LOI Terms

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November 12, 2021

by a searcher in Houston, TX, USA

How do you navigate a seller asking for earnest money as part of an LOI for a self-funded search fund. Has this served as a deal breaker, if not, how did you navigate it?



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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
We routinely ask for and receive Earnest Money Deposits for smaller transactions (<$5mm) for sellsides, and on buysides our buyers provide it. During due diligence, the buyer should be able to terminate the LOI and walk away with their EMD for any reason or no reason, but after that, unless seller breaches, it is applied to closing or the EMD goes to the Seller. As ^redacted‌ points out, it should be held in a trust account. Of note -- the correlation between buyers that readily provide an EMD and actually close is very high, even when it is fully refundable during due diligence. So if you are in a seller's market or competitive situation it will set you apart (or at least get you past an initial threshold).
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Reply by a searcher
in Portland, OR, USA
I'd suggest just depositing your money directly into the seller's checking account or possibly just locking in a time-controlled safe that won't open for 1 year.

Consider this example, during DD you learn that the roof of a critical warehouse will need to be replaced in the next year or two. You have a 7 year lease and are responsible for all maintenance costs. You consider that an adjustment to the agreed upon LOI price and the seller disagrees. Even with an iron clad legal contract you'll have to go into litigation/arbitration. Now your money is locked up, your stuck with more legal fees - which if you can't pay too bad for your ED, and you've lost all that time and work.

This is way more complicated than buying a commercial or residential property.
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