In this article, I would like to give you an idea of when to use a Letter of Intent (LOI) to purchase real estate. Next, we will look at how to write a LOI step-by-step.
First my disclaimer. Laws vary from state to state and do change from time to time. This information should not be construed as legal advice. When you engage in any type of real estate or legal transaction, you should seek competent legal and real estate advice from a professional.
There – we got that out of the way!
OK. Now let's look at when to use a Letter of Intent vs. a Purchase Offer. I am specifically going to address this when looking at buying an apartment building or commercial real estate.
The standard contract used when purchasing real estate is called a Purchase Offer, or a Purchase and Sale Agreement. You probably used this to buy your own house or condo.
Again, this is the standard agreement generally used in most real estate transactions. It is a formal proposal, usually drafted by your real estate agent or broker along with you. If the Seller agreements to all of the terms and conditions in the contract, they will simply sign the document. It then becomes a legally-binding contract between Buyer and Seller.
A Letter of Intent (LOI) on the other hand, is generally used as a “starting point” of discussion when purchasing real estate. It is a great tool to use to begin discussions, and usually is followed up with a formal Purchase and Sale Agreement.
Why use a Letter of Intent?
A Letter of Intent is a great tool to use in order to gauge the versatility of purchasing a property given the price and terms you are looking for.
A lot of times, I will use a LOI when I am trying to purchase an investment property for much less than the Seller is listing the property. I may also use a LOI if I am unfamiliar with the property and the area. I like to use a LOI in these cases to start the negotiating process while I do some due diligence work during the process.
Alright. Let's look at how to write a Letter of Intent step by step.
1. At the top of the letter, write today's date.
2. Include the Seller or Broker information at the top of the letter.
3. Explain that you are presenting this as a letter of Intent to purchase the property.
4. Explain who you are – whether you are buying through an LLC, investment group, etc.
5. Describe the property you are purchasing – the property name and address.
6. Include the price you would agree to purchase the property.
7. Define the due diligence period – it may be anywhere from 30 to 90 days, possibly even longer in a complex project.
8. Identify how you would like to finance the project – Seller financing, loan assumption, bank financing, etc.
9. Describe what you would like to review during the due diligence period – financial information, leases, rent roll, etc.
10. Include the earnest money you would have prepared to put down during due diligence.
11. Identify a Closing Date target – it may be within 30 or 45 days of conclusion of the Due Diligence Period. This will vary based on the project.
12. End the letter stating if these terms are acceptable, to let you know and you will follow up with a formal Purchase Agreement to move forward on the purchase.
13. Sign the letter.
There you have it – the essential elements to include in a LOI. Nothing too complicated – and if it is too complicated you will likely scare off a serious Seller!
The LOI is really just a simple business letter outlining the price, terms, and conditions that you would like to get when purchasing the property. Those are the basics, and everything will vary from project to project.
Again, a LOI is a great tool in your toolbox to begin discussions when purchasing real estate. Keep these steps in mind when you are looking to make your next purchase of an investment property.