Letters of Intent in Texas Real Estate Sales

Topics Covered

Purpose of a letter of intent
Non-binding and non-contractual nature of an LOI
LOIs in non-standard and creative residential transactions
Deal points to consider in putting together an LOI

Tentative Agreement on Major Deal Points

What Texas real estate transactions can benefit from using a non-binding letter of intent? The answer is nearly all of them. A letter of intent (LOI or term sheet as it is sometimes called) is an easy, effective, and inexpensive means of determining if tentative agreement exists on material terms—and doing so early in the process before substantial time is invested. Disagreements, misinterpretations, and ambiguities become immediately apparent as the parties work through the discipline of briefly outlining a dozen or so material terms in writing.

Often the parties think they have substantial agreement on major deal points but do not. Starting with an letter of intentis a painless way to establish tentativepoints of agreement.

Binding Versus Non-Binding Elements

Even though it is technically possible to include both binding and non-binding deal points in a single LOI, the best professional practice is to avoid doing this. The LOI should clearly stipulate that it is non-binding, period. It is simply not a good idea to mix binding and non-binding elements within the four corners of the same document.

Properly written, an LOI is not a contract. In fact, the best practice in LOI drafting is to use plain English and avoid legal jargon entirely. Save the legalese for the contract. Most parties prefer that the LOI does not even look like a contract or contain such phrases as “buyer shall” or “it is agreed that. . . . “ That is contract not LOI language. Everyone wants to be sure that they are not formally agreeing or binding themselves to anything at this early stage.

Preparation and Execution

Since an LOI is a non-binding, non-contractual, unenforceable document, putting one together does not constitute the practice of law (so long as it is not accompanied by legal advice) nor is it considered the brokerage of real estate. In fact, many LOIs and term sheets in the real world are produced by the parties who then take them to their attorney or broker for purposes of putting together the formal contract.

It is not strictly required that an LOI be signed in order to accomplish its objectives. However, signing the LOI is preferable because it represents a psychological (if not legally enforceable) commitment by the parties to move forward.

Residential Real Estate Transactions

The utility of an LOI in a complex commercial transaction is self-evident. But what about residential real estate? Some realtors will argue that LOIs should not beused in residential transactions, even when big dollars are at stake and complex or non-standard factors are present. This view is based on the dated notion that commercial deals are inherently more complex and expensive. But is that true? Why should a transaction for a $750,000 commercial warehouse get better negotiating or contract treatment than a $1.5M home? And what if the residential deal involves seller-financing, subject-to clauses, wholesaling (contract assignment), a wraparound, or any number of other creative approaches that are commontoday?

Consider wraparounds. After changes to the Finance Code in 2022, residential wraps are now more complicated than many commercial transactions—and there is not even a promulgated addendum for wraps. An LOI can definitely be a helpful first step.

The old rationale that residential transactions are simple and cheap is no longer valid. Utilizing an LOI as a residential tool can help determine if the parties really have a tentative agreement on major deal points. If so, then it becomes worth time and effort to put together a proper contract with all the addenda.

LOI discussions can also identify if an attorney will be needed in order to draft a custom special provisions addendum to the contract.

Texas Realtors LOI Form

TXR-1803 (“Commercial Letter of Intent to Purchase”) is a promulgated form available to brokers and agents who are members of Texas Realtors. The form states that “The terms of this letter of intent are not binding upon either Seller or Buyer” and goes on to provide a minimalist list of important deal points.

Can this form be used for residential transactions? Yes. The word commercial appears only once (in the title to the document) and can be easily struck and initialed. All the deal points following the title are equally applicable to residential transactions. Although expressly non-binding, the form contemplates that it will be signed and dated by the parties.

TXR-1803 is a good starting point but the form is intentionally brief. Beyond TXR-1803, there is no accepted standardized or promulgated form for a letter of intent in Texas.

Assembling a Custom LOI

Highlights of a custom LOI might include:

Preliminary Items
A clear statement that the LOI is non-binding
Effective date?
Who are the parties?
What is the street address of the property?
Are the parties represented by counsel?
Who will prepare the contract?

Financial
What is the sales price?
How will the sales price be paid—cash, seller-finance, or third-party financing?
Include additional details not mentioned by seller-financing addendum
What is the earnest money (and any additional earnest money)
Will there be a financing contingency?

Option or Inspection Period
Which seller’s disclosure will be used? TREC #55-0 or TXR #1406?
What is the option fee and how long is the option period?
Will an extension be permitted? Extension fee?
Will the seller provide previous repair documents and inspections?
Will the seller provide a copy of the lease and rental history if the property is rented?
How will the survey be handled? Who will pay?
Are there confidentiality concerns that may require an NDE?

Property Condition—Expectations and Assumptions
That all major systems will be delivered in good and working condition
That seller will make full disclosure of known defects and adverse conditions
That seller will maintain the Property until closing
Will the contract terminate if there is catastrophic damage before closing?
What is the threshold for contract termination due to lender-required repairs?

Anticipated Special Provisions
The contract will or will not be assignable (wholesaling permitted or not permitted)
The transaction will be accomplished “subject to” the existing indebtedness
The transaction will be done by means of seller financing (include basic details)
The transaction will be a wraparound (include basic details)
List any other anticipated special provisions
Will a lawyer-prepared custom addendum to the contract be necessary?

Closing and Closing Documents
Transaction to close within a certain timeframe
Identify title company if known
Will the buyer have the right to do a pre-closing walk-through?
What closing legal documents will be required?
Who will prepare them?
Will the non-drafting party be able to review legal documents before closing?
Will there be a general or special warranty deed?
Will the deed contain custom special provisions such an “as is” clause? JTWROS?
Will there be an assignment of rents and lease(s) if the property is rented?
Will there be an assignment of contracts and warranties?

Broker’s Fees
Identify brokers and commissions payable
Will there be any custom variation on the amount or splitting of commissions?

Conclusion

It is difficult to imagine a situation where commencing a transaction with an LOI would be an outright mistake. Completing a brief but thorough LOI can be a substantial step forward for the transaction even if it is not signed by the parties.

In order to be sure that one is getting a truly non-binding letter of intent (and not incurring exposure to a possible lawsuit) avoid junk forms from the Internet and consult an attorney knowledgeable in drafting letters of intent.