One of the most important documents in a commercial real estate purchase isn’t a contract or other agreement. It’s not even a legal document – nor is it binding. It’s a letter of intent (LOI).
Writing an LOI is one of the first steps in purchasing a commercial property.
The purpose of an LOI
An LOI is used by a prospective buyer to state their intention of purchasing a property and to make an initial offer. It’s important to do some due diligence on a property, the area and the market conditions before making that kind of offer.
An LOI is typically not used unless a potential buyer is serious about a commercial property. Generally, it’s presented to the seller after there have been discussions between the two parties. It’s always best for a potential buyer and/or their broker to do some due diligence prior to drafting an LOI so that they get information independent of what the seller may have provided. Informed decision-making is always the best way forward in real estate scenarios.
What details should an LOI include?
An LOI includes details that concern a potential sales transaction. Some of the most important include:
- The proposed purchase price
- Financing termsfor the purchase
- The amount of the escrow deposit
- What inspections are needed and how long those are expected to take
- How much time the buyer needs for further due diligence
- What information the buyer needs the seller to provide as part of that due diligence
- Estimated closing date and closing costs
An LOI, as noted, establishes initial terms proposed by the buyer. It’s a starting point for serious negotiations with the seller. If they agree on terms, they then draw up the purchase agreement, which is legally binding for both parties.
An LOI should never be written by a prosed buyer or even their broker without experienced legal guidance. It should certainly never be based on an online template. An LOI needs to be unique to the proposed transaction. The closer the proposed terms are to what the seller will accept and the better the information is that supports those proposed terms, the more expediently a transaction can proceed.