What is the difference between an Offer to Purchase & a Letter of Intent (LOI)?
The main difference between these two instruments in the real estate world is their intention, purpose and legality.
Letter of Intent
A letter of intent is just what it implies. It is simply a letter drawn up in many various forms to “signal” your intent to move forward on a project under certain terms. There is no legal requirement on your part to move forward – and neither party is bound by the terms of the letters on the page. The purpose of the letter of intent is simply a vehicle to move the parties further towards a legally binding agreement with small print items to be worked out in subsequent stages.
Offer to Purchase
The Offer to Purchase is a similar instrument – the biggest difference being that once the parties have signed off, this is a document that legally binds each party to perform their obligations. Most importantly, the buyer is obligated to move forward on the transaction or suffer the financial loss of his/her deposit.
The key thing for a buyer (or tenant) to understand is which of these is appropriate for which types of transaction:
- The Lease – a lease is an extremely complicated legal document which can be written in 1000’s of different ways. This is why the Letter of Intent is typically the initial offer. The broad terms are spelled out – rent, options, date of takeover, date of rent commencement, etc. Once the landlord, provides his/her full lease for execution, the document can go back & forth for numerous revisions until both parties are satisfied.
- Purchase of Property – most property acquisition contracts are prepared on a standard Offer to Purchase document that has been approved by a local or state real estate oversight commission. A letter of intent is sometimes used to negotiate the sales price, but typically the property isn’t taken off of the market until an Offer to Purchase Contract is executed. This binding document allows the purchasing party to incur the expense of further examining the property, without the threat of additional parties bidding on the property.
- Purchase of a Business – either document can be used in this process, however it is in the best interest of both to utilize an Offer to Purchase with the terms of the deal spelled out in detail. Most of the time, the due diligence on the buyers part is completed prior to presenting an Offer to Purchase so that the parties can reach a closing settlement as quickly as possible and avoid the business being taken off the market for longer than necessary.