What Is Letter of Intent?
In commercial real estate, you almost never go straight to a purchase contract. Instead, you submit an LOI that lays out the deal structure in two to three pages. If the seller agrees to the major terms, both parties then engage attorneys to draft the binding PSA. The LOI saves thousands in legal fees by establishing agreement on price, timeline, and contingencies before anyone drafts a 20-40 page contract. LOIs are standard practice for multifamily, office, retail, and industrial acquisitions, and increasingly common in larger residential transactions.
A letter of intent (LOI) is a non-binding document that outlines the proposed terms of a real estate transaction --- purchase price, due diligence period, financing contingencies, and closing timeline --- before the buyer and seller spend time and money drafting a formal purchase and sale agreement (PSA).
At a Glance
- What it is: A preliminary, typically non-binding agreement outlining proposed transaction terms
- Typical length: 1--3 pages, compared to 20--40 pages for a purchase and sale agreement
- Binding status: Generally non-binding, though confidentiality and exclusivity clauses may be binding
- Key terms included: Purchase price, earnest money deposit, due diligence period, financing contingency, closing date, and any special conditions
- Used in: Commercial real estate (multifamily, office, retail, industrial) and large residential portfolio transactions
- Time to negotiate: 3--14 days from submission to mutual acceptance
How It Works
Why LOIs Exist
A purchase and sale agreement for a commercial property can cost $5,000--$15,000 in legal fees to draft and negotiate. If the buyer and seller disagree on fundamental terms like price or due diligence length, that money is wasted. The LOI lets both parties align on the big-picture deal structure in plain language before engaging attorneys. It filters out deals that will not work early, saving everyone time and money.
Key Terms in an LOI
A well-drafted LOI covers: the proposed purchase price, earnest money deposit amount (typically 1--3% of purchase price, refundable during due diligence), due diligence period (30--90 days depending on asset size and complexity), financing contingency (timeframe and conditions under which the buyer can exit if financing falls through), closing timeline (typically 30--60 days after due diligence), any special conditions (seller financing, existing tenant leases, environmental remediation), and an exclusivity period during which the seller agrees not to negotiate with other buyers.
LOI vs. Purchase and Sale Agreement
The LOI is a roadmap; the PSA is the binding contract. The LOI establishes agreement on major terms in plain language. The PSA then translates those terms into legally enforceable provisions with specific representations, warranties, default remedies, and closing mechanics. Most LOIs include a clause stating that the document is non-binding and that neither party is obligated until a PSA is signed. However, certain provisions --- particularly confidentiality and exclusivity --- may be explicitly binding even within an otherwise non-binding LOI.
The Negotiation Process
A buyer submits the LOI, and the seller either accepts, rejects, or counters. Negotiations usually focus on price, deposit amount, due diligence length, and financing contingencies. Experienced brokers often handle the back-and-forth, with attorneys reviewing only the final agreed terms. Once both parties sign the LOI, the buyer's attorney drafts (or reviews) the PSA, and the formal due diligence clock begins upon PSA execution.
Real-World Example
Marcus identifies a 32-unit apartment complex in San Antonio listed at $3.8 million. He analyzes the financials, projects a 6.2% cap rate at a $3.5 million purchase price, and submits an LOI. His LOI proposes: $3.5 million purchase price, $52,500 earnest money deposit (1.5%), 60-day due diligence period (refundable deposit during this period), 30-day financing contingency after due diligence, closing within 30 days after financing approval, and a 14-day exclusivity period. The seller counters at $3.65 million with a 45-day due diligence period. After two rounds of negotiation over six days, they agree at $3.575 million with 60-day due diligence. Both sign the LOI, and their attorneys begin drafting the PSA. Total time from LOI submission to mutual PSA execution: 22 days. Legal fees for the LOI negotiation: $0 (handled by brokers). Legal fees for the PSA: $8,500. Without the LOI, Marcus would have paid his attorney to draft a full PSA that the seller might have rejected over the $300,000 price gap.
Pros & Cons
- Saves thousands in legal fees by confirming agreement on major terms before drafting a contract
- Provides a clear framework that speeds up PSA negotiations
- Non-binding status allows either party to walk away without penalty
- Establishes exclusivity, preventing the seller from shopping the deal to other buyers
- Demonstrates serious intent to the seller, differentiating your offer from tire-kickers
- Simplifies complex deal structures into plain language for initial alignment
- Non-binding nature means either party can walk away even after signing
- Sellers may use your LOI as leverage to solicit higher offers from competing buyers
- Exclusivity clauses can tie up a seller without a guaranteed close
- Ambiguous language in the LOI can lead to disputes during PSA drafting
- Time spent negotiating the LOI is wasted if the deal falls apart at the PSA stage
- Some sellers view LOIs from unknown buyers as low-priority without proof of funds
Watch Out
- Attach proof of funds: An LOI from an unknown buyer without proof of funds or a lender pre-qualification letter often goes straight to the bottom of the pile. Include bank statements, a pre-approval letter, or a track record summary.
- Be specific on due diligence terms: Vague language like "standard due diligence" invites disagreement later. Specify the number of days, what is included (inspections, environmental, title, financial audit), and under what conditions the deposit becomes non-refundable.
- Watch for binding language: Some LOIs include phrases like "the parties agree to" or "buyer shall" that courts may interpret as creating binding obligations. Ensure your LOI explicitly states it is non-binding except for specifically identified provisions.
- Exclusivity is a two-way street: If you request 30-day exclusivity, the seller expects you to move quickly. Failing to begin due diligence promptly after LOI acceptance signals that you are not serious and gives the seller grounds to terminate exclusivity.
- Do not over-negotiate the LOI: The LOI is a framework, not the final contract. Spending three weeks negotiating every detail of a non-binding document wastes time. Agree on the major terms and let the attorneys handle the nuances in the PSA.
Ask an Investor
The Takeaway
The letter of intent is the starting gun for any serious commercial real estate transaction. It lets you and the seller agree on the fundamentals --- price, timeline, and contingencies --- in a simple document before spending money on attorneys and due diligence. Submit LOIs promptly, include proof of funds, be specific on key terms, and do not over-negotiate. The goal is to reach mutual LOI acceptance quickly so you can move into binding contract negotiations and due diligence, where the real work begins.