A Real Estate Letter Of Intent (LOI), also sometimes called a Letter Of Interest, is a document that outlines the basic understanding between two or more parties about a potential agreement for the purchase, or other transaction, of real estate property. It’s like a preliminary handshake before the official, legally binding contract is drawn up.
Here are some key things to know about LOIs:
- Expresses commitment: It communicates the interest and general willingness of both parties to do real estate business together.
- Outlines main terms: It summarizes the key points of the potential agreement, like price, timing, and scope.
- Facilitates negotiation: It serves as a foundation for further discussion and negotiation of the final Purchase & Sales contract.
- Non-binding: In most cases, an LOI is not legally binding. It means that either party can walk away from the deal without legal consequences. A Seller may decide not to sell, and a Buyer may decide not to buy. Even if there is money down, it’s a deposit, paid in and for good faith, and it’s totally refundable whether it’s placed in escrow or not. However, some specific terms of a Letter Of Intent, like confidentiality clauses, may be binding.
- Formal document: While not a legal contract, it’s still a formal document written in business letter format.
- Varying complexity: Depending on the situation, an LOI can be a simple one-page document or a more detailed multi-page document.
- Business transactions: Mergers and acquisitions, joint ventures, real estate deals, and loan agreements commonly use LOIs.
- Job applications: In some cases, applicants might submit an LOI to express their strong interest in a position before the formal application process begins.
- Academic settings: Students applying for graduate programs or scholarships may write LOIs to explain their goals and motivations.
Overall, a letter of intent is a useful tool to express initial interest, lay out the groundwork for a deal, and move towards a formal agreement.
At Proxima Investors, we use LOIs (“letters of intent” or “letters of interest” both give a good idea of the purpose and goals of these documents), mainly on the Home Sellers’ side, but also on the Home Buyers’ side when time allows. Our deals typically, but not always, start slow with detailed questions about the HomeSellers’ situation, followed by thorough explanations of the exact type of deal that accomplishes the best results specifically for the Sellers. This creates a negotiation that can greatly benefit from an early LOI to design the framework of the deal, showing our seriousness and commitment to a deal, all within the parameters of good faith. The binding contract then follows, and that is what creates obligations and responsibilities, benefits and rights, or, in other words, a deal that is mutually beneficial and works for both parties involved—a win-win!
Letters Of Intent to Purchase or Sell Real Estate from Proxima Investors
Our LOIs change over time as we tweak them to provide the best possible results and may change based on the specific situation. Even with our Sellers, we may opt out of writing one if that is what the Seller wants or would greatly benefit from.
Rent-To-Own deals are also sometimes unknown to HomeBuyers, who may just have discovered them, so, unless they want to move as fast as possible, we also write one for the Buyer to review before a final sales contract. It’s another step that makes sure that the deal is understood completely by the Buyers as well.
In regards to Deals on Terms, they are particularly suitable as they determine the pivot point of the whole deal, the center of gravity around which the terms of the deal can be totally renegotiated and redesigned, but must maintain the equilibrium as offered in the LOI for a fair deal that inevitably ends with a successful outcome. Any imbalance could break the deal or ruin the outcome. So, despite their legally non-binding nature, they show good faith going into the next round when the details are defined and the contract is signed.
Conclusion: LOIs are a great tool that we use very often and will be for the foreseeable future. They are just an advanced version of a real estate offer to purchase with regards to the completeness of information, but they don’t have to be accepted formally and usually, there is no money paid, refundable or not. They have the purpose of making the basic terms clear and represent a great step towards a real estate deal done.