How to Use an LOI in Real Estate Negotiations
When you’re in the market to buy real estate, it can be challenging to understand the ins and outs. Regardless of your experience level, knowing how to turn a property that interests you into part of your portfolio is vital to success. Whether you are new to the industry or on your thousandth negotiation, understanding what a letter of intent does and how to use it gives you an edge over other potential buyers.
What is an LOI?
There are many industry-specific terms in real estate that are difficult to understand, but a letter of intent or LOI is pretty self-explanatory. Typically, the party wishing to buy a property presents the LOI to the seller. A letter of intent is brief, only a few pages compared to the twenty or so pages of a sales contract. It declares the potential buyer’s intentions to the seller, allowing both parties to come to an agreement about the basic terms before negotiating the sales contract.
An LOI differs from a sales contract in both content and length. It is very brief and does not contain a lot of information. Another significant difference between a sales contract and an LOI is a letter of intent is not legally binding and not used to negotiate the terms of the sale. When sending an LOI, the potential buyer doesn’t need to provide a deposit or down payment as they would with an offer to buy.
How to Construct A Letter of Intent and Information to Include
A letter of intent is a common way to express your intentions to buy a property without having to write a formal legally binding contract. As an interested buyer, you present the letter to a seller in the preliminary stages of a potential purchase. The LOI spells out your intentions as a buyer clearly, and the seller knows how you want to buy the property and under what terms.
A letter of intent is brief but has vital information to convey to the seller the seriousness of your interest in the property. An LOI should communicate several significant pieces of information. Let’s examine the contents of a letter of intent so that you can easily create one for your own use before moving into any formal purchasing agreements.
The Five Basic Elements of a Letter of Intent
- Your Name (The Buyer)
- The address of the property
- The offer, which should include:
- Purchase price
- Down payment
- Due diligence time
- Closing time
- Any other clauses or provisions
- When a formal contract will be written up if the LOI is approved
- A clause that makes the LOI non-binding – a reinforcement that the letter is not legally binding.
- A place for your signature and that of the seller
That sums up the content. It contains only straightforward and professional information. Your goal is to summarize each detail so that the seller knows what you, the buyer, intend to do.
An LOI allows the seller to verify facts and figures so that they understand what they are getting from the sale. The letter always permits time for you, the buyer, to perform your due diligence as well. If you discover something unexpected, you can cancel the sale without any punishment or recourse.
How to Use the Letter of Intent
As a First Offer
Use the letter of intent to present your preliminary offer to the seller. By doing so, you save time and legal fees and reduce costly negotiations because you don’t have to meet the same legal requirements of a formal contract. Using a shorter letter of intent ensures the seller understands your interest in the property and allows the sale to move forward smoothly.
As a Negotiation Point
When negotiating a commercial real estate deal, you can come to an agreement faster by using your LOI to dictate favorable terms or include alternative ways to complete a sale. Write your letter of intent factually, ignoring nothing to avoid conflict in the future. Be prepared to negotiate terms, and always know what you are willing to accept if you should get a counteroffer.
Having an informal letter of intent allows for easy negotiations. You avoid the legalese of formally written clauses and other information that isn’t important in this part of the process. When the letter of intent spells out each detail clearly, the seller can determine if they agree with the basic terms of the offer. This negotiation can go back and forth without the cost and time involved in rewriting lengthy contracts.
You should only use a letter of intent when you are serious about a property. No one likes to waste time. One of the benefits of using an LOI to explore commercial real estate is that the LOI is free to submit. Unlike with a formal sales contract, an LOI requires no deposit, allowing you to submit an offer and see if the seller is open to negotiations or motivated to sell.
Now that you’ve learned how to use a letter of intent in real estate, you can use this powerful document to improve your chances of making great deals that benefit and grow your portfolio. Use your letter of intent to present a non-binding offer on a property that you’re interested in, move your negotiations forward, or find motivated sellers. Whatever way you choose to use an LOI, it is no doubt a powerful tool for savvy real estate investors.
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