Options to Purchase Real Estate

While some people purchase their dream property immediately upon their first tour of a prospective home, others may need more time to find the right fit and consummate the transaction. Needing additional time is not a bad thing, and there are numerous reasons you may want to proceed carefully. A potential buyer may need extra time to secure financing to purchase a property or to consider several different real estate opportunities.

When a buyer needs more time than they originally anticipated for effectuating a purchase, they may want to ensure that a particular property is available at a fixed price during a more convenient point in the future. In this situation, a buyer may request to use a real estate option agreement. A real estate lawyer can work alongside a realtor to negotiate the terms of a real estate option contract.

What Is an “Option” to Purchase Real Estate?

An option to purchase real estate is a contract between the property owner and optionee (buyer). Instead of buying the property right away, an option allows the buyer to pay a certain sum of money for the right to purchase the property on or before a later date. In exchange, the buyer will have the exclusive right to buy that property prior to the expiration of the option.

A real estate option works the same as an option contract in other areas of contract law. The option contract sets a specific purchase price and definite period of time for the buyer to make the purchase at his or her discretion. For an option contract to be legally enforceable, it must be:

• In writing
• Signed by the seller and buyer
• Exchanged for an amount of money (called consideration) at the option price. This money is said to be paid “in consideration” to own the exclusive option to purchase the property.
• Irrevocable for both parties: The seller must commit to allowing the buyer to exercise the option within the stated period and for the agreed-upon consideration; they cannot suddenly decide to terminate the option early, or sell the property to another person during the option period. On the other hand, the buyer must pay the seller, and the amount of money paid in consideration can’t be refunded if the buyer backs out.

Can I Cancel an Option?

Because a seller must honor an option obligation for which a buyer pays in advance, the power to “cancel” the option is within the buyer-optionee’s discretion. That is, a buyer who has paid the option fee can either sign an option cancellation agreement, or they can allow the option to expire by refraining exercise of option to move forward with the purchase agreement for the property.

When Is an Option a Good Idea?

Buyers who want a purchase option should negotiate with the seller over the terms of the contract. A seller can agree to an option for any price or any time period. However, sellers are generally more likely to agree to a real estate option when:

• They can’t sell the property for fair market value or when the real estate market is cold.
• The option contract allows the buyer to purchase the property for a fair sum, if they decide to go forward with the deal.
• The seller receives a significant amount in financial consideration for the option.
• The buyer leases the home as a rental property for the term of the option, so that the seller is not losing money while maintaining a property that they wish to sell.

Lease With the Option to Purchase

As alluded to in the final bullet point above, it is common to see leases with the option to purchase, which afford financial certainty and flexibility for buyers and sellers. In this situation, a buyer will lease or rent the property during the option timeframe. Even while a buyer is leasing, the option must meet all of the requirements listed above. The seller might agree to provide discounts in exchange for the option. This can be a good idea when the seller’s property and operating expenses are covered by the lease’s cost.

In such a situation, the lease agreement period and the option period are typically the same. They will expire simultaneously so that the lessee has to either vacate the property or purchase it by a specific date.

When used correctly, real estate options and lease option agreements are beneficial for both buyers and sellers and considered to be attractive to real estate investors seeking to take prospective title. Home buyers and purchasers of commercial real estate alike often consider options as a part of the purchase contract in connection with real property. Because everyone’s circumstances are different, you should work with your real estate attorney to see whether an option would be conducive to your real estate purchase.