While a letter of intent is most common in commercial real estate transactions because they can involve extensive negotiation and long delays, letters of intent may also be used in residential real estate as well. A letter of intent is generally a first step in the process of buying a piece of property. The purpose is to inform the seller that the buyer intends to buy the property and to outline some of the basic terms that will be part of the transaction. The letter of intent isn't binding, but it gets the ball rolling on coming to a binding agreement.
Drafting a Letter of Intent
When drafting a letter of intent, the most important thing to ensure is that the letter makes clear that it is not a binding agreement. Because a letter of intent is written before all the terms of the transaction have been agreed to, making clear that it is not a binding agreement is necessary so you can walk away if negotiations go poorly. Of course, just because a letter of intent isn't binding doesn't mean it isn't to be taken seriously- the letter is a good way of letting everyone know that buyer and seller are on the same general page as far as making the transaction happen so that no one wastes their time.
In addition to a clause that the letter is not binding, the letter of intent typically should include a variety of other details as well. The letter should specify who the buyers and sellers are and should provide a detailed description of the land. The letter should state the anticipated purchase price and the method that will be used by the buyer to pay for the property. A time frame should be outlined with the letter both for when the purchase and sale agreement will be established and for when the final transaction will take place. Finally, the letter of intent should include information about documents that will be reviewed as part of the sale and about any items required for the buyer to do due diligence on the new property acquisition.
In many cases, a letter of intent will also include contingency clauses, such as a clause allowing the buyer to walk away from the transaction without penalty if the property fails inspection or if the buyer cannot secure financing. Contingencies should be negotiated that protect both buyer and seller and the appropriate contingency clauses will vary depending on the situation of the parties to the transaction.
Because a letter of intent generally outlines the basics of what the final transaction will become, it is helpful to have the assistance of a real estate attorney in drafting the letter of intent to ensure that your interests are fully protected under the law.