When considering real estate transactions, ‘Options to Purchase’ agreements can offer a strategic advantage. This contractual arrangement provides potential buyers with an exclusive window to buy a property at a predetermined price within a defined timeframe. By delving into the intricacies of this approach, both buyers and sellers can harness its benefits effectively.
What Is An Option To Purchase?
A purchase option contract grants a potential buyer the exclusive right to buy a property at a set price within a defined timeframe. This prevents sellers from considering other offers during this period. Within this option period, sellers are prohibited from engaging with other potential buyers.
In the context of commercial real estate, an option to purchase can take various forms, often resembling a sales agreement or lease. The price is typically fixed, agreed upon by both parties. Exceptions might lead to price changes.
Types Of Options To Purchase:
There are three primary types of purchase options, ranging from straightforward option to more intricate rolling option. Each type comes with specific requirements and distinct responsibilities for buyers and sellers. If you’re uncertain which type suits you, allow us to assist in determining the best fit during contract drafting. Here are the three categories of options:
- Straight option: Grants the buyer a chance to acquire the property at a set price within a specific period. If the property is purchased, this sum can be deducted from the final price. Non-purchase results in forfeiture of the option deposit.
- Letter of credit option: Less common, this involves a bank-issued letter of credit matching the option price. If the option is exercised, the letter is void. If not, the seller receives the letter’s value from your bank, streamlining investor involvement but necessitating more paperwork.
- Interest option: Here, the buyer agrees to compensate the seller for potential interest based on the appraised property value. If the deal falls through, the seller still gains some compensation.
What are ‘Option to Purchase’ fees?
An option agreement involves a potential purchaser forming an agreement with a landowner to acquire their property, usually with a paid option fee. The potential buyer gains the choice (within a stipulated timeframe) to purchase the property.
‘Option to Purchase’ charges are minimal and distinct from any balloon or optional final payments outlined in your contract. These fees align with your final payment timeline and are detailed in your agreement.
How long is an Option Period?
The duration of an option period can vary and is typically influenced by the nature and scope of the potential development site. Smaller, readily developable plots often have an option period of 1 to 3 years. Conversely, larger strategic land parcels, aimed at unlocking substantial development potential, typically necessitate longer periods, such as 5 to 10 years.
Extensions to the initial option period are possible, especially when planning decisions are pending, and such extensions are agreed upon by the parties within the contract.
Why would a property owner want to use an option agreement?
A property owner might acknowledge their property/land’s substantial development potential but lack the means or know-how to undertake a planning application independently for value optimization. An option agreement enables the landowner to benefit from the increased land value due to granted planning permission, bypassing the planning process. An option fee may also be offered to the landowner.