An LOI is a Letter of Intent, but it really is a letter of serious interest. The LOI is basically an offer to purchase spelling out the general terms. The letter of intent is the best way to start in negotiating the terms and conditions before spending time and money on a binding Purchase Sale Agreement (PSA) is drafted. A letter of intent is being used to purchase real estate over $1m but can be used for smaller purchases amounts. Since that real estate prices gone very high in the past 5 years and many homes and investment properties are way more than $1m, it will be highly recommended to use the Letter of intent before spending money and time on a Purchase Sale Agreement (PSA)
Usually LOI's are non-binding, they are not legal documents obligating either party, rather, they are used to outline simply a general understanding of the terms and conditions of a purchase. The Buyer wants to review and to find out if the seller is interested in selling in a price range the buyer has in mind based on the minimal information already provided to him. Most of the LOI a has non-binding clause in it. Which means Buyers and Sellers are not obligated to follow through with the LOI, even if both parties agreed and signed the LOI. Many Buyers and Agents like to start the negotiation with the LOI, but in the end, the agreement needs to be on a purchase agreement to be binding.
Buyers will often start with an LOI when they're initially investigating a Real Estate purchase rather than with a complete purchase agreement. An LOI allows a buyer to show that they're interested enough in a transaction to proceed with due diligence, but may not have enough information to draft a complete purchase agreement yet.
As a rule of thumb, the more involved the transaction and larger the size, the more likely a buyer will be to start with an LOI rather than a purchase agreement. Nonetheless, an LOI can be used effectively in any size transaction if both the buyer and seller are sincere and simply need more time and information before they can draft a formal agreement.
