The Difference between and the Letter of Intent and the Contract
As many of my Clients are aware, I often write my Blog about real life situations and certainly about education. This is the case here.
I want to discuss the reasons that the Letter of Intent (LOI) is used and how this relates to the Contract.
First, let’s discuss the Contract often referred to as the PSA (Purchase and Sale Agreement). The Contract is a binding contract on ALL parties, namely the Buyer and Seller of the Property. The Contract spells out the legally binding Terms and Conditions of the deal. It’s important to obtain the Buyer and Seller’s signature. While it is important if for some reason, an initial is missed on a page-this is still binding. The only way that the Terms of the Contract can be changed is by an Addendum that is signed by BOTH the Buyer and Seller. Many agents present a counter to the Contract after this has been signed and this is NOT used. The rule of thumb is that you would use Counters before the Contract is accepted and addendums after the Contract has been accepted. Emails, Text Messages do not change any terms of the contract. Also, the Agent or Broker cannot change anything on the contract unless they are a party to the Contract and this would mean that they are either the actual Buyer or Seller named on the contract.
The Letter of Intent is sometimes used to define terms before the expense or time of preparing a contract. Let me clear that the LOI is nonbinding and is used only for guidelines with which to prepare documents. Often I see items in the LOI that the Seller may not want to agree to when the Contract is prepared. Then it is appropriate to prepare a Counter to the LOI. Even when these are signed by the Buyer and Seller it is still not binding.
Many times the Agent will write the LOI and then once the basic items have been agreed to the LOI is shipped off to the Attorney to actually write the contract. A good Real Estate Attorney will write the contract as close as legally possible to the LOI.
I do not always use an LOI on a basic Contract as the LOI is non-binding and if we are going to go to contract, then let’s do it. However, it does NOT mean that I will be discussing the Terms that my Client wants incorporated into the Contract with the Cross Agent.
I use the LOI always when the Attorney is preparing the Contract. In fact, usually I will send the LOI over to the Attorney for Blessing before presenting it to the other Agent.
The Letter of Intent is really used to define the outline of the final Contract. Sometimes this will prevent a long list of Counters to the Contract.
Remember that the LOI is only an outline and does not bind anyone to the Terms-only the Contract does this.
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Great blog post! Always good to know the difference between the two, but how they also work hand in hand with each other when it comes to preparing the actual contract. Especially in today’s market, with everything changing so quickly!
This is so spot on, Linda – setting the right expectations and good communication are the bedrock of a win-win transaction.
It’s important to understand that point Linda made – the LOI is an outline of the terms. Final terms are always subject to final approval. On the financial side, dealing with a lending institution, this means final underwriting and approval will be needed prior to the issuance of a term sheet. A good agent, broker, etc will always make you aware of that caveat so there aren’t any surprises at the 11th hour!
Great Info as always. It is kind of like a rough draft back in English class. Always subject to revision prior to the Final Draft.
I like the analogy of rough draft!
Thanks for explaining the different between the two items. The LOI starts negotiations. Then, the purchase of sale contract are the final terms agreed upon two parties that will be signed and become a binding contract.
Harry