What is an LOI (Letter of Intent)?
The non-binding document that kicks off the hard part of every CRE transaction — and where broker skill determines whether a deal closes or falls apart.
Key takeaways
- An LOI outlines proposed transaction terms — price, due diligence period, financing contingencies, closing timeline — before a formal purchase agreement is drafted
- LOIs are non-binding, but the terms negotiated in them establish anchors that are difficult to move in the purchase agreement
- Most deals that fall out of contract do so after LOI, during due diligence — the LOI is the beginning of the hard part, not the finish line
- How a broker manages the LOI process — counter-offer timing, multiple offer communication, exclusivity decisions — directly determines final sale price and deal certainty
The plain-English definition
A Letter of Intent — abbreviated LOI and sometimes called a term sheet or offer letter — is a non-binding document submitted by a prospective buyer that outlines the key terms under which they propose to purchase a property. A typical CRE LOI covers purchase price, earnest money deposit (amount and whether it's hard or soft), due diligence period length, financing contingency (if any), and proposed closing date.
The LOI comes before the Purchase and Sale Agreement (PSA). Its purpose is to get both parties aligned on the major economic and structural terms before attorneys draft a binding contract. By narrowing the negotiation to headline terms first, both parties can move faster and spend less on legal fees before knowing whether they're actually aligned.
LOIs are generally non-binding, but that doesn't mean they're weightless. The terms in an LOI set anchors. Once a buyer and seller have agreed to a price and due diligence period in an LOI, moving either number significantly in the PSA is a retrading conversation — which creates friction, damages trust, and sometimes kills deals. The LOI matters.
How brokers use it in practice
For brokers, the LOI phase is one of the highest-leverage moments in a transaction. The decisions made between LOI receipt and LOI execution often have more impact on final sale price and deal certainty than anything that happens before or after.
When multiple LOIs come in — which is the goal of a well-run marketing process — the broker's job is to create competitive tension without burning relationships. For the full launch sequence that generates multiple LOIs, see the Listing Launch Guide. This means communicating clearly to all parties that other interest exists, setting a deadline for best and final offers if warranted, and advising the seller on which offer to prioritize based on not just price but buyer credibility, financing certainty, and due diligence risk.
Sometimes the highest offer isn't the best offer. A buyer with an all-cash LOI at 97% of asking price and a 21-day due diligence period is often more valuable than an offer 3% higher with a 60-day due diligence period and a financing contingency. Brokers who can articulate that tradeoff clearly to sellers — and who can quantify the carrying cost difference — earn their commission in the LOI phase.
Counter-offer timing also matters. A seller who takes 10 days to counter an LOI signals low motivation to the buyer. Brokers who manage response timelines — keeping the process moving without creating pressure that spooks buyers — create momentum that reduces deal fallout rates. Tracking where each LOI sits across multiple active deals is where strong pipeline management pays dividends.
Common misconceptions
The most common and costly misconception about LOIs: that receiving an accepted LOI means the deal is done. It isn't. Industry data consistently shows that 20–30% of commercial transactions that reach LOI do not close. The leading causes are due diligence discoveries, financing failures, and buyer retrades on price after inspection or financial review.
The LOI is the beginning of the hard part, not the end. The period between LOI execution and PSA signing is when the real work happens — organizing due diligence materials, preparing the seller for buyer requests, maintaining buyer engagement, and monitoring the financing timeline. Brokers who go quiet after LOI and re-emerge at closing are leaving significant value on the table and accepting unnecessary deal fallout risk.
A second misconception is that an LOI with a shorter due diligence period is always better for the seller. In practice, a buyer who is under-resourced for due diligence — and takes a short period because they had to — is more likely to use the inspection process to justify a price reduction than a well-prepared buyer with slightly more time. Match the due diligence period to the asset complexity and the buyer's sophistication, not just the calendar.
Frequently asked questions
Is an LOI legally binding?
Generally no — LOIs are structured to be non-binding so both parties can walk away if the formal PSA negotiation breaks down. However, certain provisions (like confidentiality or exclusivity clauses) within an LOI can be binding if specifically drafted that way. Always have legal counsel review before assuming.
What's the difference between an LOI and a purchase agreement?
An LOI is a brief, non-binding summary of proposed transaction terms — typically 1–3 pages. A Purchase and Sale Agreement (PSA) is the full legal contract that governs the transaction — representations and warranties, default provisions, closing mechanics, and all the details that the LOI omits. The PSA is drafted after both parties execute the LOI.
Should a seller accept the first LOI or wait for multiple offers?
It depends on market conditions and the asset. In a competitive market with strong deal flow, waiting 2–3 weeks for multiple LOIs often produces 5–15% higher prices and better terms. In a thin market or for a specialized asset with a limited buyer pool, accepting a strong first LOI quickly may be the right call. Your broker should advise based on actual buyer interest, not a blanket policy.
What is earnest money and how does it work in an LOI?
Earnest money is a deposit paid by the buyer at LOI execution or PSA signing to demonstrate good faith. The LOI specifies the amount (typically 1–5% of purchase price) and whether it's "soft" (refundable during due diligence) or "hard" (non-refundable from day one). Hard earnest money signals stronger buyer commitment and is more valuable to sellers in competitive situations.