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What Is A “Letter Of Intent” (LOI) ?

In Japan, if you want to buy a property; be it a residential property or an investment property, a family home, or a commercial space- you must first submit a ‘letter of intent’. What is a letter of intent? Simply put, it’s the document that you submit to the seller that registers your interest to buy the property. Ordinarily, unless expressly written to the contrary, it is not a legal obligation to buy the property. The document is essentially you saying “I am seriously considering buying this property, and these are my terms…”.

Because of the non-binding nature of the LOI, most sellers will not remove the property from the market until the transaction has been finalised. The LOI submission is essentially the gateway to the negotiation process. What is contained within the letter of intent in Japan varies from agency to agency, but ordinarily it will contain the following:

– Your name
– Your address
– The property that you are making an offer on
– The amount you will pay as a deposit (taking the property off the market)
– Whether or not you are going to be using a loan
– Your desired contract/completion date
– The term that the offer is valid for

Price Negotiation

You could be forgiven for thinking that this is where you can get yourself a sweet deal. Perhaps not. In Japan the “room” for negotiation is ordinarily up to 5% of the asking price. Historically, real estate prices are closely tied to their legally appraised (/taxable) value, so price anomalies are unusual compared to other developed markets. Because of this, there is usually no room for transformative price negotiations and we have even seen buyers ignored outright after an owner has taken offence to low-balling!

Deposits

The deposit should be up to 10% of the total offer price. How you feel about the deposit depends on which side of the table you’re sitting on:

Seller: I want as large a deposit as you will give me because it show’s that you’re serious about the deal and you won’t waste my time. If I’m a company I do however probably not want more than 10,000,000 JPY worth of deposit because that means that legally i’m obligated to have those funds held on deposit with an institution specified by the Ministry of Land, Infrastructure & Transport.

Buyer: I want to put down as small a deposit as is possible to get the deal done so that in case I want to go 180 on the deal and back-out, I only lose a small amount of money.

Interestingly, if the buyer backs out thereafter they lose their money. If the seller backs-out, they are legally obligated to pay the buyer 200% of their deposit money back. Not a bad investment in itself…

Why Real Estate Is The Best Asset Class (Part 2)

8 Reasons Why Real Estate Is The Best Asset Class (Part 1)

Transaction Costs For Japanese Real Estate Buyers

Taxes For Japanese Real Estate Investment

What Is A Cap Rate?

Why Tenants In Japan Are Great Investments

Holding Companies: Investing In Japanese Real Estate

Investment Loans: How To Choose The Right One

5 Point Checklist Before Investing In Real Estate

How To Calculate Your Breakeven Occupancy Ratio

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