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A property option is an agreement between a property owner and a developer, which allows companies to share with you the profits of the final development, while paying you a higher price for your original asset.
The person granting an option is known as the optionor (or grantor) and the person receiving the benefit from using an option is referred to as the optionee, or the beneficiary.
An option agreement is where a landowner grants a property developer the exclusive right to to purchase their land at an agreed price. A non-refundable fee is typically charged for this option agreement, and during the term of the option agreement, no one else can buy or sell the property.
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, you don’t have to move right away which gives you time to find your next property.
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.
Option agreements typically involve a “put option” which is an option to require a purchasing party to purchase the property within specified terms, a “call option” which is an option to require a landowner to sell the property within specified terms, or a combination of both.
The strategy for the buyer is through value-adding activities by finding ways to boost the property value and onsell the asset for a profit. However, this strategy requires a vendor who will agree to an option agreement, such as a distressed seller.
As an investor, you need to have the opportunity to add value to the property, such as through a cosmetic renovation or upgrade, as well as the ability to negotiate a low purchase price for the option.
You also need to be careful about the sellers you target, as few vendors will be inclined to agree to an option unless they have had some difficulty selling their properties.
As a landowner, there are benefits and drawbacks to entering into property option agreements.
Depending on the size and scope of the option development project, you can potentially secure sites with a residential home loan and use other forms of funding to pay for the associated subdivision fees.
Compare the home loans below to see if there’s one that suits your investment needs.
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There are many exit strategies within the option land process which can lessen your investment risk. The most common ways of reducing investment risk are to conduct thorough research into the market, local council and property legislations that may affect the build, and practicing due diligence by forecasting financial and cash flow viability with an accountant or financial planner, and also seeking legal advice to have the contract reviewed by a professional.
Option agreements are a common way for developers to secure development sites as they provide them with flexibility and also assist with managing cash flow and liability.
As an investor, you should be concerned with maximising the flexibility of the arrangements, without resulting in adverse tax and stamp duty ramifications.
As an investor, you should develop a checklist and consult the vendor regarding the following:
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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