Most commonly, an “Option Agreement” is a rent-to-own situation, more frequent in a landlord-tenant context. Typically (though 100 percent negotiable), an Option Agreement works like this: The Property Owner (called the “Optionor”) agrees to sell a home and/or parcel of land (the “Real Property”) to the Buyer (called the “Optionee”) at a later date, for a fixed price agreed to at the time of the Option Agreement. In exchange, the Optionor must receive some benefit (called the “Option Consideration”).
Examples of Option Consideration include additional monthly rent (above and beyond the lease value), a lump sum option payment, increased later purchase price, or a combination of several terms. The Option Consideration is generally non-refundable, in that, if the Optionee decides not to proceed with the purchase at the later date, the Optionor keeps the Option Consideration. If the purchase proceeds, the Option Consideration, or any part of it, can be used towards the purchase price if agreed at the time of the Option Agreement. (As a side note – if a loan will be involved, some lenders may, or may not, allow the Option Consideration to count towards a Optionee’s down payment; check with your lender.)
An Option Agreement is usually, though not required to be, concurrent with a lease. As such, there’s often ample paperwork involved as the transaction is essentially a purchase, lease, and the Option Agreement itself, along with the various required disclosures as would accompany any sale or lease. Many aspects of the sale are delayed until the Option Agreement is triggered by the Optionee’s exercising of the option, but some are still required upfront, including a complete Transfer Disclosure Statement and Natural Hazards Disclosure.
An Option Agreement allows the Optionor – the Real Property owner – to reasonably secure a sale for a later date, with terms known now. This may be ideal to avoid some market uncertainty if seeking long term planning such as in an estate plan, retirement purposes, etc. Of course, if market volatility moves downward, the Optionee – the Buyer – may pass on the ultimate purchase. Hence the need for the Option Consideration, to balance out the potential risk. Likewise, the Optionor may be disappointed if market volatility increases the Real Property’s value, nevertheless still obligating the Optionor to perform as earlier agreed.
There are often non-monetary considerations as well for the Optionor to agree to this structure, such as the desire to help long-term tenants save for a purchase, a family arrangement (i.e. selling property to children or other relatives over a gradual time), as part of an estate plan, for tax considerations, or other reasons.
Optionors therefore must carefully assess the risks and rewards available with an Option Agreement and consult with appropriate real estate, legal and tax professionals.
Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County, serving individual, investor and small business interests in real estate. Active with the Newport Beach Association of REALTORS® and Costa Mesa Chamber of Commerce, Devin R. Lucas Real Estate is an independent real estate brokerage and law practice located in Newport Beach, California.
Devin R. Lucas Real Estate
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