Not sure what an LOI is in real estate investing? You’ve probably heard of an LOI, but you’re not sure what it is or how it works. An LOI can seem confusing and intimidating, but it’s really just a way to establish the key terms of a real estate transaction before entering into a more formal contract.
An LOI is a Letter of Intent, and it is a common way for buyers and sellers to establish the key terms of a real estate transaction before entering into a more formal contract.
The LOI can be used for purchases, sales, leases, and other types of transactions. The letter can be casual yet clear, detailed yet simple, and more importantly, written with the goal of establishing a mutual understanding between the involved parties.
The key items that are typically included in an LOI are:
- The names of the parties involved in the transaction
- A description of the property
- The purchase price or rent amount
- The down payment or security deposit amount
- The closing date or completion date
- Any contingencies that must be met in order for the transaction to go through
- Potential lease terms
- Property owner, property description
If you’re thinking about entering into a real estate transaction, it’s a good idea to familiarize yourself with what an LOI typically includes. This will help you understand the key terms of any potential deals you may be interested in.
What is the purpose of an LOI?
An LOI is intended to identify the essentials of an agreement and can provide an overview of and outline some of the important details of an agreement.
The letter of intent may also be used to signify the agreement between the parties on partnerships or joint ventures.
Not legally binding…yet
An LOI is not a legally binding document, whereas a contract is. However, should the parties choose to execute the agreement as set out in the LOI, it will be legally binding.
It is important to remember that an LOI can always be amended or canceled by either party at any time before it becomes a legally binding contract.
An officially binding contract is harder to maneuver when all parties execute the paperwork.
Know the basics
This is why it’s important you understand all the basic terms, sale or lease terms, the actual proposed real estate transaction, possibly the legal description of the specifics, due diligence timeframe, inspection period, and anything else you can think of.
Importance of an LOI
A letter of intent can help define complicated transactions in written form. Anytime there is a lease agreement or property sale in motion, the stakes become higher. Although an LOI is a non binding agreement, it still is a declaration that a potential formal purchase agreement is on the horizon.
Good faith negotiations
When parties negotiate and enter the negotiation process in good faith, the letter of intent serves as a non binding mutual agreement that brings everybody to the table and on the same page.
They help simplify complicated negotiations. the letter of intent can often protect both sides as they prepare for a formal settlement for a new business deal.
Even when the document doesn’t a constitute binding contract, the letter of intent can contain elements of the binding agreement and refer to them. Having everything in place can avoid confusion and future legal battles.
Details in an LOI
Contents included in the initial draft agreement for the real estate purchase in the letter of intent can include but are not limited to:
- desired financial terms
- earnest money deposit
- formal due diligence timeframe, when will the due diligence begin, further due diligence
- purchase agreements, buyer’s criteria, inspection period
- closing costs, closing period
- binding status, binding lease, intent binding
- business partners, representing broker, prospective buyer, selling broker
- lease term, property description, proper inspection
- the proposed transaction, escrow company, escrow agent
- financial advisors
- closing statement
These terms and conditions in the letter of intent are comparable to terms and conditions or memos of understanding.
When is an LOI used in commercial real estate?
The letter of intent used when preparing for a commercial real estate transaction can be as detailed as you’d like or as simple as a real estate letter stating the details of what you’re trying to do with the commercial property.
The person presenting the letter will create it in good faith that it is not a finalized contract nor a sales contract but that this letter of intent is more of an exploratory commitment.
Similar to but not exactly
For commercial real estate and commercial space, the letter of intent may mimic a purchase contract but not serve as the final purchase agreement.
The letter of intent can be written early in the process when an investor with real estate deals to consider is ready to pursue a particular commercial real estate property.
Match investment strategy
A caveat is that the commercial property should ideally match the investment strategy of the investor so that it’s in good faith to submit the letter of intent, despite it being a non binding real estate letter.
How do you write a letter of intent in commercial real estate?
The contents of letters of intent can change according to who writes them. A letter of intent is generally a single page to three pages and maybe more depending upon how complex the property is.
It has the date, name, and address of the parties, a description of what is being sold or leased, what the purchase price is, what the down payment is, what the date to close is and what contingencies must be met.
Some LOIs also have a provision that says that the document is not a formal agreement, contract, or binding agreement, therefore it cannot be enforced. However, in many cases, if an LOI has all of the essential terms of a contract, it can be binding.
It is important to have an experienced real estate attorney review any LOI before you sign it.
Is a letter of intent an offer?
A letter of intent is not an offer. In order for an offer to exist, there must be an acceptance by the offeree of all the terms of the contract.
A letter of intent is a preliminary step in the negotiation process and is used to state what each party is willing to do. It is also used to gauge whether the parties are able to come to an agreement.
Does an LOI start a transaction?
A letter of intent is not a binding contract, but it can be used to start a real estate transaction. The letter of intent sets forth the terms of the proposed transaction and is used to gauge whether the parties are able to come to an agreement.
If both parties agree to the terms set forth in the letter of intent, then they can move forward with the negotiation process and eventually sign a binding contract.
What happens if you don’t have an LOI?
If you don’t have a letter of intent, that’s ok but it will be difficult to be on the same page without deal specifics. However, you may still be able to negotiate the terms of the deal with the other party.
It’s critical to consult an experienced real estate attorney before signing any LOI.
Should the property description be exact in the LOI?
No, the property description does not need to be exact in the LOI. The property description is used to give the parties an idea of what is being proposed, but it is not a binding contract.
The property description can be changed during the negotiation process.
Is the purchase price negotiable in an LOI?
Yes, the purchase price is often negotiable in an LOI. The purchase price is one of the key terms that will be negotiated by the parties.
If the parties are unable to agree on the purchase price, then they can terminate the letter of intent. The letter’s intent must be flexible and transparent so that termination of the LOI is amendable.
When should you sign an LOI in a commercial real estate transaction?
You should sign an LOI in a commercial real estate transaction when you are ready to move forward with the negotiation process.
What is an earnest money deposit in an LOI?
An earnest money deposit is a deposit made by the buyer to the seller to show that they are serious about buying the property. The earnest money deposit is typically put into escrow and is applied towards the purchase price of the property if the deal goes through.
If the deal falls apart, then the buyer usually gets their earnest money deposit back. However, there may be some circumstances where the seller gets to keep the earnest money deposit.
What is a due diligence period in an LOI?
This is a period of time in which the buyer can investigate the property and make sure that it meets their needs. The due diligence period is typically 30 days, but it can be longer or shorter depending on the terms of the LOI.
During the due diligence, the buyer will usually order a home inspection and have their loan approved. If the buyer is satisfied with what they find during the period, then they can move forward with the purchase of the property.
If the buyer decides not to move forward with the purchase, then they can terminate the LOI.
What is a contingency in an LOI?
A contingency is a condition that must be met before the transaction can close. The most common type of contingency is the financing contingency, which states that the buyer must get their loan approved in order to buy the property.
If the buyer fails to meet any of the contingencies set forth in the LOI, then they can terminate the agreement.
Is there a time limit for an LOI?
There is no set time limit for an LOI, but it typically lasts for 30 days. If either party needs more time to negotiate the terms of the deal, then they can extend the LOI.
What is a lock-out period in an LOI?
A lock-out period is a period of time in which the seller is not allowed to accept any other offers for the property. The lock-out period is typically 10 days, but it can be longer or shorter depending on the terms of the LOI.
During the lock-out period, the seller is not allowed to accept any offers from other buyers and the buyer is not allowed to make any offers to other sellers.
If either party breaches the lock-out period, then they can terminate the LOI.
Can the LOI be terminated for any reason?
Yes, the LOI can be terminated for any reason. If either party is not satisfied with the progress of the negotiations, then they can terminate the LOI.
If either party breaches any of the terms of the LOI, then they can terminate the agreement.
The letter of intent should always be written in a way that allows both parties to terminate the agreement easily.
Does an LOI need to be professionally designed with graphics?
No, an LOI does not need to be professionally designed with graphics. However, it should be written in a clear and concise manner so that both parties can understand it.
If you are using an LOI template, then you should make sure that it is easily customizable so that you can add or remove any terms that you want.
If you want to have it written on your company letterhead, then you should do that, it’s something easy to do and will point to your professionalism.
Should an LOI be notarized?
No, an LOI does not need to be notarized. However, both parties should sign it and date it to make it official. There should also be a copy for each party.
An LOI is a great way to start the negotiation process and it can help both parties to avoid any misunderstandings. It’s important to make sure that all of the terms are clear so that there are no surprises down the road.
By understanding what an LOI is and what it entails, you can make better decisions when negotiating a property purchase.
Always make sure that you fully understand the terms of the LOI before signing it. If you have any questions, be sure to ask your real estate agent or lawyer.
When it comes time to sign the purchase agreement, you’ll be glad that you took the time to understand the LOI.
Thank you for reading!
If you’re looking for a template to help you get started, be sure to download our free commercial real estate LOI template.
This working template is easily customizable and can be used for any type of real estate transaction.
Just fill in the information that is specific to your deal and you’ll be ready to negotiate in no time!