Willing But Un-Able: Exclusivity Periods in Letters of Intent Can Be Problematic
With the intense competition today for “good deals,” choosing the right buyer can become increasingly more difficult. A new breed of suspiciously sketchy buyers has entered the market.
Traditionally, a prospective purchaser would make an offer, secured by a certain confidence that she would be able to obtain enough financing from a lender and had enough equity to cover the cost of the property and closing costs and enough reserves to get through a period of stabilization of the asset.
That buyer would then enter into a contract of sale, put up the customary 5 to 10 percent deposit in escrow and proceed to secure all the elements necessary to get through the typical 60- to 90-day closing. At which point, clean title would transfer and the new buyer would take ownership of the property while the seller left the table with the proceeds. Both sides then went their separate ways.
More recently, the playing field has changed. A new buyer profile has digitized, throwing a curveball of mayhem into what was normally a predictable course of transaction events. These buyers have the unrealistic expectation that they can jockey for position in a deal with no money down and no skin in the game. It takes the art of flipping to a very different level.
This behavior could be the result of greed and envy. No matter the cause, it must be anticipated, understood and eradicated.
It all begins with an unsuspecting letter of intent, or LOI. A standard LOI should contain an offer with price, terms, deposit amount, closing schedule and any conditions of the sale. When it begins to resemble a contract, the broker needs to be very diligent going forward.
One land mine to be wary of is any language that alludes to an “exclusivity period.” This clause can be used as a boomerang on an unsuspecting owner. The purchaser is positioning himself for an angle to keep the property off the market while a contract of sale is being negotiated. While this is usually not a problem if the purchaser has the wherewithal to close, a purchaser who does not have the funds to close may use this as a tool to tie up an owner.
An unsuspecting broker and owner may innocently agree to this until it comes back to haunt them in a way they never suspected.
A well-respected broker recalled one situation in which an owner agreed to an exclusivity period in dealing with a particular buyer. A new and higher offer came in from a competing buyer. The owner made the innocent mistake of mentioning it to the original buyer. That buyer had his attorney send the owner a letter stating he was in violation of his letter of intent and would pursue legal remedies.