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Are you considering selling a high-end or investment property? Then, attract top-tier buyers by creating nearly irresistible terms and conditions. One such way to support this objective is by offering an option contract in real estate.
Find out what sellers and buyers need to know about real estate option contracts.
Option contracts in real estate, also known as “option to buy” contracts, purchase and sale agreements, or real estate purchase agreements, are legal contracts that grant a buyer or investor the right to purchase real estate from a seller. The seller typically offers an option to buy a property within a limited period. An option contract in real estate ensures that the buyer has exclusive real estate purchase rights.
In addition to exclusivity, the buyer is under no obligation to follow through on the purchase. A seller is also not required to reserve the property indefinitely. Once the time limitations expire, buyers lose their purchasing rights, and sellers can offer others the option to buy.
This article also explains option contracts in real estate.
The purpose of an options contract in real estate is to offer the buyer alternatives. Outcomes may vary according to the type of buyer, including early exercise, option expiration, or second-buyer sales. Real estate professionals use option contracts to provide flexibility on specific types of real estate transactions.
In addition to flexibility, the purpose of option contracts in real estate includes:
The bottom line is that real estate options contracts offer an alternative form of investment, trade, and profit over traditional opportunities. An exchange market for options doesn’t exist, but their provisions may increase the future likelihood of that happening. The most vital aspect of writing an options contract in real estate is that they are enforceable and valid.
Here’s another article about options contracts in real estate.
Meet some lawyers on our platformThe most common example of how option contracts in real estate work is developer use. Let’s say that a developer wants to purchase a $3 million building but cannot secure funding for up to one year. Since there’s no point in obtaining financing on a building that may not be for sale in a year, real estate option contracts allow the developer to get exclusivity rights.
Conversely, commercial property is challenging to sell from the seller’s perspective, depending upon location, market, size, and other factors. The building could sit vacant for years in this scenario due to its unique purpose. Instead of waiting for a solvent buyer to come along, which is rare, an option contract in real estate provides reasonable reassurance that the property buyer is sincere and earnest about their desire to satisfy the sale terms and transfer the property.
Assignable purchase option contracts are a specific type of real estate option agreement. The assignable purchase option transfers and grants assignments to another party. This process is known as the contract assignment, and they’re used when one party wants to directly transfer real estate assets to the assignee.
In this situation, assignees receive the benefit of the property acquisition under the original purchase terms. However, they must also understand that they’re taking on the assignor’s duties, responsibilities, and liabilities.
Getting the terms and conditions right in a real estate option contract is the most vital aspect of protecting your seller’s rights. They also define the particulars of the contract so that all parties are on the same page with each other. Ensure that you write your option contracts in real estate with simplicity and clarity to avoid confusion or a misunderstanding in the future.
Here are the key terms included in real estate option contracts:
Option fees are used in the commission of contract enforceability. For a contract to be valid and enforceable, something of consideration must exchange between the buyer and seller. The option fee cannot be nominal, but there’s no specific guidance on reasonability.
It’s also worth noting that option fees are non-refundable. Therefore, if the buyer doesn’t want to exercise their purchasing rights, they generally forfeit the option fees. However, if the buyer follows through on the purchase, the seller typically deducts the option fee from the sale.
Real estate option contracts must also specify a date by which they have to exercise their purchasing rights. There is considerable flexibility in this term since sellers can allow them to continue for weeks, months, or years. The standard range by which most sellers follow is between one and five years.
Buyers have the opportunity to purchase the real estate asset at any point during the option period. However, if the period expires, the agreement terminates, and the buyer loses option fees paid to the seller.
Option contracts in real estate must also include the purchase price of the asset. The value is based on the property’s current appraisal value. However, this strategy doesn’t always seem sensible, especially for more extended option duration periods.
In most cases, sellers require that the buyer agrees to a reappraisal of the property. Other issues may include the seller simply agreeing to sell at the current market value. Regardless of the method, the most critical aspect for enforceability is that everyone agrees and is amenable to the terms.
Some states have specific statutes surrounding option contracts in real estate. As such, you should ensure that your agreement includes a choice of law clause and complies with the mandated rules.
A choice of law clause allows you to specify what rules your agreement will follow. In many cases, it is based upon where the property is located.
Real estate investors and developers most commonly use real estate option contracts. The flexibilities and advantages they provide make them an excellent buying opportunity while limiting seller benefits. Buyers, assignors, and assignees are usually the receiving parties of option contracts in real estate and sign them alongside the seller.
Yes, real estate option contracts are required to be in writing. The reason for this requirement is that they must comply with the Statute of Frauds (SOF). SOF transactions must contain key elements to be legally binding and enforceable.
It’s easy to make legal mistakes with option contracts in real estate due to their complexity. These mistakes could result in unwanted or unintended financial and legal consequences for you in the future. The most practical approach toward writing a real estate options contract is seeking legal advice from real estate lawyers in your state.
ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
An experienced commercial contracts attorney with sales, leasing, NDA, SEC compliance, corporate governance, commercial real estate, and employment experience. Also well versed in internal and external policy document and manual creation.
Jason is a self-starting, go-getting lawyer who takes a pragmatic approach to helping his clients. He co-founded Fortify Law because he was not satisfied with the traditional approach to providing legal services. He firmly believes that legal costs should be predictable, transparent and value-driven. Jason’s entrepreneurial mindset enables him to better understand his clients’ needs. His first taste of entrepreneurship came from an early age when he helped manage his family’s small free range cattle farm. Every morning, before school, he would deliver hay to a herd of 50 hungry cows. In addition, he was responsible for sweeping "the shop" at his parent's 40-employee HVAC business. Before becoming a lawyer, he clerked at the Lewis & Clark Small Business Legal Clinic where he handled a diverse range of legal issues including establishing new businesses, registering trademarks, and drafting contracts. He also spent time working with the in-house team at adidas® where, among other things, he reviewed and negotiated complex agreements and created training materials for employees. He also previously worked with Meriwether Group, a Portland-based business consulting firm focused on accelerating the growth of disruptive consumer brands and facilitating founder exits. These experiences have enabled Jason to not only understand the unique legal hurdles that can threaten a business, but also help position them for growth. Jason's practice focuses on Business and Intellectual Property Law, including: -Reviewing and negotiating contracts -Resolving internal corporate disputes -Creating employment and HR policies -Registering and protecting intellectual property -Forming new businesses and subsidiaries -Facilitating Business mergers, acquisitions, and exit strategies -Conducting international business transactions In his free time, Jason is an adventure junkie and gear-head. He especially enjoys backpacking, kayaking, and snowboarding. He is also a technology enthusiast, craft beer connoisseur, and avid soccer player.
Josh Bernstein has been serving real estate and corporate transactional clients since 2002. His experience is varied, and he enjoys working on and puzzling out novel and complex corporate and real estate matters. Josh’s experience includes, among other things, the following: representation of public companies in connection with SEC reporting and compliance work (proxies, 10-K’s; 10-Q’s; 8-K’s, etc.); representation of public and private company securities issuances (including private placements, and other similar offerings); assistance in structuring and drafting joint ventures, both for investors and operating partners, and including both real estate and corporate ventures; handling public and private company mergers and acquisitions; and asset sales and dispositions; assisting clients, big and small, with real estate acquisitions, sales and financings; managing large-scale and multi-state real estate portfolio acquisitions, dispositions and financings; complex condominium creation, structuring and governance work, including: commercial condominiums, use of condominiums as a land planning tool, wholesale condominium property acquisitions and dispositions, and rehabilitating failed or faulty condominium legal structures to make ready for sale; development of restrictive covenants and owners’ association documents for master-planned communities; compliance with federal statutes governing real estate sale and development (including, without limitation, the Interstate Land Sales Full Disclosure Act, the Housing for Older Persons Act, and the Americans with Disabilities Act); representation of real estate lenders, for both improved and unimproved property, and including numerous construction financings secured by real estate; assistance with commercial leasing; from both the landlord and tenant side, and including condominium leasing; training residential home and condominium sales staff for compliance with applicable local and federal law; and workouts of all kinds. When he’s not busy lawyering, Josh may be found watching 80’s commercials, flying a single-engine plane, playing poker, or trying to be a good dad.
