What is LOI meaning, real estate?

If you are a real estate investor, you need to know the Letter of Intent (LOI) meaning, real estate. Also, its significance, and how to write one. Such a cost-free and non-binding letter is helpful in complex commercial real estate deals. It helps in navigating the deal. 

The LOI acts as the first offer, often based on initial information provided by the seller or their broker. It’s usually written after the potential buyer has viewed the property. And, has had initial talks with the owner or broker about proceeding with the transaction. 

What does a Letter of Intent convey in real estate?

An LOI is a non-binding agreement that shows a basic commitment between the parties involved, allowing negotiations to progress without getting bogged down in minor details initially.

This letter confirms that all parties are generally in agreement, which speeds up the contract creation process. It also serves as a reference point for future negotiations. Simply put, it shows that both the buyer and seller are serious about moving forward with a property purchase. And, it outlines the fundamental terms and conditions agreed upon by the buyer and seller before formalizing the deal with a binding contract.

LOI vs. purchase agreement: What is the difference?

An LOI is less formal and binding compared to a purchase agreement. While both contain similar elements, a purchase agreement provides more detailed terms and is legally binding. Purchase agreements are used after the due diligence period when both parties are prepared to finalize the real estate transaction.

Who is responsible for sending an LOI?

The party interested in buying the property usually sends a Letter of Intent (LOI). Sometimes, the prospective buyer or tenant creates it, but it should be checked by their real estate attorney. However, in certain cases, the seller might send the LOI instead. For instance, if the seller is eager to sell fast and is open to negotiating on the sale price, they might send an LOI with their preferred terms to expedite the process.

LOIs can be informally submitted via email or official letterhead. Some landlords prefer both parties to sign the LOI as a good-faith gesture, indicating mutual agreement before formalizing the contract. Although non-binding, this step signifies a commitment to proceed.

Why is LOI significant in real estate investment?

LOI serves as an indicator of a prospective buyer or tenant’s level of seriousness. Keep in mind that commercial real estate transactions involve considerable time, complexity, and expenses, even for seasoned investors and tenants. An LOI helps ensure that both parties are on the same page before delving deeply into a deal.

It acts as an intermediary step between initial discussions and the creation of a lengthy, legally binding sales contract, which can span over 20 pages or more. 

The LOI, usually ranging from a single page to several depending on the negotiated details, efficiently outlines the fundamental terms of the proposed transaction. It allows for any negotiation before engaging a legal advisor to draft or review the final contract or lease agreement.

How to write an LOI?

When drafting an LOI, it’s crucial to recognize its non-binding nature. Remember that it allows either party to withdraw from the agreement without any legal ramifications. The LOI should be succinct and precise, encompassing only the most pertinent terms of the deal. For instance, it should include a statement explicitly declaring its non-binding status. 

An important aspect of writing an LOI is seeking legal counsel or a real estate agent’s help to review the document. It will ensure comprehensive protection and readiness for potential legal challenges. Despite its simplicity, legal scrutiny guarantees that both parties are safeguarded against unforeseen complications, fostering clarity and confidence in the negotiation process.

What does an LOI entail?

Since an LOI is a preliminary agreement, it should outline the key terms and conditions before the formal contract is drafted and signed. 

Here’s a breakdown of what is typically included in an LOI.

• Details of both parties: This section identifies the buyer and seller by their legal names and often includes their contact information.
• Property description: The LOI should provide a detailed legal description of the commercial property being considered for sale or lease. This includes its address, square footage, commercial zoning information, and unique features if any.
• Purchase price: LOI must include the agreed-upon sale price for the property. It could be a fixed amount or a formula based on factors such as square footage or market value.
• Financial terms: LOI must mention the down payment amount, financing terms (if applicable), due diligence period, earnest money deposit, and any other financial considerations relevant to the deal.
• Payment method: The LOI should specify how the property will be paid for – through cash, financing, or a combination of both.
• Purchase conditions: These are the conditions (closing date, allocation of closing costs, possession date, provisions for property inspection, and disclosure of property condition) that must be satisfied before the sale can proceed. 
• Lease conditions: If the property is being leased, the LOI will outline the terms of the lease agreement, including the lease term, rent amount, rent escalation clauses, security deposit requirements, maintenance responsibilities, utilities, parking provisions, pet policies, and options to renew. It may include disclaimers and any other lease-related terms. 
• Governing law: This section specifies the jurisdiction whose laws will govern the interpretation and enforcement of the LOI and any subsequent purchase or lease agreements.
• Signatures: Both parties are required to sign the LOI with the date to indicate their agreement to its terms and conditions. 

LOI meaning, real estate: Key takeaway

An agreed-upon LOI signals readiness to lease, buy, or sell a piece of property. Keep in mind that despite an LOI landlords may still seek backup offers in case the original deal falls through.

After the LOI is signed by both parties, negotiations for a sales contract commence. It incorporates terms from the LOI and addresses any outstanding details. And, once both parties sign the finalized contract, it becomes legally binding, obligating them to fulfill their commitments.

Written by Ramona Sinha. March 29, 2025

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.