What is submitted after an LOI for purchasing real estate?

So, you’ve submitted a Letter of Intent (LOI) for purchasing a piece of real estate. Congratulations! What happens next? Is it smooth sailing from here, or are there still a few hurdles to jump? Don’t worry, we’ve got you covered. Let’s break down step by step what is submitted after an LOI for purchasing real estate. The idea is to help you know exactly what to expect after the LOI is in the home seller’s hands.

What is LOI: A quick recap

Let’s quickly review what LOI is. In simple terms, a Letter of Intent (LOI) is a written agreement that lays out the basic terms of a real estate deal between a buyer and a seller. The benefits of using an LOI include saving time, clarifying key terms, and setting the stage for negotiations without immediately committing to a legally binding contract. It’s like a handshake in document form. It is serious but not legally binding (in most cases). The LOI typically has an expiration date, often between 72 hours to two weeks, to ensure negotiations don’t become too time-consuming.

An LOI is used in:

• Commercial leases: Landlords and tenants outline rent, lease duration, and responsibilities.
• Real estate purchases: Buyers and sellers agree on the purchase price, due diligence period, and key terms before finalizing a formal contract.

The idea is to highlight the key points so both sides can decide if they want to go ahead and make a formal real estate contract. For instance, in an LOI for renting commercial real estate space, the parties might talk about important issues such as how much the rent will be, how long will the lease term last, if the rent will go up each year, any improvements the tenant can make, whether the lease can be transferred or not, and other details.

How important is an LOI, in real estate?

An LOI brings structure and clarity to real estate transactions, ensuring all parties are aligned before committing to a formal contract. It helps:

• Establish a framework for ongoing negotiation.
• Confirm the sincerity and good faith of each party’s intentions.
• Assist in ironing out details before entering a legally binding agreement.
• Aid parties in conducting due diligence efficiently.
• Promote and streamline discussions to save time and effort.

Read more: LOI meaning in real estate

So, what is submitted after an LOI for purchasing real estate?

Now, let’s talk about what happens once the seller agrees to the terms outlined in the LOI.

Step 1: Negotiation and refinement of terms

Once the buyer submits an LOI, the seller reviews it and may either accept it as is or propose changes. This back-and-forth ensures both parties are comfortable before moving forward. The main points discussed include:

• Purchase price
• Due diligence period (typically 30-60 days)
• Earnest money deposit
• Closing date
• Any special conditions like property zoning, financing, or inspections

Step 2: Drafting the purchase and sale agreement (PSA)

Once the seller agrees to the LOI, the next step is drafting a formal contract, known as the Purchase and Sale Agreement (PSA). This is where things start getting serious. Unlike an LOI, a PSA is legally binding and includes all the final deal details.

When you write a purchase and sale agreement, PSA, it typically includes:

• The final purchase price
• The earnest money deposit amount and how it will be held in escrow
• Contingencies (e.g., financing, inspections, environmental studies)
• The closing timeline
• The rights and responsibilities of both the buyer and seller

Step 3: Due diligence period

This is the fact-checking phase. The due diligence period is the buyer’s opportunity to inspect the property, verify financials, and ensure there are no hidden surprises. Depending on the complexity of the deal, this period can last anywhere from 30 to 90 number of days.

The key activities during this phase include:

• Property inspections (structural, environmental, etc.)
• Reviewing title reports to ensure clear home ownership
• Appraisals to confirm the property’s market value
• Checking zoning laws and regulations
• Securing home financing if applicable

During this period, the buyer can typically back out of the deal without penalty if they find something concerning.

Step 4: Finalizing financing and escrow

If the buyer is taking out a loan, the lender will conduct their own due diligence, including another appraisal and financial verification. The earnest money, which was agreed upon in the PSA, is typically held in escrow account until closing.

Escrow acts as a neutral third party, making sure that all conditions of the sale are met before the money and property change hands.

Step 5: Closing the deal

Finally, if everything checks out, both parties proceed to closing. This is where final signatures are made, payments are transferred, and ownership is officially recorded.

At this stage:

• The buyer transfers the remaining funds to the seller
• The seller hands over the deed
• Any final paperwork (e.g., tax documents, title transfers) is completed

And just like that—you’re the new property owner!

What is submitted after an LOI for purchasing real estate: Key takeaway

Submitting an LOI is just the beginning of a real estate transaction, but it plays a crucial role in setting the framework for a successful deal. While the LOI itself isn’t usually legally binding, key clauses like the confidentiality agreement and exclusivity period often are. After the LOI is accepted, the real work begins: drafting the PSA, conducting due diligence, and finally closing the deal.

So, the next time you hear someone mention a Letter of Intent in commercial real estate, you’ll know exactly what it means and what happens next. Whether you’re buying an office building, leasing a retail space, or purchasing land for development, the LOI keeps things organized and efficient, saving both time and headaches in the long run!

Written by Ramona Sinha. February 25, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.