Utilizing A Purchase Option
A real estate purchase option is a document that grants the optonee the right to
acquire a piece of real property at a fixed price during the term that the real estate purchase option is in effect. During the option period, the owner is prohibited from selling property to anyone other than the optionee. The purchaser has the right, but not the obligation, to purchase the property during the term negotiated. The purchaser can let the option expire without purchasing the property if they decide that the purchase is not to their financial advantage. Your only loss, in this case, would be the price you paid for the real estate purchase option.
There are three things you must negotiate at the time that the option for the property is created.
1. What will the purchase price of the property be if you decide to purchase it during the negotiated term? This can be a difficult negotiation as the seller will want a premium to current market value because they give up their right to sell the property to anyone else. For the buyer, it does not matter if the value of the property goes up or down during the option term, you will be able to purchase the property for the price agreed upon in the option. If the value goes up, you win, but if the value goes down, you should let the option expire and just purchase it for the going value at the time. Your maximum loss is the amount you paid the owner for the real estate purchase option.
2. What will be the duration of the option? The duration or term is a fixed amount of time and will depend on what you and the owner will agreed upon. Most option contracts have a one or two year term but it can be any amount of time that you agree. Obviously the further rout you extend the option, the more costly it will be.
3. How much are you willing to pay for the option? You must purchase the option from the owner of the property. This money belongs to the owner no matter if you decide to purchase the property or let the option expire. What is your upside? How much do you think the property will appreciate during the term of the option?
To prohibit the owner or optionor from selling the property while the option is in effect, you can document the real estate purchase option with the county courthouse. However, you may wish to weigh the consequences as some mortgage companies will call the loan due if they see a purchase option for the property, as they consider it a sale. You should utilize your best judgment in regard to this strategy.
Once you have acquired a real estate purchase option, you have power over the property. Also, the real estate purchase option is also an asset that may be sold, or assigned to another person if you wish.
by: Bill Fulton
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