Everyone thinks the purchase contract is where the deal gets serious.
It is not. The LOI is.
An LOI is a written offer from a buyer to a seller outlining the key terms of a proposed transaction: price, earnest money deposit, due diligence period, and target closing date. In most cases it is non-binding, meaning neither side is legally obligated to close. But do not let that fool you. A signed LOI is a serious commitment of time, attention, and credibility.
Here is what the LOI establishes:
Price. What you are offering to pay, and whether it is subject to change after diligence.
Earnest money. The deposit you put up to show the seller you are serious. It is typically at risk if you walk away without cause after the diligence period ends.
Diligence period. The window you have to inspect the property, validate your underwriting, and decide whether to proceed. This is where the real work happens.
Exclusivity. Most LOIs include an exclusivity clause, meaning the seller cannot market the property or negotiate with other buyers while you are in diligence.
Here is what the LOI does not tell you: whether the deal will actually close. Diligence exists precisely because the LOI assumptions need to be tested. We have walked away from deals after going under LOI.
We have also used the diligence window to execute our business plan before we even owned the asset. Our Gilroy acquisition: tied up with zero signed leases and it was 88%(!) leased before close.
The LOI is the starting gun. Diligence is the race.
What is the first thing you do once you have a signed LOI?
Wednesday Real Estate 101: The letter of intent (LOI)
