6 Reasons Why a Real Estate Option Contract Might Work for You

Wouldn’t it be awesome to have the opportunity to lock in a property now for purchase later? Or perhaps you aren’t quite in a position to purchase right now but would love to put roots down in your dream home in your ideal neighborhood? With an option contract, you might have some interesting options to consider!

What is a Real Estate Option Contract

So, what exactly is an option contract?

An option contract is an agreement that gives a buyer the right to purchase property for an agreed upon price within a certain time frame. Only the seller (optioner) is bound by the contract making this a unilateral agreement until the buyer (optionee) exercises their option, then it becomes bilateral. The buyer has the right to purchase the property but has no obligation to do so.

The option could be assignable to another party unless the contract specifically says it cannot be. And once a buyer has an option to buy a property, the seller cannot sell the property to someone else (unless he sells it subject to the continued existence of the option).

An option contract must be in writing and must list the parties involved, the location of the property, the purchase price, the specified time frame (period of time to exercise the option, which can be done any time up to the date listed on the contract) and it must have consideration (an amount of money paid for the option).

Options are bought at an agreed upon price — either with upfront or monthly payments usually accompanying the rent payment. If the buyer doesn’t purchase the property within the time frame, the seller keeps the payment for the option. In other words, the buyer pays the seller to have the right to purchase the property later.

Here are six example scenarios when an options contract might make sense:

  1. A builder who wants to buy raw land and needs time to test the soil to make sure it's a buildable lot can lock in the land during this time frame with an option contract. Some examples might be to conduct a "perc" test for water/septic or to verify proper zoning with the city or county.
  2. An investor may use options in several occasions. They can use options with a property that has a stronger 'highest and best use' or perhaps just need some cleaning or repairs. The investor would have an option contract, record it at the county, do the needed work and research and market the property. Then if they find a buyer for the price they determine, they will gain a profit and the seller gets the price he wants. Everyone wins (similar to wholesaling which is a topic for another day)!
  3. An investor can also have an option contract on land, wait for the value to increase and then exercise the option, purchase the property and make a profit on the sale.
  4. A buyer may have bad credit and need some time to get that corrected. The option contract may be a good solution for this scenario.
  5. A buyer is moving to a new town for a job that he or she might get, but isn’t sure, so he or she enters into an option contract and exercises the option ONLY IF he or she gets the job. This could work in a highly competitive local market.
  6. A renter/lessee (optionee) agrees to lease the property with the option to purchase it. Typically, the lessee has to put money upfront and/or money on top of the monthly rental payment that would go towards the purchase if the option is exercised.

When you might use an Option Contract

When dealing with an option contract, if you ever need help understanding any details of the contract, it's best to find a real estate lawyer to answer any questions you may have before you sign on the dotted line. Also, it's always a great idea to speak to a lender to make sure you are financially able to purchase the property for the agreed upon price in the specified time frame so you don't expose yourself to unnecessary risk.

And lastly, if you are the seller of the property and you still have a mortgage, you will definitely want to speak with your lender before offering a lease-to-own or option-to-purchase to a potential buyer as banks can consider this a violation of the 'due on sale clause' which could be a costly mistake.

These tips should help you understand the fundamentals of an option contract. If you think it may be a good option for you, it's always a good idea to speak with your Real Estate Agent upfront about it. If you don't have a great Real Estate Agent to represent your best interests yet, we can help you select the best Agent for you.

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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