Are there groups that fund LOI deposits?

December 22, 2020

by a searcher from Columbia University in New York, NY, USA

I'm working on a transaction with a seller that stood really firm on his deposit. With some negotiating, i got the deposit down to 3% and executed the LOI. I could place this myself -- but have another deal coming around the corner for which I might need the same dollars.

Does anyone know of people or groups who would place such a deposit? It is fully refundable and ergo riskless, and I'm happy to pay some reasonable carrying cost.

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Reply by an intermediary
from Arizona State University in Long Beach, CA, USA

Vik, I agree with the above comments. The factor to consider is what happens if you do move forward with the "deal coming around the corner"? I assume you only have the capacity to complete one of these transactions. So, I suggest you put the deposit for the deal that is already under LOI (since you have it), then move quickly through DD, and do some preliminary DD on the other deal that is coming up before committing to another LOI. After all, you can't be certain that your LOI for the next deal will be accepted! So, focus on the bird in hand first, and fulfill your obligations per the LOI, so you don't jeopardize this deal. You may need to be more firm on the next deal about not offering a deposit, or at least negotiating more time before you need to put the deposit (ex. 10 days), if you haven't yet made a decision on the first deal. That should hopefully buy you enough time to assess both deals to decide which one you are going to pursue, so you don't end up needed deposit funds for two deals.

Reply by a searcher
from Harvard University in New York, NY, USA

"Reasonable carry cost" is probably like 15%+ to whoever is willing fund you uncollateralized. If this is your first time with deposit LOIs, I wouldn't be so nonchalant about it. These transactions aren't like, buying something off of AMZN and returning it if you don't like it, no questions asked. LOI deposit language (my deal had a deposit) is pretty stringent in laying out the conditions for which a deposit is refundable -- you have to prove some gross misrepresentation of the facts, or the business has to have some fundamental change over ur DD period. This can get real sloppy real fast if you actually want to back out. If you think the #s are 10% lower, does that count? Or, the seller maintains there's 100k in cash receipts that are unreported, but you don't want to give him credit for it, is he going to allow you to get ur deposit back? You can see how people wouldn't be willing to loan u deposit money unless it's a hefty fee.

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