A property option agreement is a contract between a vendor and a buyer. Under this contract, the parties agree on a purchase price at a specified time in the future. The buyer also has to pay the vendor an option fee.
Property option contracts allow a seller to lock in a specific price in the future and give the buyer time to find the funds. These agreements are common between landowners and property developers wishing to develop a piece of land.
An option is essentially an agreement made between a vendor and a developer to exchange land for an agreed price at an agreed time. This allows the vendor to achieve a higher than market value for their asset. As option terms are normally around 24 months, the vendor doesn't have to move right away, which gives them time to find their next property. And it gives the buyer time to get the funds together for the purchase (and to lock in a price).
The agreement between the vendor and developer is secured with the payment of an option fee to the vendor. After this, a developer is granted a certain amount of time to improve the value of the land by obtaining a Development Approval (DA) from the local council.
Once the DA is in place, the value of the property is likely to appreciate, which will be reflected in the premium that the developer will offer you. The property is then sold in accordance with the original agreement, and construction can begin.
The option fee is usually a percentage of the sale price, typically between 3% and 10%. This fee may form part of the deposit, and depending on the details of the contract, the fee may be refundable if the purchase falls through.
Option agreements usually contain 2 options: put and call options. Most agreements combine both.
The strategy for the buyer is to add value to the property through upgrading or renovating the property. It also gives the buyer the ability to negotiate a low purchase price for the option. Then they sell the property for a profit.
This strategy requires a vendor who will agree to an option agreement. This often means a vendor who has had trouble selling the property or doesn't have the cash to improve the property.
Property option agreements can work out well for both parties. A savvy buyer can lock in a good price and then spend money to improve the property before selling it at a bigger profit – all before they even need to come up with the full purchase funds. For a vendor who has been unable to improve or sell the property themselves, an option agreement is their best chance to offload the property.
As a landowner, there are benefits and drawbacks to entering into property option agreements.
The most common ways of reducing investment risk are to conduct thorough research into the market as well as local council and property legislation that may affect the build. You also need to do your due diligence by forecasting financial and cash-flow viability with an accountant or financial planner and having the contract reviewed by a professional.
As an investor, you should be concerned with maximising the flexibility of the arrangements, without resulting in adverse tax and stamp duty ramifications.
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Can you help me with the contact details of a good options lawyer in Melbourne? Thanks Colin
Hi Colin!
Thanks for your inquiry.
Please be informed that we at finder.com.au provides comparison service across different lenders who can help finance property option agreements. We are not affiliated with any solicitors or legal practitioners on this matter.
You may get in touch with your local regulatory for further assistance.
Hope this clarifies.
Cheers,
Jonathan