What’s the Difference Between a Letter of Intent (LOI) and a Purchase & Sale Agreement (PSA)?

marketing08413
6 days ago
2 min read

When buying or selling commercial real estate, two documents play a central role in moving a deal forward: the Letter of Intent (LOI) and the Purchase & Sale Agreement (PSA). While they relate to the same transaction, they serve very different purposes—and understanding those differences can help you navigate negotiations with confidence.

1. Purpose of Each Document

Letter of Intent (LOI)

The LOI outlines the key business terms both parties intend to include in the final contract. It acts as a roadmap for the deal, ensuring buyer and seller are aligned before attorneys begin drafting the formal agreement.

Purchase & Sale Agreement (PSA)

The PSA is the legally binding contract that governs the entire transaction. It formalizes all terms—business, legal, financial, and procedural—and defines each party’s rights, obligations, and remedies.

2. Binding vs. Non-Binding

LOI

Generally non-binding
May include a few binding provisions like confidentiality or exclusivity
Allows both sides to negotiate freely with minimal legal risk

PSA

Fully binding contract once executed
Dictates earnest money terms, contingencies, representations, warranties, and closing procedures
Violations can carry legal and financial consequences

3. Level of Detail

LOI (High-level terms)

Purchase price
Earnest money structure
Due diligence timeline
Closing date or timeframe
Basic contingencies (financing, inspections, appraisals)

PSA (Comprehensive terms)

Covers everything in the LOI—plus:

Title, survey, and environmental requirements
Representations and warranties from both parties
Default provisions and remedies
Prorations, closing costs, and estoppels
Conditions for terminating or extending the deal
Post-closing obligations

4. When Each Is Used

LOI

Used at the beginning of negotiations to:

Align expectations
Establish key deal terms
Move toward drafting the PSA

PSA

Used after agreement on LOI terms to:

Begin due diligence
Govern the transaction through closing
Legally finalize the sale

5. Why Both Are Important

The LOI:

Speeds up the deal by resolving major points early
Reduces misunderstandings before attorneys invest time in drafting
Gives both parties confidence before committing resources

The PSA:

Protects both the buyer and seller
Defines the legal framework for inspections, financing, and closing
Provides enforceable remedies if something goes wrong

The LOI is the conversation starter—a non-binding outline of what both parties hope to achieve. The PSA is the final contract—a binding agreement with full legal effect.