- How Much Money Is Needed To Invest In Rental Property?
- Should A Real Estate Investor Get An Agent’s License?
- 5 Big Factors That Affect The Costs Of Renovating Your Home
- SIBOR Hike – What You Can Do With Your Current Loan
- 6 Basic Don’ts Of Real Estate Negotiation Tactics
- Will New Condo Relaunches Trigger The Great Property Sale We Have All Been Waiting For?
- 10 Proximity Amenities That Add Value To Real Estate
- How To Get Personal Loans More Easily With Good Credit
Option To Purchase And The Right To Buy
A seller and buyer might take ages to negotiate for an agreed price for a transaction to take place. But sometimes it can be as quick as an hour after viewing the property in an open house.
Whatever that case, a seller tends to have lengthy discussions with potential buyers about price and market value.
It’s no coincidence that sellers usually have to go through dozens of interested parties before finally landing a serious buyer.
Option to purchase
The first step towards moving a deal from casual chat to serious transaction is often the issuing of an option to purchase.
Also commonly referred to as the OTP, the option to purchase is unlike a sales and purchase agreement.
Many home buyers and sellers use the two terms interchangeably and refer them as the same thing. This is not the case.
Difference between Sales and purchase agreement and option to purchase
A property sales and purchase agreement (S&P) is a bilateral two-way contract whereby both parties have come to agreement. The binding agreement being the buyer agrees to buy and that seller agrees to sell.
In theory, the S&P comes after the OTP. Meaning that it is the next step after a valid OTP in the property transaction process.
It’s not unheard of for the OTP to be skipped with buyer and seller moving straight to the S&P.
On the contrary, the OTP is a unilateral contract whereby the seller is obligated to sell, and the buyer is not obligated to purchase.
If the buyer must buy, it must be clearly stated in the OTP. But this will defeat the purpose of the OTP and both parties should move on to the S&P instead.
Sales and purchase agreement with contingency
While real estate agents and sales people often try their best to adhere to industry practice of issuing OTP followed by S&P, more and more deals, especially with developer sales now go ahead with issuing S&P contracts to buyers.
Some of which have contingencies. Effectively making these bilateral agreements with contingencies.
Practically speaking, when a bilateral contract consist of a contingency in favor of the purchaser which allows him to back out of the deal, it basically functions like an option to purchase.
Yet technically in legal speak, they a bilateral S&P that contains a contingency is not the same as an OTP.
At the same time, you can be sure that developers with hundreds of millions of dollars in the bank and in-house lawyers will have their reasons to go straight to S&Ps instead of starting with OTPs.
More about OTP
The buyer, who is the option receiver , is also referred to as the optionee. While the seller, who is the option giver, is also referred to as the optioner.
In order for an OTP to be issued by a seller, the seller will require some form of consideration, usually in the form of a non-refundable booking fee.
The value of this booking fee will be determined between both parties.
A typical option to purchase should contain material information including:
- Legal name of buyer and seller
- Official address of the property in question
- The purchase price
- Time frame in which is option is valid
- Amount of booking fee
With the OTP issued to the buyer, this will effectively and officially give the buyer the right to buy the property within a certain time frame that will expire after a stated date.
If no action is taken on it during the period when the OTP is active, going past the due date will render the OTP as redundant due to lapse of the contract.
The option money will be forfeited to the seller and there is no more obligation to sell.
If the option to purchase is exercised, the agreement between buyer and seller will move from a unilateral agreement to a bilateral one.
At this point, either party will be liable to penalty fees or damages should the other party fail to honor the completion of the transaction.
Investing in options
While most people who come across an OTP are regular home buyers who buy property with the full intention to be it’s residents, options can be a tool for real estate investors and flippers to profit from properties.
Savvy investors can use it to acquire control of a property without ever having to own it outright. Even landlords can use lease options to induce good behavior of tenants.
For example, a meticulous investor might have have spent time on investigating master plans and become aware of future developments in a particular area. Forecasting a rise in value, he can then obtain options for real estate on the land, and in turn sell it to developers when they finally get wind of the city plans.
When there is a very strong market outlook for a particular area, a savvy investor can also convince land owners to issue a long term option to purchase. This allows the investor time to see how developments progress and judge in future whether to purchase the property outright in future.
What many people don’t realize is that OTPs can be sold to third parties.
But these days, in an effort to avoid dealing with speculators and investors, many sellers make an option to purchase non-assignable by getting this term written into the contract.
So if you have an intention to trade OTPs, do ensure that the OTP you have in possession also grants you the right to assign it.
Otherwise you might have to complete the transaction and only profit from it via double closing which requires a lot more work