There are some common terms everyone interested in real estate investing should know. Understanding the vocabulary in an industry will help you communicate more effectively with other investors and navigate transactions easier.
One of the terms you’re likely to come across is LOI. You may wonder…what is that?
So, let’s break it down.
What is an LOI in Real Estate Investing?
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An LOI is actually quite simple. It stands for Letter of Intent, a document that outlines the terms and conditions of an agreement between two parties before the agreement is finalized.
Commercial real estate, is an interactive process, starting with a series of informal offers that precede the more formal purchase contract. This is where an LOI comes in.
Once the offer price moves into the range the seller is looking for, the broker initiates the offer via an LOI.
The LOI is not legally binding, but it communicates the major points of the transaction and is used as the basis for negotiating the deal
Once the buyer and the seller sign the LOI, it goes to an attorney, and the purchase contract is drafted.
What is included in an LOI?
The LOI is always submitted in writing and signed by both parties. It includes:
- the offer price
- the amount of the down payment
- how long you have to complete due diligence
- and the closing timeline
It also includes a statement that the parties involved will prepare a final written contract.
Why is an LOI important?
When making an offer, the buyer always wants to put their best foot forward. They want the offer to be taken seriously and increase the chances of having the contract accepted.
The LOI is an important element of the offer package and achieves two goals – communicating the terms of the offer and building the credibility of the buyer
Communicating credibility is an important part of the offer-making process and a good LOI is an essential part of that.
A good LOI helps to ensure that both the buyer and seller are on the same page before moving forward with the transaction.
It’s the step between preliminary discussions and the legally binding contract, which can be dense. So, the LOI is an accessible way for the buyer to keep track of the terms of the contract, as well as a way for the seller to determine the seriousness of the buyer.
No one wants to pay an attorney to draw up a formal purchase contract before the main terms of the transaction are agreed upon, and that's the function the LOI provides.
Once it’s signed, it's on to the purchase contract.
There you have it, another term to add to your real estate investing glossary.
Only three letters, but an important part of the deal!
