There are many different ways to purchase real estate. While some people find a piece of property that they want and purchase the property immediately, other people may need a little more time to complete the transaction. There are many reasons for needing more time – it could be that a potential buyer needs the time to come up with the financing to purchase the property or that the potential buyer is considering several different properties for a home or business project. When a buyer needs more time to complete a purchase and wants to ensure that a particular property will be there when the buyer is ready to make the purchase, the buyer may request to purchase a real estate option.
What is an Option to Purchase Real Estate?
An option to purchase real estate allows a buyer to pay a seller a certain sum of money in exchange for the exclusive right to purchase a specific piece of property at a specific price within a definite period of time.
In order for a real estate option to be enforceable, it must:
· Be in writing and signed by both parties;
· Be in exchange for financial consideration. The purchaser of the option must pay the seller for the option. That money is not refundable if the buyer does not purchase the property because the money was paid in consideration for owning the exclusive option to purchase the property; and
· Be irrevocable. The seller cannot decide to terminate the option early or sell the property to another person during the option period.
A buyer who wishes to purchase an option should negotiate the option with the seller. A seller may agree to an option for any reason. However, sellers are more likely to agree to a real estate option if they are currently unable to sell the property for fair market value and the option contract provides that the buyer will purchase the property for a sum that they determine to be fair if they exercise the option. Sellers may also decide to create a real estate option if the consideration that they receive for the option is significant or if the buyer agrees to lease the property for the duration of the option term so that the seller is not losing money maintaining property that the seller wishes to sell.
Lease with the Option to Purchase
Given the financial needs of the buyer and seller in most real estate transactions, leases with the option to purchase are common. In this situation a buyer leases, or rents, the property during the term of the option. Even when the buyer is leasing the property, the option must meet all of the formal requirements described above, although the seller may agree to less consideration in exchange for the option because the seller’s operating expenses are covered by the lease. The lease period and the option period typically expire simultaneously so that the leasee either has to vacate or purchase the property at a date certain.
Real estate options, when used correctly, have great benefits for both buyers and sellers in different situations and can be advantageous to all parties.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.