What Is an LOI in Commercial Real Estate? (Explained Simply)

A buyer likes your building. Before anyone signs a contract, they send you a letter of intent.

It’s usually two to five pages. It’s mostly not binding. And it shapes almost everything that happens next.

Here’s what an LOI is, what’s actually in it, and how to compare more than one.

The Short Answer

A letter of intent (LOI) is a buyer’s written offer that lays out the main terms of a deal before the full purchase contract gets drafted.

• It proposes price and key terms
• Most of it is non-binding
• A few clauses inside it usually are binding
• Once both sides sign, the attorneys turn it into a purchase and sale agreement

Think of it as the deal’s outline. The contract fills in the details, but it rarely strays far from what the LOI said.

What’s in a Commercial LOI

Most LOIs cover the same core terms:

• Purchase price
• Earnest money deposit: how much, and when it becomes non-refundable
• Due diligence period: how long the buyer gets to investigate
• Financing contingency: whether the deal depends on the buyer getting a loan
• Closing date
• Exclusivity: how long you agree not to negotiate with anyone else
• Confidentiality: keeping the deal terms private

Two terms deserve extra attention.

The deposit. “Soft” money is refundable during due diligence. “Hard” money isn’t. A deposit that goes hard early shows a committed buyer.

The financing contingency. If the buyer can walk away when their loan falls through, your deal depends on their lender, not just on them.

What’s Binding and What Isn’t

This is where sellers get confused. The LOI as a whole usually isn’t a contract. Either side can walk away before signing the purchase agreement.

But that’s not the full picture. As law firm Sands Anderson explains, certain provisions inside an LOI, like confidentiality, exclusivity, and how long the LOI stays in effect, are often binding and enforceable even when the rest isn’t.

That matters most for exclusivity. Once you sign, you may be legally locked out of talking to other buyers for weeks.

The line between binding and non-binding also depends on the exact wording. Law firm Bean Kinney notes that LOIs have been a common source of litigation, and that whether one binds the parties depends on the language in the document.

The takeaway: have a real estate attorney read every LOI before you sign it, even though it’s “just a letter.”

How to Compare Two LOIs

The highest price isn’t always the best offer. Here’s an illustrative example on the building from Article 2.

LOI A:

• Price: $2,180,000
• Deposit: $25,000, refundable throughout
• Due diligence: 90 days
• Financing contingency: yes
• Exclusivity: 90 days

LOI B:

• Price: $2,120,000
• Deposit: $100,000, non-refundable after 30 days
• Due diligence: 30 days
• Financing contingency: none (cash buyer)
• Exclusivity: 30 days

LOI A pays $60,000 more on paper. But it ties up your property for 90 days with a buyer who can walk for any reason and lose nothing.

If LOI A falls through after four months, you relist and start over. At an assumed $12,000 a month in carrying costs, that’s $48,000 gone, plus months of lost market momentum. Some buyers may also wonder why the first deal died.

LOI B is $60,000 lower, but it puts $100,000 of the buyer’s money at risk in 30 days. That’s a buyer who intends to close.

Which is better depends on your situation. The point is to compare certainty, not just price.

Mistakes Sellers Make With LOIs

• Accepting the highest price without reading the contingencies
• Agreeing to a long exclusivity period with a fully refundable deposit
• Signing without an attorney because “it’s not binding”
• Leaving key terms vague, which just moves the fight to the contract
• Not setting an expiration date, so the LOI hangs open indefinitely

Recap

• An LOI is a buyer’s written offer outlining the main terms before the contract
• Most of it is non-binding, but confidentiality and exclusivity clauses often are binding
• The deposit, due diligence period, and financing contingency matter as much as the price
• Compare LOIs on certainty of closing, not just the headline number
• Have a real estate attorney review every LOI before you sign

Final Word

A strong LOI isn’t the one with the biggest number. It’s the one most likely to close at a number you can live with. Read the terms around the price, and protect yourself before you agree to exclusivity.

See how commercial properties reach buyers before the first LOI. Browse commercial listings at hutfin.com.