An option is an agreement to keep open for a
predetermined period of time, an offer to purchase or sell property.
The prospective purchaser is referred to as the optionee, the
property owner is the optionor. The option contract is deigned to
assure the optionee the right to purchase the property
at an agreed upon price and within a specified period of time.
Usually, the optionee is keenly interested in the property, but will
not exercise the right to complete the purchase unless certain
problems are resolved or questions answered beforehand.
-Speculation. The prospective purchaser believes that
the property will increase in value.
- Investment. The prospective purchase thinks the
property will be a good investment but wants to wait until he or she
can find other investors willing to contribute capital and share the
risk before actually purchasing the property.
- Comparison. The prospective purchaser thinks the
property is a good buy but wants to investigate other properties
before coming to a final decision.
- Profit. The purchaser plans on selling the option
for a profit.
- Time to acquire cash to close. The prospective
purchaser needs additional time to save for the down payment, to
sell other property to obtain the down payment to sell other
property, to obtain the down , or otherwise obtain the cash
needed to close transaction.
- Qualifying. The buyer is unable to qualify for a
loan at present, but has reason to believe that circumstances will
change shortly and that he or she will be qualify fir a loan within
the next year.
- Rent Credit. The buyer and seller mat agree to
credit part or all of the lease payments to the down payment, loan
amount, or sales price (which would reduce both the down payment and
the necessary loan amount)m making it easier for the buyer to make
the purchase in another six months or year.
Consideration for an Option. To be enforceable, an
option must be supported by consideration. The consideration is
something of value given by the optionee to the optionor in return
for a commitment to sell the property to the optionee at some time
in the future. The consideration is usually a sum, of money, but it
can be anything of value. It is sometimes called the option money.
For example: If an renter puts down $5,000 for deposit
that will guarantee the he or she will qualify for a mortgage in an
upcoming year, and eventually cannot qualify the option is voided
and money of $5,000 are non-refundable.
However, any arrangement with an owner should be
spelled out in the option contract.
Advantages/Disadvantages. The main advantage of
the lease/option is keeping a sale alive until the parties are in
position to close. The lease/option allows buyer to reduce the
selling price over a period of time, making an easier to come up
with a down payment or to qualify for a loan when the option is
Also the seller is receiving some money income from
the rent of the property, which can be used to make payment a new
house until the old house is sold., or to cover financing chares to
cover the payments.
The primary disadvantage of the lease/option is that
the seller cannot sell the property to anyone other then the tenants
during the term of the option. In addition, the seller cannot occupy
the property during the term of the lease, so this plan normally
involves sellers who have already purchased a new home or who have
been holding the subject property for income production rather than
as a personal