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88 Part II:Getting Started Making Deals
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 details and signing a Commercial Contract to Buy and Sell real estate within 10 days of the date this letter is signed.
This clause lets everyone know that your letter of intent is a serious offer and should be treated as such. The parties are agreeing to move forward toward completing details. We call this “getting the ball rolling.” Your letter of intent is like a starter’s gun for the negotiation and agreement process. To see sam-ples of letters of intent for the various commercial asset types, go to investorforms.com.
The advantage of using the letter of intent is that it’s a simple, time-efficient way to get the basic points of a deal down. Besides, a one-page document is easier to get a seller to agree to right at the time you strike up the deal.
The disadvantage is that you don’t have the property under contract until you’ve written up a formal agreement. So with all your killer deals, make sure you write up the official contract pronto!
Commercial contract to buy and sell real estate
Your commercial broker should have the standard state-approved contract form that’s commonly used to buy and sell commercial properties. On this form, which is many pages long, you’ll find all kinds of clauses to cover every possible situation that might ever come up with your deal. Ask your broker to give you a copy of this form so that you can get familiar with it.
It’s important that you use the proper state-approved commercial contract to buy and sell real estate because brokers and agents will be used to seeing it and will be comfortable with it. Writing up your commercial offer on a form that brokers aren’t used to seeing is a surefire way to cause a listing broker to immediately question the seriousness of your offer.
There are certain disadvantages that come up when you use your state-approved form, however. The biggest drawback is that the approved form probably has a number of clauses that you don’t necessarily want to have as part of your deal. Don’t worry, though. You can use a simple addendum to remove or change any of the language to make it sound exactly like you want it to. The secret is to put the addendum at the end of the standard contract so that you can make your changes after the broker and the seller have gone all the way through all the good, official-sounding stuff. Then at that point they get to see your addendum that includes a statement like this:
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 . . .
Chapter 5: Strategies for Making Offers and Negotiating 89
This language allows you to put whatever you want in the addendum. For instance, if the official contract says that your agreement isn’t assignable, you simply add a quick paragraph that says it’s fully assignable to whomever you want. Pretty cool, huh? Look for addendums you can use at www. investorforms.com.
You can also use addendums to provide the “outs” in your agreement. This allows you to tie up a commercial property yet still have time to look it over, do your due diligence, and make sure it’s a deal that you’re comfortable moving ahead with.
Another disadvantage of commercial contracts is that they can be fairly large and may be a little bit intimidating for new investors and sometimes for sell-ers. Most serious investors use a computer program to fill out their offers so that they don’t end up with writer’s cramp. (Check out www.commercial investingsoftware.com for details on investing software.)
Liquidated damages clause
When you’re looking through your state contract, the most important thing to do is to find out whether there is a liquidated damages clause and whether it is written in a way that will protect you (as the investor) in the event that you don’t close on the property. Here’s what a typical liquidated damages clause says:
If the buyer fails to perform any of the covenants of this contract, all money paid to 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 liquidated damages clause says that in the event that you don’t close on the property (which means that you’ve basically defaulted in your agreement to buy the property), the seller’s only remedy for your failure to buy the property is to keep whatever money you’ve given to the seller so far.
The advantage of the liquidated damages clause is that it doesn’t really look like an escape clause. This allows you to make quick close/cash offers with no obvious escape clauses that a seller may balk at. We use the liquidated damages clause as an “out” in the deal only in situations where we’ve tied up the property for a short period of time, such as 30 days or less. Why? We don’t ever want a seller to feel as if we tied up his property for an unreason-able time — and then didn’t close.
When we first started investing in commercial property, we used to think that when you signed an agreement to buy a property that you absolutely had to close. We soon realized that by using the liquidated damages clause you could make all kinds of offers, and the only downside was that you’d lose
90 Part II:Getting Started Making Deals
any money that you put into tying up each property. That’s when we devel-oped Addendum A, which provided clear language so that the sellers were never surprised when we decided not to close on a property. You can get a copy of The Addendum A that we use as part of your free Commercial Quick Start Training Package by registering at www.commercialquickstart.com.
Memorandum of agreement
After your deal is accepted, you’ll want to take one extra step beyond keeping a copy of the signed agreement. We use a memorandum of agreement that’s recorded at the courthouse, which lets everyone know that you have the property under contract. This prevents the seller from selling the property again. (Sounds crazy, but hey, it happens.) It also prevents another investor from trying to do an end run around you if you decide to sell your contract or flip the property.
Presenting Your Offer in the Best Light
At times, it seems that life is going 100 miles per hour. When you call a broker on the phone or visit her office, she may be racing along getting everything done that’s on her to-do list. For some people, even when they stop and sit down with you, their minds can easily continue to race ahead, which means that you don’t stand a chance of really connecting with them. And if you can’t properly connect with your broker, you aren’t able to create the rapport and other elements that are so critical to getting your deal accepted.
The way to break through to the quiet place of attention that you prefer is by using our scripts. For instance, here’s what you can say if you’re calling your broker on the phone: “Hi this is Peter Conti. I’m calling about the strip center on Elm St.” Pause here for two to three seconds (it doesn’t matter if you get a response or not), and then say “Sounds like I caught you in the middle of something.” The broker will normally give some excuse like “No, it’s okay. I’m just clearing off my desk.” However, by calling the broker on her lack of atten-tion, she’ll likely stop what she’s doing and give you her full attention.
When presenting offers, it’s important to convey a message that the brokers will understand. As part of becoming an expert commercial real estate investor, you need to be able to speak about “cap rates,” “the mix,” and “value added” deals. If you’re new to the commercial real estate field, simply study and notice the words used by investors (many of which are in this book). It’s also helpful to talk with your mentor, because chances are that he or she is already in the loop when it comes to talking like a pro investor. After you understand the lingo, you can start sprinkling the new “investor language” into your conversations with brokers.
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The Five-Step Deal Filter
We don’t want you banging your head against a wall trying to seal a deal that just isn’t going to happen. Use the following five filters to make sure a deal is worth more of your time.
Filter 1: The five-minute test
To make it through this first step, one of the following things (all of which indicate a high probability of success) has to happen within the first five minutes of beginning to look at a deal:
U The seller or broker gives (or hints about) a compelling reason that’s motivating the owner to sell the property quickly.
U Your number-crunching software tells you that based on the actual num-bers (or the software’s estimates) the property is priced at or below market value.
U You become aware of a big upside to the deal, such as knowing that the current rents are way below market value.
It may seem harsh to judge a deal this quickly, but you have to remember that there are thousands of opportunities to buy commercial properties. So, your time and energy must stay focused on deals with the highest probability of success.
Filter 2: Sign it up!
If the deal you’re analyzing passes through the first filter, you should move quickly to get the deal under contract by using forms that will allow you to get out of the deal without any cost besides your time. Why do we encourage you to be in such a hurry to sign up the deal? Because good deals don’t last. If it really is a good deal, you need to move on it before someone else snatches it up. The other reason is that getting a deal under contract — even if the price and terms aren’t perfect — gives you the green light to move ahead with the next steps.
It seems that people are so afraid of risk that they hesitate to sign up a deal until they know for sure it’s going to be a great deal. We’re here to tell you that it’s rare to find a deal that you know for sure will be great at sign up time. Great deals simply don’t wait for you to process through days and days of analysis or contemplation.
92 Part II:Getting Started Making Deals
One of the first things you need to have in your investing arsenal is a set of forms and contracts that you use on a consistent basis. This keeps you from having to spend hours of your time and from spending money with your attorney every time you negotiate a deal. In fact, you’ll probably end up with your own version of agreements. These will likely be a combination of other investors’ forms, your own changes, and your attorney’s tweaks. Research www.investingforms.com to come up with a number of options to use.
When using escape clauses that allow you to get out of a deal, make sure you not only have the right language in your agreement, but that you also use the right language when talking to the broker and/or the owner. That way they aren’t unpleasantly surprised when you exercise the rights that the contract gives you. Go to this book’s companion Web site, www.CommercialQuick Start.com, to hear a podcast of a sample script that we use. With this sample, you can listen to the language, the tone, and the timing that we
use so that sellers and brokers understand the escape clauses without being alarmed about them
Filter 3: The quick view
The quick view filter is designed to help you determine whether the property is worth the time it will take to do the real due diligence required in the next filter. Remember: We don’t start this step until we have the property under contract. The quick view for commercial property requires you to check two important numbers:
U Check the purchase price as it relates to the true market value of the property in its “as is” condition. This view helps you determine whether you have equity.
Using your connections with brokers and property managers in the area, find out and enter these variables into your number-crunching software to help determine the estimated value of the property:
· The market cap rate
· The average price per unit for apartments
· The average price per square foot for land, office, or retail properties
U Check the market rents for comparable properties in the area. Doing so tells you whether the property value can be increased by raising rents over time.
You’re doing a fast-and-dirty quick view in this step to see if the property has an upside. At this point, you aren’t trying to see exactly what the property is worth. So expect to make some estimates and assumptions here with the com-fort that this isn’t the final filter for your deals. If the property looks like it may be priced under market, or the rents appear to be low, move to the next step.
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