Making an Offer to Purchase
Putting your first offer to purchase commercial real estate in writing can be an exciting and at the same time frightening event. There are certain legal aspects of the offer you want to make sure are included to protect you. Here is a breakdown of what steps you should follow when making an offer on commercial real estate.
Purchase contract vs. Letter of Intent
Depending on who you talk to in the commercial real estate investing field you will get different answers as to whether you should make your offers using a fully detailed contract or a basic letter of intent. A letter of intent is designed to tell the owner that you are a real buyer who's ready to close at the price and terms that you've spelled out in your LOI, provided both parties can work through all of the details needed to complete the transaction.
A purchase and sale agreement is the actual, final document that all parties sign to create a binding contract. It will have all of the legal clauses and addendums in it along with detailed explanations of the terms of the transaction. Many investors feel it is not worth putting in the time and effort to write out a detailed contract for a property in which they have no real feeling on whether the seller is motivated. So using a LOI is similar to testing the water. It lets the seller know that you are interested in the property at these terms and if they are also interested then let's talk some more and see if we can make a deal.
If you decide to use LOI's to make your offers then it is critical you put this language inside your letter.
While this letter of intent, once signed, does not legally bind the buyer or seller, it is expected that both parties will move forward in good faith toward completing the details described herein and the signing of a Commercial Contract to Buy and Sell real estate within 10 days of the execution date of this letter.
This clause lets the seller know that your LOI is a serious offer and also creates a good faith expectation for both sides to negotiate the terms of the LOI to completion. The real advantage of using a LOI instead of a full blown purchase and sale agreement is that it is a simple, time-efficient way to get the basic points of a deal down. Also, a one-page document is easier to get a seller to agree with right away rather than a 15 page contract that will most likely require them to bring in their attorney and possibly pay a legal fee to see if they even want to do business with you. The disadvantage of an LOI is you do not have a legally binding contract when you have a signed LOI from both parties. The seller can still cancel the deal or shop it to another buyer. So therefore it is imperative you convert your LOI to a contract as soon as possible.
Writing up the Contract
It is important that you use the proper state-approved commercial contract to buy and sell real estate when making an offer simply because it will be the form that sellers will feel most comfortable with. While there is nothing preventing you from writing up your own contract with your own special clauses and language in it, odds are the seller is going to go over it in much more detail and bring in their attorney to review it which will slow down your entire opening negotiations. So use the state-approved form and then write up an addendum to attach to that form to change any of the standard clauses you wish to modify or remove. Make sure your addendum has this language in it:
In the event that any of the provisions in this addendum conflict with the attached commercial contract then in that event the provisions of this addendum shall prevail.
This language allows you to put whatever you want in the addendum and not worry about its legal effect on the rest of the contract.
A liquidated damages clause states what the seller is entitled to in the even you, as the investor, fail to perform on the contract. (If you should default). It limits the seller's remedies to collect against you to the amount of the deposit you placed on the contract. A typical liquidated damages clause will read as follows:
If the buyer fails to perform any of the covenants of this contract, all money paid to the Seller by Buyer as aforesaid shall be retained by or for the account of the Seller as consideration for the execution of this contract and as agreed liquidated damages and in full settlement of any and all claims for damages.
The advantage of a liquidated damages clause is it lets both sides of the transaction know in advance what the penalties for default will be and therefore avoids expensive litigation over the default.
Memorandum of Agreement
After your deal is accepted, you'll want to take one extra step beyond keeping a copy of the signed agreement. You should record a Memorandum of Agreement with the Clerk of the Court in the jurisdiction where the property is located. This lets the world know that you have this property legally under contract. It prevents the seller from selling the property again to a third party and it also prevents another investor from trying to move in on your property and cut you out of the deal. It puts the whole world on notice that if they enter into any agreement with the seller regarding this property they are going to have to deal with your claim on the property first.