Earnest Money and the Letter of Intent in an Apartment Deal

A letter of intent (LOI) is the short written offer a buyer sends before the full purchase contract. It sets the price and the main terms, and it usually includes an earnest money deposit and a due diligence period. For an apartment syndication, the LOI and deposit are the first real money at risk. If you are the sponsor, DoorRaise helps you raise the equity and handle the paperwork for buildings with 5 or more units, but the purchase terms and deadlines are yours to set and read.

For the wider picture, see real estate syndication. For the cash you need before a raise closes, see how much money to start a syndication as a sponsor.

What is a letter of intent?

An LOI tells the seller who you are, what you will pay, how you will pay, and how long you need. It can cover the price, the earnest money, the diligence period, the financing you plan to use, the closing date and any conditions. Many LOIs say they are non-binding, meaning neither side is required to buy or sell until the purchase contract is signed. Read the LOI closely anyway, because some of its clauses (such as exclusivity or a deposit) can bind you.

How does earnest money work?

Earnest money is a deposit held by an escrow or title agent named in the contract. It shows the seller you are serious. The contract sets the amount and when it is paid, and sometimes you pay it in parts, for example one part at signing and another when diligence ends. Usually it goes toward the price at closing. If the deal closes, it is credited to you. If it does not, what happens depends on the contract.

The key question is when the deposit becomes non-refundable. In many contracts it is refundable until the diligence period expires, and then it hardens unless you have terminated in writing. Other contracts add a financing contingency, which can be the only protection if the lender turns you down. Check the exact wording, because a deposit can become at risk before you expect it.

What is the due diligence period?

Due diligence is the window to inspect the property, review the rent roll and operating statements, check the title and survey, and confirm that the lender will fund the loan. The length is negotiable. It needs to be long enough to finish those reviews, and the seller will usually want it short. Choose a length that gives your team time to report back, and make sure the deadline appears in the LOI and the contract.

If the work will not finish in time, you can ask for an extension. Extensions often come with a cost, such as an additional deposit or a fee that becomes non-refundable. Price that cost before you agree to it.

Who funds the deposit?

The sponsor usually funds the deposit, from cash they have or can commit. Some sponsors look for a partner to fund it. If an investor is asked to put money toward a specific deal before the offering documents are final, that money is part of the offering. It has to be disclosed, and the offering must meet the conditions of its exemption. Get advice from a securities attorney before you ask anyone to fund a deposit or a diligence cost.

What protects the sponsor?

A few terms in the LOI and contract do most of the work:

1. A clear diligence deadline, written as a calendar date, not just a number of days.
2. A right to terminate during diligence and get the deposit back, in writing, before the deadline.
3. A financing contingency, if your lender's approval is not certain.
4. A written schedule for any extension, including what it costs and when it hardens.
5. A list of what the seller must deliver during diligence, such as the rent roll, the operating statements and the leases.

What protects the investor?

Investors should see a summary of the deposit and deadlines in the offering documents, even if they never read the LOI or purchase contract itself. A sponsor who shows investors the deposit amount, its refund rules and the diligence timeline is easier to trust than one who says the deal is "under contract." Our investor due diligence checklist lists what investors should ask for.

Common mistakes

• Signing an LOI that makes the deposit hard before inspections are done.
• Missing the diligence deadline because the calendar was not set.
• Agreeing to an extension without pricing its cost.
• Raising investor money after the deposit is already at risk, without telling investors the timeline.
• Treating the LOI as the final deal. The purchase contract sets the binding terms.

Trade-offs and who should wait

If you do not yet have a team for inspections and lender review, do not sign an LOI with a short diligence period and a hard deposit. A longer period costs the seller time and may cost you the deal, but it protects your deposit. Bring in an experienced partner or a broker who has closed deals in the market before you negotiate the timeline.

How DoorRaise fits in

Once the contract is signed and you are ready to raise, create your sponsor page or see the fee card.

FAQ

Is a letter of intent binding?

Many are not, but some clauses can be, such as exclusivity, confidentiality or a deposit term. Read the whole document, and ask a securities or real estate attorney to review anything you sign.

When does earnest money become non-refundable?

It depends on the contract. A common structure is refundable until the due diligence period ends, and non-refundable after that unless you have terminated in writing. Check the exact wording and date.

Can I get my deposit back if the lender says no?

Only if the contract has a financing contingency that covers that case, and you act before its deadline. Without one, you may lose the deposit.

What should investors see about the deposit?

A summary of the deposit amount, when it hardens, the diligence deadline and any extension cost. Those terms affect their risk, so they belong in the offering documents.

Sources

• 17 CFR 230.506, Exemption for limited offers and sales
• SEC, Private placements under Rule 506(b)
• SEC, General solicitation under Rule 506(c)

This article is general information, not legal, tax or investment advice. Deposit, deadline and extension terms are negotiated in each contract and vary by deal. Talk to a securities or real estate attorney and a CPA before you sign an LOI or contract. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.