If you’re a property investor, you may have heard of option agreements in any of your previous deals. A property option is a way for you to secure an investment opportunity without paying large sums of money upfront. Option agreements have their own advantages depending on the situation you find yourself in. The question is, how exactly do property option agreements work?
What Is an Option Agreement?
In real estate investing, an option agreement or an “option contract” gives you the right to purchase a property for an agreed-upon price up to a certain timeframe. The person granting an option is known as the grantor, and the person receiving the benefit from using an option is referred to as the beneficiary.
If you’re a property investor and would like to purchase a property, the landowner (grantor) will grant you the exclusive right to purchase their land at an agreed price in an options agreement. A non-refundable fee is typically charged for this option agreement, and during the term of the agreement, no one else can buy or sell the property. For transactions like this, it’s best to work with Australian property lawyers in Ipswich to help you smoothen things out.
How Do Option Agreements Work?
This kind of real estate investment transaction is called a unilateral contract because only the seller is bound by it. An option obligates the seller but not the buyer. If you, as the buyer, would like to buy the property, then you have the right to purchase it, but you don’t actually have to. Basically, you have the option to back out of the agreement and not purchase the property, but the owner can’t really sell the property to anyone else in the duration of the contract.
What Are the Benefits of Option Agreements for Investors?
Option agreements are frequently used by property developers and investors who are interested in high-end luxury homes or commercial properties. There can be several reasons why developers use this. More often than not, investors do not want to purchase raw land only to find it cannot be built on or that approvals to change zoning or to subdivide the property won’t go through.
Another possible scenario is when an investor, such as you, doesn’t want to pay too much money doing feasibility tests only to find out that the seller sold the property to someone else. That could be quite a missed opportunity, especially if you’re eyeing some prime real estate options. To prevent that from happening, you can enter an options contract with the landowner to lock down the property. This is done by paying a non-refundable amount for the exclusive rights to purchase the property.
What Are the Benefits of Option Agreements for Landowners?
The most obvious benefit is the option fee that landowners receive from the investor. This is, most of the time, non-refundable. On top of this, both parties are able to agree on a reasonable price for the property that is typically above market value. This is possible as the investor intends to increase the property’s value by obtaining a development approval.
An option contract is an excellent example of an agreement where both parties could greatly benefit from it. The agreement offers protection for the investor while also providing security for the seller as the sale is guaranteed after a set amount of time. Consider utilising this type of agreement on your next investment.
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