When Do I Use a Letter of Intent (LOI) to Purchase Real Estate?
A Letter of Intent, or LOI, is a somewhat informal letter that tells the broker that you would like to purchase the property and the general terms. It is a “soft offer” to gauge the interest of the broker and seller.
Use an LOI as a tool to find out if the seller would accept your offer, without the time and expense of working up an official purchase and sale agreement (PSA). An LOI can be non-binding, if you specify it as such in the letter. You can back out of the offer if you don’t want to go forward.
But you don’t want to just start sending LOIs all over the place. You only send it to the broker after you’ve run the numbers on (a.k.a. underwritten) the deal on your end and made sure it fits your criteria.
For instance, if you need a certain DSCR on a property, you need to make sure the net operating income is at the right level before you send an LOI. An LOI includes things like purchase price, financing terms, earnest money, due diligence and closing time frames. You wouldn’t have enough information to put on the LOI unless you had reviewed the property.
Backing up a bit, you will need to prove to the broker that you are a serious buyer, and potentially send proof of funds, to get the property financials. From there, you can analyze income and expenses and decide whether you want to send an LOI in the first place.
Commercial Property Letter of Intent Template
The LOI can be quite short. You can make many offers on various properties as fast as you can analyze them because an LOI takes almost no time to write up, once you know the terms.
Here are items to include in the LOI
- Seller’s broker name and address
- Property Name and Address
- Buyer’s broker
- Buyer name (individual’s name, LLC, etc.)
- That the LOI is non-binding
- Financing terms (down payment, interest rate, institution providing financing, approval within X days of going under contract)
- Earnest money amount and when it will be deposited upon full execution of the purchase contract
- Due diligence: Number of days to receive the appraisal, environmental reports, surveys, and other 3rd party reports required by the lender
- Closing: Number of days to close after due diligence is complete
- Any additional terms
- Who will pay for title costs and any other costs that are traditionally split or paid for by one party or the other
- Taxes: Prorated using customary proration method
- Deadline: Date LOI needs to be accepted.
Remember, this is non-binding. It’s just to let the broker know what terms you would include in a formal contract. That being said, don’t add anything to the LOI that you can’t follow through with.
A great LOI goes a long way to show that you’re a serious buyer and have thought carefully about your intent to purchase.