Option to Buy Contract: Everything You Need to Know
An option to buy contract is an agreement between two parties where an investor or tenant pays a fee in exchange for the rights to buy a property in the future.3 min read
Updated October 28, 2020:
An option to buy contract is an agreement between two parties where an investor or tenant pays a fee in exchange for the rights to purchase property at some point in the future. You can have a straight option to buy a contract, which is a unilateral contract that only binds the seller to its terms. Under this type of contract, a landowner or homeowner will keep open the offer for sale in return for a certain fee paid by the buyer, also referred to as the optionee.
Option to Buy Contracts in Real Estate
In a straight option to buy contract, the ability to purchase is available for a certain period of time at the agreed-upon price. When this type of contract is used in a residential contract, it is often considered a rent-to-own agreement or a lease option in real estate terms. The tenant will enter into the lease or rental agreement with the option to buy the rental in the future part of the agreement.
If a lease option is chosen, a portion of the tenant's rent is applied to the principal of the purchase option on the house. These types of options contracts allow those looking to buy a home or property to put the purchase on hold until they are ready or have the financial means to complete the sale. In essence, an option contract involves an offer that cannot be revoked. It is the same as making a sale on the house or property, just on a more lengthy time schedule.
Other Uses for Option to Buy Contracts
While option to buy contracts are most widely used in real estate, they can be used for the option to purchase other things as well. When a contract is made, it becomes binding — the seller must sell and the buyer must buy according to the agreed-upon terms and price. One a contract for an option to buy has been created, the property cannot be sold to anyone else.
When creating a contract, the buyer will often pay a fee to have this option. They will agree upon the price as well as the term that the price will be valid for. Typically terms are valid for six months to a year. What is unique about these types of contracts is that it binds the seller to sell the property by the agreed-upon terms of the contract, but the buyer does not have to purchase it in the end. If the buyer decides to not complete the purchase within the agreed-upon timeframe, the seller is allowed to keep the fee money that was paid to have the option to buy included in the contract.
Option to buy contracts is often used by builders and developers who are looking to build large subdivisions or luxury homes. The builder may choose this option so they have the ability to test the land and ensure that zoning will go through properly. If the builder did not have an option to buy, they may have to invest a significant amount of time and money to check the property without having the guarantee of being able to purchase it if it is found suitable.
Another party that often uses option to buy contracts are real estate investors who may want to hold property they expect will appreciate more in the future. By doing this, they are able to lock into the lower current price and take advantage of the higher value in the future if the property does appreciate in value.
What Should Be Included in an Option to Buy?
To make sure that your option to buy will be considered a valid and binding contract, there are multiple things that need to be included and procedures that should be followed. Your option to buy should:
- Be made in writing, as a handshake or verbal contract is not considered sufficient
- Include the signatures of all parties as well as the date
- Verify that one of the signing parties is the title holder
- Include the address of the property
- Include the parcel identification number
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