What is an "LOI"?

Published on Aug 30, 2017 | by Michelle Stow

Recently, I was surprised to learn that many of my clients are unfamiliar with the term “LOI?"  In the residential real estate world, the standard practice is to submit a contract and await the counteroffer from the seller. That method works very well in the residential setting; however, this method isn’t as efficient in commercial real estate applications. 


Let's start by explaining the nomenclature of "LOI" and what it stands for. These three letters stand for "Letter of Intent". When the commercial purchaser, whether it be on a large or small project, is considering the submittal of an offer on a property, the drafting of an LOI is the most efficient way of determining whether both parties (i.e. the buyer and seller), have a mutual understanding of the terms of the agreement that will eventually be cast into a formal and legally binding contract.


With that being said, an LOI is typically not a legal binding agreement between the parties, and is often misunderstood by the parties. Although it does dictate and specifically defines the terms which will eventually be included into the legal and binding contract, the specifics and the agreement of these terms are not legally binding as they often do not have the legal phrasing required to be binding.


So an LOI defines the eventual contract specifics such as the purchase price, purchase terms, due diligence requirements and timing to complete, the terms and conditions of financing, zoning requirements necessary for the purchaser's intended use, as well as a host of other important specifics, required by the purchaser. The LOI actually contains the important bullet points of the eventual contract, and defines the terms and conditions without the legalese terms which officially casts the contract as a legal binding contract.


An LOI is easy to read, to the point and contains somewhat the "cliff notes" of the official contract. This short summary of terms in the LOI, like a contract, go back and forth from the purchaser and the seller until the terms and conditions are agreed upon by both parties. Once agreed upon by both parties, it is then that the official binding and legal contract is designed and prepared for both parties to execute.


In real estate, "time is of the essence" when submitting and negotiating contracts. In some cases with competing contracts on the same property, it may seem that an LOI may take additional time. Although this seems a bit counter-productive, the LOI can give a seller a good indication in whether he or she has multiple offers to consider as opposed to just one. Getting to the deal points of the contract terms in an LOI form to the seller has many times, in my career, moved the deal to the LOI terms that I've submitted.


For more information on the submittal of an LOI on a particular property, feel free to contact our office.  There are many aspects of a real estate transaction that should be weighed and considered prior to contract submittal. We would be delighted to assist in that endeavor!


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