Definition
A Letter of Intent (LOI) is a short, written proposal that outlines the key business terms of a potential real estate transaction. It is used to align the buyer and seller on the “big rocks†(price, timing, and structure) before attorneys draft a formal Purchase and Sale Agreement (PSA).
In most real estate deals, an LOI is primarily non-binding, but it may include a few binding provisions such as confidentiality, exclusivity, or a no-shop clause.
Why an LOI Exists
- Speed: get agreement on core terms without paying lawyers to draft a full contract first.
- Clarity: reduce misunderstandings about pricing, deposits, timelines, and contingencies.
- Momentum: create a written “checkpoint†so the PSA drafting process doesn’t drift.
- Negotiation: focus discussion on economics and risk allocation early.
What an LOI Typically Includes
- Parties: buyer entity, seller, and key contact information.
- Property: address, parcel IDs, and what’s included (land, improvements, personal property).
- Purchase price: headline price and any assumptions that affect it.
- Earnest money deposit (EMD): amount, timing, and when it becomes non-refundable.
- Due diligence / inspection period: length, access rights, deliverables, and termination rights.
- Financing: cash vs debt, any financing contingencies, lender timing expectations.
- Closing date: target closing and any extension options.
- Prorations and credits: taxes, utilities, rents, security deposits, unpaid balances.
- Representations / warranties concept: “as-is†vs limited reps, survival period (high level).
- Confidentiality and exclusivity: NDA reference, no-shop window (if requested).
- Brokerage: who represents whom and how commissions are handled.
Binding vs Non-Binding Terms
Most LOIs include a sentence stating the LOI is non-binding and that no party is obligated until a definitive agreement (PSA) is executed. However, the LOI may carve out certain sections as binding.
Common binding clauses (if included)
- Confidentiality: restrictions on sharing financials, tenant data, or deal terms.
- Exclusivity / no-shop: seller pauses marketing for a defined period while the PSA is negotiated.
- Cost allocation: each party pays its own fees (or special cases like surveys/environmental reports).
- Governing law / venue: sometimes stated early, especially for complex deals.
How LOIs Affect Negotiation Leverage
- Price is only one lever: deposits, diligence, closing certainty, and speed often win deals.
- Risk allocation shows seriousness: EMD structure and “go hard†timing signal conviction.
- Exclusivity is valuable: buyers often “pay†for it with stronger terms (price, timing, EMD).
- Precision reduces retrades: clear diligence scope and deliverables can prevent surprises.
Example
A buyer submits an LOI offering $12,500,000 with a $250,000 earnest money deposit and a 21-day inspection period. The LOI states that the deposit becomes non-refundable after day 21, and the parties target closing 15 days after diligence ends.
This structure tells the seller: “We want time to verify the asset, but if the diligence checks out, we will close with a meaningful deposit at risk.â€
Common Pitfalls
- Too vague: missing EMD mechanics, diligence deliverables, or extension rights can create PSA battles.
- Accidentally binding language: careless wording can create obligations beyond what was intended.
- Unrealistic timelines: diligence and lender timing are common failure points.
- Not defining what’s included: personal property, reserves, security deposits, and contracts matter.
- Confusing “inspection period†with “financing contingencyâ€: lenders can extend the real closing risk.