What is a LOI in Real Estate?: Letter of Intent Multifamily EXPLAINED
This article is part of our guide on passive investing in multifamily via syndication, available here.
A letter of intent is an essential document for carrying out a multifamily real estate transaction. This preliminary agreement shows commitment between buyers and sellers or landlords and tenants. In short, it can be used when buying or leasing commercial real estate.
So, what’s a letter of intent multifamily? What does it contain, and how can you draft one?
Read on to find out why an LOI agreement is one of the most important real estate transaction documents and how you can structure one.
What does an LOI Stand for in Real Estate?
A letter of intent (LOI) refers to an agreement where two parties commit to doing business together. It’s the initial commitment made before the fine details of the deal have been worked out.
An LOI in real estate outlines the basic terms and conditions for the potential real estate transaction. The buyer, seller, landlord, and tenant can then negotiate the deal based on the detailed provisions.
An LOI is generally drafted by the buyer or commercial real estate broker during the negotiation process. All parties then sign the document once they’ve agreed on the provisions. This document prepares the way for a legally binding contract, especially in commercial real estate.
What is an LOI in Commercial Real Estate?
In commercial real estate, the buyer uses a letter of intent to declare interest in purchasing a commercial property that generates income. A typical commercial real estate transaction consumes a lot of time and money. It isn’t as straightforward as other transactions. However, letters of intent in commercial real estate streamline and record different aspects of the deal.
The letter of intent isn’t a legally binding contract. It’s simply used to declare that both parties are interested in doing business. Once the fine details are ready, they can now both sign a legally binding sales contract.
A commercial real estate LOI can protect both parties as they prepare to get into a formal contract in the future.
What is a Letter of Intent Multifamily?
A letter of intent in multifamily is an agreement to declare a buyer’s interest in purchasing a multifamily property. A multifamily property is a residential property with more than five units.
A buyer can use a letter of intent to purchase a townhome, duplex, apartment complex, or condominium-style multifamily property.
Letter of Intent to Purchase Multi family Property
As we’ve seen, a letter of intent to purchase multifamily property isn’t an offer. It’s like agreeing to acquire the property over the phone but putting it down on paper to make it a more formal agreement.
To help us understand a multifamily letter of intent better, let’s look at three main differences between an LOI and an actual offer:
- An LOI isn’t legally binding: An LOI is a non-binding agreement where the parties can change the terms or pull out if you’re no longer interested. However, an LOI can be binding depending on the terms and provisions detailed in the agreement. It’s better to discuss your concerns instead of pulling out of the deal. On the other hand, an offer is binding. Once you sign an offer, you’re bound by the terms of the contract.
- An LOI isn’t enforceable: Since an LOI isn’t binding, it isn’t enforceable. Meanwhile, if you sign an offer and the seller doesn’t meet their end of the bargain, you can take action through a court of law. You can be awarded damages for the seller failing to close. This isn’t the case with an LOI.
- An LOI is brief: An LOI is 1-2 pages of quick basics. It simply states the terms without going too in-depth. On the other hand, a sales contract is comprehensive and covers every possible aspect of the deal. It comprises multiple pages explaining everything both parties must do in that transaction.
So, why use an LOI for multifamily deals if it isn’t binding and is brief?
LOIs save both parties a lot of time and effort. They’re easy to prepare and make complicated transactions more streamlined.
How to Craft Your LOI for Commercial Property Like Multifamily
Typically, a commercial real estate letter of intent is drafted by the buyer either before or after seeing the property to conduct informal negotiations with the seller. Below are things to keep in mind when crafting an LOI:
- Use a letter structure – First, you need to structure your letter of intent like a letter instead of a point form.
- Draft an opening paragraph – Write an opening paragraph to include the reason for your letter of intent, and also state your goal for the agreement
- Mention all parties – Now state all the parties involved in the transaction, including the buyer, seller, broker, and any other third parties. Ensure you mention each party’s legal and financial responsibility, as well as the property obligations. Also, specify the party represented by the broker and the commission they’ll collect from the deal.
- Write the property description – Now it’s time to draft a comprehensive report of the subject property. The description should include the property’s square footage, lot size, and physical address. Include the commercial property’s projected revenue value and expenses such as maintenance and management.
- Draft the deal terms – This is where you mention what’s expected of both parties during the due diligence stage. The due diligence stage is the period between the signing of the LOI and the lease agreement signing or closing day. Terms to include are the purchase price, closing costs, expected closing date, and the LOI agreement date of expiry. We’ll look more deeply into the LOI terms in a while.
- State disclaimers – Every party may have conditions that may lead to the termination of the agreement. State these caveats and any other reasons that may nullify the LOI.
- Write a closing statement – Conclude the agreement with a sentence or two to sum up your LOI. Your conclusion should mention what the parties will do once they start negotiating a formal contract. Both parties agree that the sale or lease terms could change once formal negotiations start, but the proceedings will be straightforward. This is where both parties append signatures to show that they understand and agree to the terms.
Now that we’ve understood how to craft an LOI for commercial properties let’s have an in-depth look into what to include in this agreement.
What to Include in Your LOI for a Proposed Real Estate Transaction?
When drafting an LOI for commercial and multifamily properties, it’s essential to understand the vital elements of the agreement. Here are the basic provisions that sellers want to see in the agreement:
- Deal particulars
- Acceptance date
Your introductory paragraph should indicate the reason for the LOI agreement, such as the sale of a multifamily property. Include your company’s name, the property, and its location.
The following section should cover the deal details, including:
- Parties – These are the names of all the parties involved in the deal
- Purchase price – The buyer must include the price they’re paying for the property
- Terms – The LOI must consist of the terms of the transaction, such as the security deposit, land survey information, title insurance policy, and tax returns.
- Disclaimers – This section also mentions the conditions that may lead to the voiding of the deal.
- Earnest Money Amount and Due Date – When the earnest money is due and for how much.
- Due Diligence Timeline – How long is the due diligence period before the contract goes firm.
- Closing Timeline – How many days from the start of the contract until you officially expect to close on the property.
The acceptance date is simply the date until which the sale or lease agreement is valid. You can call it the expiry date. If this date passes and you’re yet to meet the terms of the deal, then it may indicate that you’re no longer interested. The seller can then negotiate with other prospective buyers.
An LOI agreement isn’t valid without signatures from both parties. Signatures from both the seller and buyer show they’re committed to it.
Frequently Asked Questions About A Real Estate LOI
A letter of intent to purchase must include an introduction, deal details, acceptance date, and signatures from both parties.
No. A letter of intent is primarily drafted before the fine details of the transaction have been finalized. Once the details are ready, the parties can sign a purchase agreement. The parties move on to a purchase and sales agreement once theye have agreed upon the terms and conditions of the LOI.
An LOI can be non-binding or binding, depending on the agreement’s provisions. On the other hand, an offer is a buyer’s proposal to the seller. An offer becomes binding if accepted.
Since an LOI is a non-binding agreement, any of the parties can choose to walk away at any time. However, this depends on the terms of the agreement. Some agreements are binding, while others include a “cancellation fee”.
LOI in Commercial Real Estate - Conclusion
An LOI is a document that shows a commitment of a buyer and seller or property owner and tenants to carry out a transaction. This agreement includes an introduction, names of the parties involved, terms of the agreement, disclaimers, acceptance date, and both parties signatures.
You can draft an LOI or get help from your real estate broker. Once the fine details of the deal have been worked out and you’ve carried out your due diligence, you can move on to working on an actual offer.
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