"Nobody remembers who came in second." – Charles Schulz
Apartment investors that are looking to purchase a property often ask me:
Which is Better: An Offer to Purchase or Letter of Intent?
First, let's define the two, then I'll discuss when to use a Letter of Intent.
1. Purchase Offer, or Purchase Agreement – A legal document that describes the price, terms, contingencies, and other details of how a buyer would be willing to purchase a piece of real estate.
2. Letter of Intent (LOI) – A preliminary document outlining the price, terms, and other transaction details that a buyer would be interested in purchasing a piece of real estate.
Note that the definitions are not too far apart, but the documents themselves are. The largest difference is a Purchase Offer is a formal legal document, that once signed by both parties becoming a legal and binding agreement. If you are working with a real estate agent or broker, this is usually the document they will have you sign if you are interested in placing an offer on a property.
A LOI is typically used as a "starting place" for negotiations on a property. Generally a LOI will be followed up by a formal Purchase Agreement after the terms are settled on. This may or may not be the case in your area, but it is a good use of the two documents.
The difference is a Letter of Intent is basically a letter stating the kind of offer you are contemplating in making. Usually it contains what I call the GENERAL items of price, terms and closing date. Most of the other legal STUFF is left out.
It is good to use an LOI to gauge the liability of purchasing the property based on the price an terms you are considering. IN other words, it is good to use to gauge wherever or not the offer you have in mind is even going to come close to making sense to the seller.
I use LOI's a lot when I am trying to buy a property for much less than what the seller says they want, more flexible terms than the seller says they want OR if I am unfamiliar with the property and area I will use the LOI to start the negotiating process while I do my due diligence work in the background.
Remember, most of the time an LOI is not a formal offer but mainly a point of understanding between you and the seller.
So, use an LOI as a method of exploration of a property and to get the ball rolling. Based on the sellers reaction and response to your LOI will tell you to move ahead with a full purchase agreement or not.