Something that I notice brokers are utilizing quite frequently these days, are LOI agreements, or Letter of Intent agreements.
These are basically written agreements that are negotiated between a property owner, and a prospective buyer or tenant, in which the terms of the agreement are worked out, with the intention of then moving towards the final binding written agreement between the parties, in the form of a purchase and sale agreement, or as the final, official lease for the property.
But especially from the perspective of the broker representing the buyer in a transaction, I don’t like the idea of utilizing these LOI agreements, because they are non-binding on the owner, and they allow more time where someone else can swoop in with a better offer, and then beat your own deal for the purchase.
Especially when it comes to representing the buyer, I want a binding agreement signed as quickly as the buyer and seller can come to an agreement on the terms, because this now puts my buyer in control of the entire situation.
If another offer then comes along that the owner prefers, the owner is bound by the agreement they’ve already signed, and my buyer can then still buy the property, subject to the removal of their own contingencies.
There are good forms that you can utilize to create this kind of a binding agreement, including the form that has become the standard for so many commercial brokers within our industry, the Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate, as published by AIR CRE. (Click here to see an example of this form.)
With a form like this one, you’ll have a binding agreement in place once the seller signs it, instead of spending time going back and forth with the proposed terms on a non-binding LOI, and then needing to translate that LOI into what will then become the binding agreement, before finally getting the approval and signature of both parties.
So while all of this is going on, if you are not the listing agent, you have no idea of what is really going on in terms of other interest in the property, and the potential for another offer to suddenly appear at the last minute, to beat your deal.
It would then not be uncommon for another potential buyer or their broker to be told, “There’s another offer that’s moving forward on the property right now, so you’d better act fast, and you’d better come in aggressively with your price.”
You don’t want the length of time it can take to reach a final, binding agreement, to now serve as motivation for another buyer to come in strong, to beat your deal.
So in effect, when you’re negotiating when utilizing an LOI, there can be a longer period of time when you’re deal is out there hanging in the wind, with the basic price and terms already being known by several different parties, including brokers, and this information can then be utilized by others against your buyer.
This can create an even greater negative impact on your buyer when the market is hot, and when multiple offers are coming in, as opposed to when the market is cooler, and no other offers have been coming in.
So in my opinion, if you are representing a buyer, and you are able to submit your offer on a form that immediately will become a binding agreement, when the final terms are signed and accepted by the seller, do it!
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