What Is a Real Estate Option Contract?
A real estate option contract is a legal agreement between the potential buyer of a real estate property and the owner of that property. The real estate option contract gives the potential buyer the exclusive right to buy the property at a specific price within a specific time period. The potential buyer must pay the property owner an option fee for the right granted in the option contract.
Since it is derived from a real estate sale contract, an option contract is a financial derivative. If the option contract is transferable or assignable, it has value by itself and may be transferred or assigned to another potential buyer for a profit.
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No obligation to buy created
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Like most option contracts in the financial world, the real estate option contract normally conveys the right to purchase without imposing an obligation to purchase.
On the other hand, a real estate property owner who signs an option contract is under an enforceable obligation to sell their real estate under the terms specified in the real estate option contract. If a property owner fails to perform the sale under the terms of the option contract, the owner risks a lawsuit and a verdict, which might force the sale of the property under the terms of the option contract.
Obligation to sell is created
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While potential buyers don't incur an obligation to buy in signing an option contract, property owners incur an obligation to sell at the specified price. If the real estate buyer (or another buyer to whom the option is assigned or transferred) exercises the option to buy in the manner described in the contract, the property owner will be obligated to sell. Property owners should only sign option contracts when willing and able to comply with the terms of the contract. Not fulfilling the option contract obligation might lead to a lawsuit that forces the seller to complete it.
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Advantages of option contracts for potential buyers
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Lease options have allowed many people to attain their dream of a home with a white picket fence An option contract can allow the potential buyer more time to secure financing, to investigate feasibility of certain property development or business ideas, to investigate potential problems with the property, or to attract partners. An option can also allow a potential buyer to leverage a small amount of money in return for a large gain.
One common use of real estate options is in a rent-to-own or a lease-option transaction wherein a buyer leases a property with the right to purchase it at a specified price after a year. Often buyers can improve their credit and get a part of their rent credited towards the purchase transaction in this kind of arrangement.
Disadvantages of option contracts for potential buyers
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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 who decides not to exercise an option contract often forfeits all of the option fee.
In the case of a lease-purchase or rent-to-own transaction, a potential buyer 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 purchase, they may have forfeited the higher rent already paid.
Advantages of option contracts for property owners
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The primary benefit a real estate option contract offers a property owner is the option fee he receives to enter the contract. Most option contracts allow the property owner to keep all of the option fee if the potential buyer does not exercise the option to buy, and of course, the owner still has his property and can sell it to someone else.
Option contracts can also allow a property owner more time in a property before having to conclude a sales transaction, for example a property owner may be able to complete a job relocation before having to finalize the sale of his house.
Disadvantages of option contracts for property owners
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Only option your castle if you're able and willing to sell The primary disadvantage of option contracts for property owners is the loss of other transaction opportunities during the time the property is under option. This is more likely to happen if the option contract duration is too long and the property value rises above the price agreed upon in the option contract.
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