There are so many benefits of investing in commercial real estate! It is a tangible asset – an asset with potential for both appreciating value and equity. And if you’re new to the commercial real estate world, you don’t want to lose earning potential by starting off on the wrong foot!
One of the most important documents you need to be aware of is a letter of intent (LOI). An LOI is both a sign that you are sincerely interested in purchasing/selling the property and an initial outline of the sale terms between you and the other party. In a few words, it is an offer letter.
An LOI is significant because it is the middle-ground between inquiring about a property and drawing up a legally binding contract. You can also think of it as a point of reference for the buyer and seller as they move further into the transaction. With this in-mind, an LOI is intended to save both parties time, which is growing increasingly more valuable in today’s commercial real estate market.
Sounds simple enough, right? In fact, there are several facts about a letter of intent that you should know about:
Unlike a contract, an LOI is short, is written in a letter format, and is no more than one to three pages long. This is because, as an initial offer, the LOI mostly includes preliminary information such as:
Information of the buying/selling parties
Property information (address, square footage, gross income, operating expenses, etc.)
Purchase price (including earnest money)
Due diligence period (for inspections)
LOI expiration date (usually 5 to 10 business days after the offer)
Close of escrow/date of possession
It’s worth noting that an overly-detailed LOI could actually be a detriment to you legally. However, because this is the first step in negotiating what you want out of the exchange, anything of importance to you should be included.
In most cases, an LOI is not legally binding because it is the initial agreement on the larger points of the sale – such as the purchase price and financing – rather than minor details.
At the same time, an LOI is meant to be a sign of good faith between the parties. In fact, if either party deviates from the original agreement, the following conditions are enough to enforce an LOI as a binding contract:
The parties are legally capable of entering into a contract;
The parties reached a mutual agreement;
The subject of their agreement isn’t illegal; and
And each party receives consideration.
This does not mean, however, that a party cannot change their terms following the initial LOI or pull out of the deal entirely based on new information, say, following an inspection.
Even though letters of intent may be agreed upon, circumstances can change that impair the parties from progressing with the sale. If this happens, the initial offer may be withdrawn altogether. Examples include worrisome inspection results or a missed deadline by the seller during the due diligence period.
Additionally, and as mentioned previously the LOI is not the final contract. The parties need to have 1) a binding contract drafted, 2) a closing date, and 3) a title insurance agent or notary to witness the signatures for the sale to be finalized.
Whether you are buying, selling or managing a property, you need legal guidance and representation to protect your best interests. Learn more about Rochford Law & Real Estate Title can do for you!