Option versus Obligation

Like most option contracts, the real estate option contract normally gives the potential buyer a right to purchase but without imposing an obligation to do so. A property owner signing an option contract, though, has a legal obligation to sell the property under the terms specified in the real estate option contract. If a property owner fails to perform the sale under terms of the option contract the owner risks a lawsuit that could might force the sale of the property.

Advantages for Buyers

Option contracts allow potential buyers more time to secure financing, investigate property development possibilities and check problems or attract partners. Under option contracts, potential buyers are able to leverage a small amount of money in return for a large gain. Real estate options are commonly seen in rent-to-own or lease-option transactions where buyers lease property with purchase rights at agreed-to prices after a year. Buyers using real estate option contracts can also improve their credit and have part of their rent applied to a future purchase.

Disadvantages for Buyers

Potential buyers should be careful that the option fee they pay to get a real estate option contract is not too high. A potential buyer declining to exercise an option contract often forfeits the entire option fee. In the case of a lease-purchase or rent-to-own transactions, potential buyers may agree to a higher-than-market-value rent in order to apply part of the rent towards the purchase price. If such potential buyers later decide not to exercise their purchase option they normally forfeit the higher rent already paid.

Advantages for Owners

The primary benefit a real estate option contract for property owners lies in the option fee received. Most option contracts allow property owners to keep the option fee when buyers don’t exercise their purchase options. If a purchase option is declined, the property owner is free to sell it to someone else. Option contracts can also allow property owners more time in a property before having to conclude a sales transaction, such as when an owner needs time to relocate.

References

Resources

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