A real estate term sheet is a document that outlines the key terms and conditions of a real estate transaction, such as an investment opportunity or a loan.
It may include information about the buyer’s financial situation, the seller’s economic situation, and the sold property. Ideally, a term sheet should also include any contingencies that need to be met before closing.
What Is a Real Estate Term Sheet?
A real estate term sheet is a non-binding document to secure a real estate investment or loan. Typically, a term sheet is between one and five pages long and contains the important conditions of the transaction.
Although it is a customarily non-binding document, a term sheet establishes the expectations of both parties.
In addition, term sheets define the price, payment structure, and other fundamental terms and conditions of the transaction. The document helps determine whether or not the parties agree before they commit to anything, such as signing a full-blown contract.
An indicative offer, also called a non-binding offer, is similar to a real estate term sheet, but it generally occurs earlier in the negotiation process. It could include information about the purchase price, timeline, and prospect of a final agreement.
While a non-binding offer cannot be relied on during the later stages of the negotiation process, it can help keep discussions moving forward.
How Is a Term Sheet Different From a Purchase Agreement?
While term sheets are often considered non-binding, the purchase agreement is a much more detailed document that addresses items not clarified in the term sheet.
Once executed, the purchase agreement is considered a legal contract between the parties. This agreement finalizes a real estate transaction and includes final terms concerning closing details, purchase price, and provisions about termination and indemnification.
A real estate purchase agreement can take weeks to complete, including terms and conditions, disclosures for both parties, and a title search.
If the buyer does not sign the contract, the seller has the option to withdraw from the agreement. The buyer should be informed of any changes made to the contract before finalizing it.
Why Is a Real Estate Term Sheet Important?
The term sheet may have several benefits for both parties. It can reduce delays in drafting a definitive agreement. Often, a term sheet is not legally binding unless otherwise noted in the document and is meant to ensure that the parties are on the same page.
It lays the groundwork for the agreement between the parties and reduces the risk of unnecessary disputes and expensive legal fees.
For example, if the buyer wants to make a binding obligation, they may want to lock in terms with the seller using a definitive, legally binding agreement.
In addition, a term sheet could include an exclusivity period that prevents the seller from shopping for another deal. It can also be used in a dispute over the terms of the purchase and sale agreement.
What Are the Fundamentals of a Real Estate Term Sheet?
If you’re buying real estate, the term sheet is an essential piece of documentation. It details the terms of the sale and includes the purchase price, contingencies, and timeline for financing. To ensure that both parties are protected, it is crucial to have specific key provisions in a real estate term sheet. A few of the most critical requirements include the following:
- The names and addresses of all parties involved in the transaction (i.e., buyer, seller, broker, and lender).
- The property address and a description of the property.
- The purchase price and any deposits like the initial down payment.
- The closing date and any contingencies you must meet before closing (e.g., obtaining financing).
- Any special conditions or restrictions apply to the property (e.g., zoning restrictions).
Terms and Conditions
A term sheet must clearly state which provisions are non-binding and binding. The non-binding and binding conditions should be clearly noted in the term sheet. A term sheet may also specify the type of transaction that is taking place.
For example, a term sheet describing an asset sale should clearly state what the asset is being sold.
In a loan or debt agreement, the real estate term sheet must outline the repayment terms like loan size, payment structure, and interest rate.
Other key terms, which include property taxes, insurance, closing costs, and relevant fees like an origination fee, also need to be addressed.
A real estate term sheet may also outline how the deposit will be applied toward the purchase price, whether the deposit is refundable, nonrefundable, or given to the seller.
Timespan and Expiration Date
A real estate term sheet should include a specified time frame with a date when the agreement is supposed to expire. If there are any special conditions related to escrow closing, a term sheet should reflect this.
In a real estate transaction, an escrow holds the money until both parties have agreed upon the sale price and conditions of the contract.
Contingencies in a real estate term sheet protect the buyer by preventing a potential seller from accepting an offer if there is a better offer.
Generally, sellers will want to consider an offer with fewer contingencies. The most common contingencies involve detailed financing terms, such as a specific interest rate or amortization schedule.
For example, the terms could give the buyer the time needed to secure a loan commitment. If the buyer cannot guarantee the loan in time, the contingency allows them to withdraw from the contract and keep their earnest money. However, this clause is not as strict as a real estate contract and does not have a specific date when it must be waived.
While contingencies provide valuable legal protection for buyers and sellers, buyers should be mindful of including extreme conditions.
Adding too many conditions can be risky, especially if the property market is hot. Other prospective buyers may make an offer without a contingency, making them look more attractive to the seller.
How To Negotiate a Real Estate Term Sheet
When you’re ready to negotiate a real estate term sheet, there are a few essential points to remember.
First, you’ll want to understand your goals and objectives clearly. What are you hoping to achieve with the transaction? What are your must haves? Once you know what you want, you can begin to negotiate from a position of strength.
Next, it’s essential to do your research.
Know the market value of the property and be prepared to negotiate accordingly. It’s also helpful to understand the other party’s objectives. What are they hoping to achieve? What is their bottom line? With this knowledge, you can craft a deal that meets the needs of both parties.
Finally, it’s important to remember that negotiation is a process. Be prepared to give and take, and be willing to walk away if an agreement can’t be reached. With these tips in mind, you can come out with a fair and favorable deal.
Four Steps to Take After Signing a Real Estate Term Sheet
If you’re ready to move forward with a real estate deal, then it’s time to sign a term sheet, which lays out the deal’s essential terms and conditions and helps solidify the agreement between the parties. Consider following these steps when dealing with a real estate term sheet:
- Review the term sheet carefully. Make sure that you understand all of the terms and conditions that have been laid out before moving forward. If there is anything that you’re unsure about, be sure to ask questions and get clarification.
- Begin working on due diligence. Once the term sheet is signed, it’s time to start doing your due diligence by digging into the property’s details and assessing its value. This process can take some time, so getting started as soon as possible is essential.
- Prepare for negotiation. The term sheet is not a final contract. It’s simply an agreement to move forward with negotiations. Be prepared to discuss and negotiate various aspects of the deal, such as price, contingencies, and timeline.
- Get everything in writing. Once you’ve agreed on all terms, get everything in writing before proceeding with the transaction. This will help protect both parties and ensure everyone is on the same page.