Option agreements give a prospective buyer or investor the chance to purchase real estate within a particular time, without imposing a definite obligation to buy it. These contracts must be carefully drafted to protect the interests of the parties involved. Whether you’re a property owner or potential buyer or investor, it’s important to have legal counsel negotiate, review, and help you execute an option agreement. Palumbo Law serves the legal needs of real estate clients in Rhode Island, Massachusetts, and Connecticut. We can advise you today.
What Is An Option Agreement?
A real estate option agreement, also known as a purchase option, gives a potential buyer or investor the exclusive right to buy a specific piece of real property. The buyer pays for this right, preventing the owner from selling the property to anyone else. The option is only good for a limited amount of time, often about six months to a year. A preset price, or a set of factors to determine the price, is built into the agreement.
The prospective buyer does not have to purchase the property but has merely purchased the right to buy it. However, if the person with the option does not ultimately buy the property, the owner gets to keep the money paid pursuant to the agreement.
Advantages Of a Real Estate Option Agreement
Real property buyers, investors, and owners can all benefit from real estate purchase options. These are among a few of the advantages:
- Allows time to line up financing. A buyer may spot a piece of land he or she wants, but might not yet have the funds or financing to purchase it. But he or she may have enough funds to purchase an option and keep someone else from getting the property in the meantime.
- Locks in the value. Even if the property value increases during the life of the option agreement, the owner is locked in to the price set in the option agreement. The owner also cannot break the agreement and sell it to someone else who is willing to pay more. Note that some agreements have factors to determine the price of the property, while others simply have a preset amount.
Return on investment. Investors sometimes identify pieces of property that are located in areas with high development potential. Knowing that future development might increase the value of the property, the investor secures an option agreement with a relatively low purchase price.
Later, when the value of the property appreciates, the investor can purchase the land outright for the preset price and then sell it to developers at a premium.
- Price certainty. By setting a purchase price in the option agreement, or having a set of factors that help determine the price, the owner knows how much he or she will get if the holder of the option agrees to buy the property.
- Minimized risk. If the option holder does not agree to buy the property, the owner gets to keep the money paid for the option. The owner can then sell the property for however much he or she wants. If the market value of the property has decreased, the owner can keep the property until the market improves.
Risks Of Real Estate Purchase Options
There are some potential drawbacks of real estate option agreements that affect each party above. They include:
- No guarantee of financing. There’s no assurance that a buyer will acquire the requisite financing to purchase the property during the option agreement period. He or she may end up losing the money spent to buy the option.
- No guarantee of property value increase. If the value of the property never appreciates, an investor could be faced with either losing the property (and the money spent to buy the option) or purchasing a piece of real estate with no assurance of when or if its value will increase.
- Lost opportunity. The owner of the property is locked in to the purchase price (or method to determine the price). If the holder of the option decides to buy and the value of the property later appreciates, the buyer benefits and the owner loses.
Why You Need A Real Estate Attorney
All real estate contracts, including option agreements, must contain certain terms to be enforceable. For instance, terms must be sufficiently detailed, must evidence an intent of the parties to be bound, and must meet the definition of a “writing” (for instance, within the meaning of the Statute of Frauds).
Many purchase options are given to real estate tenants, to wit: at the end of the lease term, the tenant has the option to buy the property outright. These option agreements can become complex and require careful drafting. For example, a portion of the rental payments can be applied to the future purchase of the property.
As mentioned above, some option agreements contain factors to determine the price of the property. Knowing which factors to include or not can be tricky. A knowledgeable attorney who has experience with real estate can advise you on how best to determine the price and can negotiate the terms of the agreement.
Finally, if the owner defaults on the agreement, you as an owner or investor may wish to take the owner to court and compel him or her to sell the property as agreed. The owner may have a number of defenses, however, including insufficient specificity to enforce the option or the buyer’s failure to exercise it within a given amount of time. Whether you’re the owner of the property or the party wishing to purchase it, our real estate litigation attorneys can represent you.
Contact Our Rhode Island Real Estate Option Agreement Attorney
Interested in learning more about real estate option agreements? Have you agreed to enter into one and need help drafting it? Are you facing litigation over a real estate option? Our comprehensive real estate practice has you covered. Call Palumbo Law today.