Understanding a Letter of Intent (LOI) in Real Estate
A Letter of Intent (LOI) is a crucial document in real estate transactions that outlines the initial terms of an agreement between a buyer and seller before a formal contract is drafted. While it is non-binding, an LOI serves as a roadmap for negotiations, ensuring both parties are aligned on key terms before proceeding with a legally binding contract.
What is Included in an LOI?
An LOI typically includes:
Purchase Price – The buyer’s proposed offer for the property.
Payment Structure – Whether the payment will be in cash, financed, or involve alternative strategies like a subject-to agreement.
Terms & Conditions – Specific conditions under which the buyer is making the offer.
Contingencies – Any requirements that must be met before finalizing the deal (e.g., inspections, financing approval, title checks).
Closing Timeline – A proposed date for completing the transaction.
Due Diligence Period – Time allocated for property evaluations, financial assessments, and any necessary research before finalizing the contract.
Why is an LOI Important?
Clarifies Intentions – Both parties understand the terms before investing time in formal contracts.
Saves Time & Costs – Helps streamline negotiations, reducing unnecessary legal fees and paperwork.
Demonstrates Seriousness – Shows the seller that the buyer is committed to purchasing the property.
Provides Negotiation Leverage – Acts as a foundation for discussions, allowing room for adjustments before finalizing the deal.
Is an LOI Legally Binding?
Most LOIs are not legally binding, meaning either party can walk away before signing a formal contract. However, some LOIs may include binding clauses related to confidentiality or exclusivity, ensuring that both sides remain committed to negotiations in good faith.
LOI in a Subject-To Real Estate Deal
In a subject-to transaction, where a buyer takes over the seller’s existing mortgage payments, an LOI helps outline:
The agreed-upon cash amount the seller will receive upfront.
Terms for assuming the existing mortgage with its current interest rate.
Any responsibility for back payments owed on the loan.
How title transfer and ownership protections will be structured.
Final Thoughts
A Letter of Intent is an essential step in real estate deals, providing structure and clarity before moving into legally binding contracts. Whether you are a buyer looking to secure an investment or a seller evaluating offers, an LOI ensures that both parties start negotiations on the same page.
If you're considering buying or selling a home and want to learn more about using an LOI in your transaction, feel free to contact me today!
