What is a Letter of Intent (LOI)?
A letter of intent (LOI) is a preliminary document that outlines the basic terms of a proposed real estate transaction before a formal purchase agreement is drafted. It expresses the buyer's serious interest in acquiring a property and establishes the framework for negotiation. An LOI is typically non-binding, meaning neither party is legally obligated to complete the transaction based on the LOI alone. It's a negotiation tool, not a contract.
LOIs are most common in commercial real estate and larger investment transactions, but they're increasingly used in residential investment deals, especially when the buyer wants to establish terms before engaging attorneys to draft a full contract. In the wholesale world, LOIs are less common because most deals use standardized purchase contracts (like the TREC 1-4 in Texas), but understanding them is valuable for larger deals and commercial opportunities.
What an LOI includes
- Property identification: Address, legal description, and any relevant parcel numbers.
- Proposed purchase price: The buyer's offer amount.
- Earnest money amount: How much the buyer will deposit upon execution of the formal contract.
- Due diligence period: How long the buyer needs for inspections and investigation.
- Closing timeline: Proposed closing date.
- Contingencies: Financing, inspection, title, or other conditions.
- Exclusivity period: A request that the seller not negotiate with other buyers for a specified period (may be binding).
- Expiration date: When the LOI expires if not accepted.
Binding vs non-binding
Most LOIs are explicitly non-binding with respect to the obligation to buy or sell. However, certain provisions within an LOI may be binding even when the rest is not. Common binding provisions include confidentiality (both parties agree not to disclose terms), exclusivity (seller agrees not to shop the deal during negotiations), and the obligation to negotiate in good faith.
The distinction matters legally. If an LOI doesn't clearly state it's non-binding, a court might interpret it as an enforceable contract. Always include clear language stating whether the LOI is binding or non-binding, and which specific provisions (if any) are intended to be binding.
LOI vs purchase agreement
| Factor | LOI | Purchase Agreement |
|---|---|---|
| Binding? | Usually no | Yes |
| Detail level | Summary terms | Full legal contract |
| Legal review needed? | Recommended | Required |
| Earnest money? | Discussed, not deposited | Deposited at execution |
| Purpose | Establish negotiation framework | Legally bind both parties |
When to use an LOI
LOIs are most useful when the deal is complex enough that drafting a full purchase agreement before agreeing on basic terms would waste time and legal fees. If you're not sure the seller will accept your price, an LOI lets you test the waters before investing in contract preparation. They're standard practice in commercial deals, portfolio acquisitions, and transactions involving attorneys on both sides.
For most single-property residential wholesale deals, going straight to a purchase agreement is more common and efficient. The standard TREC contract in Texas, for example, is a well-established document that both parties can execute quickly without needing a preliminary LOI.