An LOI – When to Use It
What is an LOI?
Before we go into when to use an LOI let us first discuss what it is.
An LOI is simply a Letter of Intent (a.k.a., Letter of Interest). If you refer to Wikipedia, they simply state that it is an understanding between two parties before actually effectuating the terms in a formalized contract.
Thus, you can negotiate terms by text, email, or paper working out details before you actually put it into a contract. This is often done when there may be unusual situations that writing up a formal document doesn’t seem to be the best method of negotiating.
When to Use an LOI in Real Estate?
As a REALTOR®, I will often use an LOI. This is especially true when I am negotiating a lease option contract.
The reason I will use an LOI in a lease option negotiation is that there are two things going on when doing a lease option. First there is a purchase, but second, there is also a corresponding rental on the same property.
The parts of a lease option are the purchase price, the option payment, the monthly rent, the rental credit, and the duration of the option.
When doing a normal purchase you have inspections and due diligence periods. On a normal rental, you have credit checks and also a multitude of other things.
Having so many moving parts can make it tedious to be doing both a rental and purchase at the same time.
Thus, in my opinion, it is the perfect solution. You can work out the above lease option terms. Once those terms are agreed upon then you can put “pen to paper” and formalize the contract.
Where Else Would You Use an LOI?
There is a multitude of areas where an LOI could be useful.
If you were interested in buying a business, you could use an LOI to indicate your interest without actually going into a contract. Thus, you can see the selling business owner’s profit and loss statements and other books.
When buying a multifamily property or other commercial property this would be a great way to get a deal started prior to going under contract.
I can even see it being used when purchasing land especially if you have concerns on zoning and other possible concerns.
One other way is if you are looking at purchasing an investment property that is not listed on the MLS (Multiple Listing Service) sending someone an LOI could spark the negotiations on a particular home.
Is an LOI Enforceable?
In my opinion, an LOI is not enforceable. This is mainly because as the name implies it is showing intent to buy or having an interest in buying. Being interested doesn’t mean you have to commit. Thus, an LOI is not enforceable. Of course, you may want to speak to an attorney before using one.
Having an LOI in your toolbag is a great item to use when it is needed. This is a perfect tool to use without always going into a formal contract. Use it wisely and you may be able to make more deals happen.