Purchasing real estate is a difficult process, and understandably, you are unsure of where to begin.
Once you’ve decided on the home you intend to purchase, the first step is writing a letter of intent (LOI), a non-binding document written to guide both the buyer and seller during the negotiation process.
In this article, we will help you understand the importance of a letter of intent, how to write and structure it, and how it can serve as a template for drafting a legally enforceable contract.
What is a Letter of Intent?
A letter of intent is a non-binding document given to the seller by the buyer. An LOI is also known as a Letter of Understanding, a Memorandum of Agreement, or a Memorandum of Understanding.
Besides being a legal requirement to buy property, it also allows the buyer to put a hold on a property, especially if it is still in the pre-sale stage. The mutually signed LOI is used to secure the parties’ exclusive efforts in completing the deal, indicating that the parties have agreed on key terms within the agreement.
Suppose you’re the third individual to submit an LOI. You can only buy the property if the first and second prospects who have previously expressed interest in the property choose to back out of the deal.
If you’re working with real estate brokers in the Philippines, you can expect them to supply a template LOI during the property tour where you also informally discuss the sale of the property. Otherwise, you, as the buyer, can create the LOI in handwritten format.
Essential Details That Should Be Included in the LOI
Here is a guide as to what should be included in a letter of intent:
These are the entities involved in the agreement. In referring to the involved parties, you should indicate the following details:
- Name of seller and buyer
- Address and contact information of both parties
- Other authorized parties, such as an assigned real estate broker
This information details the real estate asset’s full address, descriptions of the structure’s boundaries as well as existing fixtures and attachments.
The offer is the conditional amount you are willing to provide to acquire the property, which becomes legally binding if accepted. The details of the offer should include the following:
- Initial deposit amount
- Mode and terms of payment
- Period of due diligence, where the buyer evaluates the company’s track record
- Deadline for the seller to agree to the terms
A well-written LOI clearly expresses the parties’ intentions and terms. Uncertainty, conflicts, and even litigation might result from an unclearly stated LOI about what’s expected of each of the parties, which is why disclaimers are important.
These clauses aim to limit the application of certain terms in the contract. They should also specify that the LOI is non-legally binding unless the parties identify and mutually agree that specific sections are binding such as the purchase price or financing structure for acquiring the property.
Writing the Letter of Intent
Now that we have clarified what the LOI entails, it is important to know how a letter of intent is structured, based on the different parts the letter should contain. An LOI is typically two or three pages long.
Use these steps to guide you on how to write an LOI.
Start with a proper salutation
Ideally, you should address the recipient by their name along with their title (Mr./Ms./Mrs.) instead of the generic “Dear Sir/Ma’am” or “To whom it may concern.” Information about the property owner is usually available on the listing site, or it can be provided by your real estate agent.
Write an introductory paragraph
This should describe the purpose of the LOI – that is, your interest in purchasing the property or space. For example, ‘We present this letter of intent to purchase [property name and address]. Let it be known that the terms and conditions outlined in this LOI are not final and binding but are only an expression of our intent to enter into a Purchase and Sale Agreement. ’
List the essential details in the body
In the previous section, we identified the essential components to include in the body of the LOI. Ensure there is no incorrect information on the parties’ legal names, property descriptions, and purchase terms, such as the property price.
Write a closing statement
This is where you specify the non-binding nature of the agreement. In cases where certain sections are binding, you should identify what those are. You can also include here a non-disclosure agreement or confidentiality clause, proposed remedies should there be a breach in the LOI’s binding provisions, and a request for a signed copy of the LOI within a specific period.
Here is a sample of how to conclude the LOI:
Both parties acknowledge and agree that the Purchase Agreement will take precedence over this letter of intent. Both parties agree to proceed following the terms and conditions outlined in this letter of intent until the purchase agreement is signed.
This letter of intent is not a binding offer to buy or a binding offer to sell. If you agree with the above terms and conditions, please sign the enclosed copy of this Letter of Intent and return it on or before [Expiration Date] to confirm the status of our negotiations.
In a Nutshell
The letter of intent is a straightforward document necessary in minimizing miscommunications as you enter into discussions with a real estate broker. RE/MAX Gold can help you sort out the technicalities in real estate investing while providing the best property deals in your preferred location.