with an earnest money deposit that is refundable. There’s a lot of different pieces to putting a deal under contract. These are the main three components. Now that you have this deal, follow through, put the LOI together and make competitive terms at a good price to lock the deal in so you can purchase and multiply your money.
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