How to Craft a Letter of Intent

What are letters of intent (LOIs) when it comes to real estate investing?

In this blog post, I’m going to walk you through what an LOI is, how it’s different from an offer, and how you can draft and craft your own LOI. Let’s get right into it.

What Is a Letter of Intent (LOI)?

An LOI is a short document that builds the foundation for a potential offer.

It is submitted by a potential buyer — somebody who is interested in acquiring a certain piece of real estate. The LOI basically says to the seller or the owner of the property, “Hey listen, I’m interested in acquiring your real estate. If I proceed with an offer and we get a deal done, these are the general terms I’m looking for.”

An LOI is not an actual offer. It’s just stating your intent more formally than a simple verbal agreement like in a phone conversation. In this case, you’re actually putting it down on paper.

How Is an LOI Different From an Offer?

There are three basic differences between an actual offer and an LOI:

1. An LOI is non-binding.

You can submit an LOI to a property owner and say, “Hey listen, I’m interested in potentially acquiring your property. This is what my offer would look like if we actually do one.” If the seller says, “Yeah okay, I’m willing to accept those terms,” it’s non-binding. You can still change your mind if you want to. Now, I’m not saying you want to change your mind because real estate is a small world. People talk. You will hurt your reputation if you send out several LOIs, people say yes, but then you never follow through. But legally speaking, it is non-binding.

An offer, on the other hand, is binding. Once you sign an offer, you are signing a contract. So you are bound by the terms of that contract.

2. An LOI is not enforceable.

This follows from the previous point. In contrast, an actual offer is enforceable. If you as a buyer sign a contract or sale agreement to acquire a property but the seller refuses to close, you have recourse through the courts. You will be awarded damages for the seller failing to close. You can enforce the offer and you can take it up several notches if the seller doesn’t cooperate with the terms of the contract. But again, an LOI is not enforceable.

3. An LOI is brief.

It only includes the basics. It doesn’t have multiple pages — just 1–2 pages. Short and sweet.

On the other hand, an offer is very in-depth. It covers all sorts of things. So an offer is going to consist of multiple pages. It’s going to be very detailed and will explicitly state everything that has to occur in that transaction.

But why would you use an LOI if it’s not binding and if it’s going to be very very brief?

Here’s why…

It saves a whole lot of time.

An offer takes a lot of time and effort to prepare. But an LOI is very easy to prepare.

Here Are the 3 Things Sellers Really Care About

Most sellers care about three things — price, terms, and closing. That’s it. Incidentally, that’s also what buyers really care about, too.

Terms are things like deposit structure, due diligence (DD), etc. The other things that comprise or are in an offer — title search, date requisition dates, and all that other stuff — can be figured out later once you get the meat and potatoes of the offer done. Again, those three items are price, terms, and closing. Those are the three main things that people care about.

By doing an LOI and submitting it to a potential seller or property owner, you’re giving them the price, terms, and closing. Those are the big ticket items that they really care about. You can figure out all these other minor things after the fact.

How to Craft Your Own LOI

What does an LOI look like? Let’s write one out right here. Here’s what we need to include:

1. Your Company Name and the Property

First, write down your company name — who is writing the LOI? Next, you’re going to write down the property and location. For example, 123 Main Street in a certain town or city.

2. The Big Three Items

Next, you’re going to cover the “big three” — the things the potential seller really cares about:

A. Price

So we’re going to say, “I’m going to offer you this price.” You’re not just going to write a dollar figure and that’s it. Lots of people have different styles of LOIs. You’re going to find your own style. If you have your lawyer preparing one for you, they’ll have their own style. But generally speaking, you’re going to have a heading, and then underneath you’re going to have text saying, “for consideration for this transaction.” The consideration is the price you’re paying. You’re going to be paying X number of dollars for the property.

B. Closing Date

Then, you’re going to write down your closing date. Obviously, you’re not going to have a specific date yet because you don’t have an offer prepared. You also don’t know how long this is going to take once you submit your LOI and once you have the offer drafted. So usually, the closing date is expressed in terms of days. So you’re going to say, “I’m willing to close on this property within 30 days, 45 days, or 60 days of an offer being accepted” — whatever that is.

C. Terms

Terms are going to comprise a couple different things. You’re going to have your deposit. So right now the market’s pretty hot. So you may say, “I’m going to offer a deposit of $300,000. That’s hard money, non-refundable. And I’m going to give this to you within seven days of acceptance of this offer or or within five days or within two days of acceptance.” Maybe you’ll have half deposit hard, half refundable in case something happens. It really depends on what you’re offering with the property and the type of market you are in.

And then, you’ll have your due diligence clauses. So maybe you’ll have 45 days for financing, 30 days for due diligence inspections. Or maybe it’s five days, depending again on your market.

These are just the meat-and-potato things — the things the seller really cares about. You’re going to leave all the minutiae and the legalese for the actual offer.

3. Acceptance Date

Now here’s the important thing at the bottom of your LOI. You’re going to have an acceptance date right on the bottom. And what this is saying is, “Mr. or Mrs. Seller, my letter of intent so my intent to purchase your property and draft an offer based on these terms my LOI is good so it’s able to be accepted on or before x date.” So you may choose a date three days from now or you may choose a date within a week from now. It all depends on the market situation and the seller situation. But you want to make sure that you have a date on there saying, “Hey, after this date and time I’m no longer interested. The terms included in my LOI will no longer be on the table.” Why is this important? Because it’s always the fear of loss. If you don’t have a date, the seller may think, “Hey, I could take three months. This person’s still going to be interested.” You have to explicitly state that after such and such a date, your LOI will no longer be on the table.

4. Signatures

Finally, you’ll have a place for signatures. As a potential buyer, you’ll have your signature on the bottom left corner and then you’re going to leave a spot for the seller to sign on the right corner.

Now you might ask, “Why do I need to have the seller sign the LOI if it’s non-binding?” That’s a really good question because an LOI means nothing. This document is just saying that in the future, you and the seller will be preparing an actual offer and this will be binding.

But whenever you sign a document, you’re committing to it. The seller could in theory just say, “Yeah, I accept everything and we’ll prepare an offer.” But by actually having the person physically sign on a piece of paper, they’re committing to something. It doesn’t matter what sort of organization or cause, people use this all the time, even though they’re not signing anything binding. They still want you to sign a piece of paper because you’ve committed to it. So you always want to have a spot for the seller to accept your LOI.

A Counter Offer?

Once the LOI is completed and everybody is happy with the terms, the seller may counter offer and say, “Hey listen, I like your closing, I like your terms, but your price. I’m looking for x amount per unit, or I’m looking to sell at x cap rate. So I want you to improve your price. Is that okay?”

You guys agree on it and accept or modify the LOI. It will be used as the foundation of the offer by the lawyers. They’ll prepare the offer and it will be much more detailed. But the important points have already been covered. You’re going to make the lawyer’s life so much easier.

The Bottom Line

An LOI is a short document that builds the foundation for a potential offer. That’s an LOI in a nutshell. That document will cover the meat and potatoes — the price, terms, and closing. That’s all that most people care about. The little details can be sorted out by the lawyers after the fact, once you actually get the foundation of the deal done.