A Brief Introduction About the Letter of Intent Real Estate
A letter of intent real estate is not a legally binding document. It merely conveys the intention of the buyer to the seller that the former is interested in buying a particular property owned by the seller.
Consider this situation. There is this commercial real estate that seems to be perfect from all points of view. However, you are having second thoughts about making a firm offer and, at the same time, don’t want to lose the opportunity to buy this property. This is when you send a letter of intent to the seller.
In the case of commercial real estate, before an official commercial real estate lease is finalized, a letter of intent for real estate lease commercial is sent by the prospective buyer.
Through the letter of intent, you let the property owner know that you are not just interested in buying the property, but what you intend to use the property for. You provide sufficient information to the seller, which will help him or her decide whether they should go ahead with you or talk to other prospective buyers.
Who Takes the Letter of Intent Real Estate?– People Involved
A letter of intent real estate is, in most cases, written by the buyer to the seller of commercial real estate. The size of the letter of intent would depend on the complexity of the property deal, as a lot of details would have to be incorporated.
A letter of intent for real estate lease is not a legal contract, and hence, it cannot bind the buyer to buy the property or the seller to sell the property. If you are serious about buying the property, then you need to convert the letter into a binding document. The property owner, in this case, cannot negotiate with any other buyer.
Purpose of the Letter of Intent Real Estate– Why Do You Need It?
A letter of intent real estate is required when the prospective buyer of commercial real estate wants to convey their intent to purchase to the seller.
The letter of intent not only mentions that you are interested in buying the property but details of what you intend to do with the property. Though it is not a formal offer of purchase of the property, the letter of intent provides sufficient details for the owner to decide whether he or she will sell or lease the property to you or continue to negotiate with other prospective buyers.
Though a letter of intent has no legal validity, it is the first step for you as a buyer of commercial real estate to inform the owner or seller that you would be interested in the property.
The letter of offer will contain all your important information like your full legal name and address, the terms of your offer and so on. If the owner wants to sell the property to you, then preparing the sale or lease agreement will not be a problem as all the relevant information will be available.
When both you and the owner of the property decided to finalize the contract, then a formal contract can be prepared for the transfer of ownership of the property.
Contents of the Letter of Intent Real Estate – Inclusions
A letter of intent real estate is an important document, though it has no legal standing. It lets the seller or owner of the property know that you are interested in buying the property. Though it is not an official bid for the property, it does provide sufficient information to help the seller decide whether you should be shortlisted or not.
Here are the contents of a letter of intent for real estate:
- Names of parties: The names of the prospective buyer and seller must be included in the letter
- Date of the letter: The date on which the letter is being sent to the seller must be mentioned
- Address of the property: The address of the property in question which the buyer intends to purchase has to be included
- Offer price: The tentative offer being made by the buyer and where the advance for the same would be deposited has to be stated. The letter also needs to mention when the balance payment will be made.
- Possession: The date on which the possession of the property would be made has to be mentioned. That full and final payment for the property would have to be made before handing over the property has to be stated
- Inspection of property: Before proceeding to the binding agreement, the buyer will have the property inspected by an official agency of their choice to ascertain if any repair work needs to be undertaken with respect to mechanical, structural, electrical, plumbing, lead-based paint hazards, pest-related damage, and any other inspection which would be mandatory as per the local laws
- Financing: The details of how the property would be financed by the buyer will be mentioned
How to Draft the Letter of Intent Real Estate?
Points to Consider While Preparing the Agreement
While drafting a letter of intent for real estate, the following points need to be considered:
- Names of the concerned parties: There are two parties in the letter of intent, the buyer and the seller. Their names need to be mentioned as well as the relationship between them
- Property Address: The address of the property which the buyer has interested in should be mentioned
- Price: The price which the buyer is offering the seller, including the amount of advance and when the balance amount will be paid needs to be mentioned
- Possession: The date on which possession would be given to the buyer would be mentioned
- Inspection: Before the binding purchase agreement, the buyer will need to satisfy himself or herself whether there are any major repairs to be undertaken with regard to the property
- Financing: The buyer will provide the details of financing the property
- Closing costs: The distribution of the closing costs between both parties
- Standard provisions: The standard provisions as required by the laws of the state need to be stated
- Stand still: This clause states that the seller cannot enter into any negotiation with another buyer unless the agreement is abandoned for some reason
- Non-binding: The parties are not contractually bound by this letter
Negotiation Strategy
As a letter of intent for real estate is not binding on the parties, the buyer and the seller can negotiate the price of the property or the payment terms. Once the buyer and seller have come to a mutually agreed price, they can go ahead with a formal legal contract, which will be a binding agreement.
Benefits & Drawbacks of the Letter of Intent Real Estate
The benefits of a letter of intent real estate are:
- Communication of intent: The prospective buyer will let the owner or seller of the property that he or she is interested in buying the property. The seller would be aware that there is a potential buyer of the property and if the terms and conditions mentioned in the letter of intent are favorable, then both can enter into a binding agreement
- No earnest money: Unlike a formal offer of purchase, no earnest money has to be deposited for sending a letter of intent. Only when the deal is finalized, does the question of payment arise? In the meantime, you can inspect the property and negotiate the price
- Flexibility: The owner is free to negotiate with other buyers, and the buyer is also not bound by law to purchase the property
The drawbacks of a letter of intent real estate are:
- Time-consuming process: A letter of intent provides almost the same information as a formal purchase offer. There is a lot of time spent by you in getting a letter of intent drafted by either you or your real estate attorney. Once you and the seller decide to sign a binding contract, there will be duplication of effort as a formal purchase contract will have to be prepared. Apart from the legal costs of preparing these documents, the value of the property might rise or fall.
What Happens In Case of Violation
When a prospective buyer of a commercial property decides to inform the seller that he or she is interested in the property, they send the seller a letter of intent for real estate.
The seller can examine the letter of intent real estate and decide whether he or she will enter into further negotiations with the buyer. The letter of intent has nearly all the details that a purchase contract has, but unlike a formal contract, neither party is legally bound by the contract.
There might be many buyers who are interested in the property, and it is the seller’s discretion as to which buyer he or she would finally choose.
Law does not come into play unless both parties enter into a legally binding agreement.
Though a letter of intent real estate has no legal bearing and therefore there is no penalty for violation of the same, it is certainly a useful tool for getting the buyer and the seller together. The two parties can then negotiate the terms and conditions together, and if there is an opportunity where both can benefit, then a formal contract can be entered into.
The letter of intent offers the buyer an opportunity to inspect the property to determine its condition and find out the extent of repairs required. Thereafter, the buyer can negotiate a more competitive price.
If you are looking for that dream commercial property and don’t want to lose out to other prospective buyers, then go ahead and send a letter of intent for real estate to the owner or seller of the property.
What a letter of intent does is that it informs the seller that you are a serious contender for the property. The seller can go through your proposal to see if it makes sense to go ahead with it. The seller has the flexibility to choose other buyers(1), though if your proposal stands out from the rest, you might be selected.
Neither the seller nor you are bound by a letter of intent(2), and there are no legal implications. You can inspect the property to find out if the price is higher than the value of the property or not.
So before you get into a formal legally binding agreement for purchasing commercial real estate, examine the property to your satisfaction and then sign on the dotted line.