Sellers can use the Option as a tool to entice a prospective buyer or tenant. If you own a commercial tract of land and think it would be a great spot for a fast-food restaurant, you might be willing, or even excited, should a major fast-food restaurant come to you and ask for a 90-day free option to allow it to ascertain if your site was the best one. If you can understand this concept, take it one step further. Why not go out and find all the fast-food restaurant who are not in the immediate area and offer them a 90-day free look at your site. All you want is to make sure that they actually spend the time and effort to make a decision.
Getting Paid for the Option
There is a pint of time when you should not be expected to give the prospective buyer any more of a free look. At this point of time, which generally follows a reasonable due-diligence period, the contract should call for a deposit to go hard, and a timetable established that winds down to the actual closing:
It is important to both parties that there be a very clear understanding of the terms and conditions surrounding the option. Does the option money get to be applied as part of the purchase price? When is the buyer in default? Is there any other term in the agreement that might extend time periods, and cause dates to conflict? Very careful reading of a contract is essential. If it is not in plain language, as some lawyers seem to pride themselves in avoiding, then get the darn thing redrafted so that it is clear.
The Conditioned Option
Here the optionee has included in the contract some conditions that can cancel or change the contract. These conditions might be such that the price will change, or the time to buy will be increased or decreased, most importantly, the conditions may call for a full return of the option money if something doesn’t occur.
From the buyer’s point of view, the conditioned option is the least risky of deals. If you have an option agreement and can tie up a tract of land for period of time, and because of some condition in the agreement (which you may control) you can get your option money back, you haven’t’ risked anything.
Thirteen Conditions Used in Conditional Options Include:
- Soil test. Your right to test and approve the subsoil conditions.
- Survey certification. Your approval of the exact dimensions, and so on.
- Bering test. A more detailed subsoil examination.
- Site plan approval. Government approval of your planned development.
- Issuance of building permit. Actual and final stage before building.
- Partner’s approval. A clear-out if your partner nixes the deal.
- Corporate ratification. Similar to the above.
- Obtaining satisfactory financing. Necessary in many deals
- Government approval. This covers a wide range of conditions.
- Prior sale of a third property. When you need to sell something else.
- Prior development of a section 1031 exchange. You have to develop an exchange before you can close.
- Preleasing of to-be-developed space. Many lenders will demand this.
- Environmental inspections. Many lenders insist on this.
Of these thirteen items, you can see that some can be simply accomplished and would not normally take a long time, while others can take months or in some cases, such as governmental approval, years. In all cases you (the buyer) have control over these items and can make sure the conditions fail to be met.
When You Know You Are Going to Buy, Use the Option
You can see that when you are not sure about buying, the option gives you some time to make the final decision. It locks up the price and terms so that you know exactly what to base the decision on. But when you know you are going to buy, the option gives you added appreciation and reduces your carrying cost.
Using the Option to Sell
The seller likes the option because he is a gambler. If you were a seller and you didn’t have a buyer for your property and someone came along and said, “I’ll give you money just to let me decide if I’ll buy the property,” you might be inclined to take the deal. After all, if the option fails to be exercised, you still have the property. In the meantime, the investor has paid you for the time which passed, during which you might not have sold the property anyway. Options work because people like to gamble and options are a safe way to risk little from the seller’s point of view.
As seller you can use the option to help entice a buyer into your hard-to-sell property. If a buyer will pay your price if you accept his or her terms. In the case of a tough-to sell property, you may have to resort to some very creative selling techniques. There is nothing wrong with being creative, and moving a dog in a touch market may call for all the creativity you can generate. One of the problems of the real estate market is that there are times when value has little to do with the ability to sell something. The inability to finance a deal might cause a builder to shy away from your kind of land, or a potential user to decide not to buy your vacant building. Use the option to get interest. It’s like anything else. If you can get someone’s attention, then you can often create an environment that didn’t’ exist before. In dealing with builders and developers, getting them involved is often the first step in making the deal.
ICRE Investment Team has partnered with the most prominent businesses, banks, construction companies, and investors to provide the most up-to-date information on Phoenix’s market condition and opportunities.
