What an LOI Actually Does in a Commercial Sale
An LOI is a short, typically one-to-two-page document that a serious buyer submits to a seller to align on the major economic and procedural terms of a deal before a formal purchase and sale agreement (PSA) is drafted. It is not a contract. It does not transfer title. It does not obligate either party to close.
What it does is narrow the gap between two parties early, so that attorneys and lenders are not drafting a full PSA around terms that one side never actually agreed to. In Washington State's small multifamily market, where a triplex or fourplex in Tacoma or Bellingham may attract multiple serious inquiries within days of becoming available, a clean LOI signals that a buyer has done preliminary underwriting and is ready to move.
The LOI also serves a practical filtering function for sellers. When you receive an LOI that clearly states a purchase price, financing structure, due diligence timeline, and closing target, you can evaluate the offer on its merits rather than spending weeks in back-and-forth before discovering a fundamental disagreement on price or contingencies. For context on how serious buyers approach this stage, the piece on how to qualify serious multifamily buyers vs tire kickers covers the signals that separate prepared buyers from those who are still exploring.
One important clarification: an LOI is generally non-binding, but specific clauses within it can be binding if they are drafted that way. The most common binding clause in a commercial LOI is an exclusivity or "no-shop" provision, which asks the seller to take the property off the market for a defined period while the buyer completes due diligence. That clause, if signed, carries real weight. Everything else is typically a good-faith framework.
The Core Economic Terms Every WA Buyer Must Define
Vague LOIs create expensive problems downstream. When the purchase price is stated without specifying what it includes, or when financing terms are left open, the PSA negotiation becomes a second round of deal-making rather than a drafting exercise. Here are the terms that must be specific.
Purchase price and earnest money. State the exact dollar amount. If the offer is contingent on an appraisal or financing, say so here. Earnest money is not always required at the LOI stage, but if you plan to offer it as a show of good faith, specify the amount, the escrow holder, and whether it is refundable during due diligence.
Property description and income summary. For small multifamily assets, the LOI should identify the property by address, number of units, and the seller's represented gross rental income, operating expenses, and net operating income (NOI). This matters because the purchase price is almost always tied to the NOI in some form. If the seller's NOI representation later proves inaccurate during due diligence, you need a documented baseline to reference. The article on NC multifamily rent roll red flags that kill deals covers income verification issues that apply equally in WA markets.
Financing terms. In 2026, commercial loan rates for small multifamily properties in Washington remain elevated compared to the residential market. A buyer using a conventional commercial loan, a portfolio lender, or a seller-carry note should specify the structure in the LOI. If financing falls through, the LOI's due diligence and closing timeline will need to adjust. Defining the financing type upfront prevents a seller from assuming an all-cash close when the buyer is actually waiting on a loan commitment.
Closing date and prorations. Name a target closing date. Specify that rents, taxes, and utility deposits will be prorated as of closing. These are standard terms, but leaving them out of the LOI invites disagreement during PSA drafting.
Who drafts the PSA. This is often overlooked. State whether the buyer's attorney or the seller's attorney will prepare the first draft of the purchase and sale agreement, and set a target date for that draft to be delivered.
Due Diligence Period: How Much Time Is Enough
The due diligence period is the window during which a buyer can inspect the property, review financial documents, verify leases, and assess physical condition before committing to close. In Washington State, the customary due diligence period for small multifamily commercial transactions typically runs between 15 and 30 days, though off-market deals with motivated sellers sometimes compress that window.
What matters is not just the length of the period but what it covers. The LOI should specify which documents the seller will deliver at the start of due diligence. A reasonable list for a small multifamily asset includes:
- Current rent roll with lease expiration dates and security deposit amounts
- Last 24 months of operating statements
- Current leases for all occupied units
- Utility bills (especially if any utilities are owner-paid)
- Any existing inspection reports, warranties, or permits
- Property tax statements for the current and prior year
- Any pending or active insurance claims
Washington State's small multifamily market includes a mix of older building stock in cities like Everett and Yakima, where deferred maintenance on HVAC systems and roofing can be significant. A 15-day due diligence window may not be enough time to schedule a licensed inspector, review findings, and obtain repair estimates. If the property has known issues or is older than 30 years, push for 21 to 30 days and make sure the LOI language says the period begins when the seller delivers all requested documents, not when the LOI is signed.
For a detailed look at what thorough due diligence actually involves at this stage, the guide on small multifamily due diligence: what serious NC buyers actually review provides a practical checklist that translates directly to WA transactions.
Non-Binding Language and Where Deals Go Wrong
The most common LOI drafting mistake is failing to include a clear, unambiguous statement that the document is non-binding. Without that language, a signed LOI can create legal exposure, particularly if one party later argues that the other acted in bad faith by walking away after the LOI was executed.
The non-binding disclaimer should appear near the signature line, in plain language. Something like: "This Letter of Intent is not a binding agreement and does not obligate either party to complete a transaction. The parties agree that no binding obligation will arise unless and until a formal Purchase and Sale Agreement is fully executed by both parties."
Avoid vague qualifiers like "subject to attorney approval" without more specificity. That phrase has been interpreted differently in different jurisdictions, and it creates ambiguity about when, exactly, the deal becomes binding.
There are two areas where LOI language most often causes problems in practice.
First, binding clauses buried in non-binding documents. If you include an exclusivity clause (asking the seller not to market the property to other buyers during due diligence), that clause is typically intended to be binding even though the rest of the LOI is not. Place binding provisions in a clearly labeled separate section. Do not mix them with the non-binding economic terms.
Second, LOIs that are too detailed. Some buyers and sellers try to negotiate every PSA term inside the LOI, which defeats the purpose. The LOI should cover the major economic and procedural points. Detailed representations, warranties, and indemnification language belong in the PSA, drafted by attorneys. An overly detailed LOI often signals that one party does not trust the other to negotiate in good faith during the PSA stage, which rarely leads to a smooth closing.
Turning a Signed LOI Into a Clean Path to Close
A signed LOI is not a deal. It is a starting line. The work that follows, specifically the due diligence review, PSA negotiation, and financing confirmation, determines whether the transaction actually closes.
For sellers, the period between LOI and PSA execution is the time to organize your documentation. If your operating statements are incomplete or your leases are not current, a buyer's attorney will flag those gaps during PSA review and may use them to renegotiate price or extend the due diligence period. Preparing a clean package before the LOI is even submitted reduces friction at every stage. The guide on how to package your small multifamily property for maximum buyer interest walks through exactly what that preparation looks like.
For buyers, the LOI stage is also the right time to confirm your financing path. In Washington's 2026 commercial lending environment, loan commitments for small multifamily assets can take longer than buyers expect, particularly for properties with fewer than five units that fall into a gray zone between residential and commercial underwriting. If your LOI includes a financing contingency, make sure the timeline is realistic given your lender's current processing capacity.
Finally, both parties benefit from keeping the LOI negotiation short. The longer it takes to agree on LOI terms, the more likely a competing buyer or a change in market conditions will disrupt the deal. Define the core terms, include clear non-binding language, set a realistic due diligence window, and move to the PSA as quickly as both sides can manage.
If you are at the stage where an LOI is on the table and you need to connect with a serious counterparty in Washington's small multifamily market, FlowExit's education resources and lead flow tools are built to help owners and buyers reach that point without the noise of traditional brokerage. Start at flowexit.com to learn more.