A Letter of Intent, or LOI for short, is a document you may have encountered if you have ever considered investing in residential real estate or even commercial real estate. ‘
In essence, it’s a means of demonstrating your seriousness about purchasing a home without yet entering into a formal contract. What happens after the LOI is sent and accepted, however, is the next question that most people have.
What Is a Letter of Intent?
A letter of intent is similar to a handshake in writing. It lays out the fundamentals of the agreement you’re putting forward, including the amount you’re offering, the closing date, and some important terms.
It helps the buyer and seller get on the same page before they hire lawyers and enter into a full contract, but it’s usually not legally binding.
What Happens After the LOI?
Things begin to proceed after both parties have agreed upon the terms in the LOI. This is typically what happens immediately after:
1. The Formal Purchase Contract
Making a formal contract known as a Purchase and Sale Agreement (often simply referred to as a PSA) is the next step. This is the actual, enforceable contract that seals the deal.
It is typically prepared by lawyers or real estate experts and contains all of the finalised terms, including price, timelines, contingencies, and more. This contract is enforceable in court, unlike the LOI.
What’s covered?
• Final terms and price
• Description of the property
• Details of the deposit
• Date of closure
• Clauses for contingencies (such as financing or inspection)
Before signing, the parties may exchange details.
2. Deposit of Earnest Money
The buyer usually deposits earnest money after signing the PSA. “I’m all in” is what this means. The sum is kept in an escrow account and is typically between 1% and 3% of the purchase price.
Unless the transaction fails for a legitimate reason, this money demonstrates good faith and is applied to the final purchase at closing.
3. Commencing the Due Diligence Phase
This is the point at which reality sets in. The buyer conducts a comprehensive physical, legal, and financial inspection of the property during the due diligence period.
Depending on the kind of property, this may entail obtaining records such as:
• Reports on titles
• Surveys of properties
• Studies of the environment
• Rent rolls (for commercial or multi-family transactions)
• Records of zoning and previous permits
In order to find any warning signs, buyers frequently enlist the assistance of experts such as appraisers, engineers, or inspectors.
4. Sending the Lender the Documents (If Using a Loan)
The next important step, if the buyer is financing the purchase, is to send their lender all required documentation. This may consist of:
• Returns of taxes
• Pay stubs
• Statements from banks
• Reports on credit
• A signed copy of the purchase contract
In order to confirm that the property is worth the amount being paid, the lender will now also order their own appraisal.
5. Title and Escrow Preparation for Closing
When financing and due diligence are almost complete, it’s time to get ready for closing. The escrow agent and title company will assist in bringing everything together.
This comprises:
• Documentation for title insurance
• Closing statement, which displays all of the money coming in and going out
• Documents for deed transfers
• Payment instructions for wire transfers
At closing, the buyer formally receives the title, the money is transferred, and both parties sign.
Final Thoughts
A letter of intent (LOI) is a significant first step in a real estate transaction, but it is only the beginning. You’ll enter more formal territory with a signed contract, deposits, inspections, and a tonne of paperwork once it’s accepted.
Knowing what happens after the LOI can help you stay ahead of the game, regardless of your level of experience with real estate transactions.
