There are many ways to define the word "option", however it has a specific connotation in the world of real estate. It means that there is an agreement between a seller and a potential buyer regarding the future purchase of a specific property. Real estate options are not often sold during real estate booms because they limit the seller's choices. However, sellers often use options in certain markets that they wish to remove their investment from, but especially during times of declining property values.
Most aspects of option agreements are negotiable, although some states and localities impose restrictions or mandate certain terms. The general idea is that the potential buyer pays the seller an option fee, which gives the potential buyer the option of purchasing the property at the end of the agreement. An option also prevents the seller from selling it to someone else during the period that the agreement is in force. The length of an option is negotiable, although most are for a period of between one and three years. The longer the option, the more likely it is that the actual value of the property will diverge from the fixed amount agreed to in the option agreement.
Usually, the hallmark of option agreements is an established purchase price for the property in question; nevertheless, it is not required for an option to be legal and binding. However, a guaranteed price ensures that the buyer can purchase the property at that agreed-upon amount notwithstanding the actual value of the property as long as the option is in effect. Additionally, an option is a marketable commodity, meaning that for the duration of the option the holder is able to sell the option to a third party.
The option fee is a negotiable amount that the parties arrive at; there is no limit to the sum agreed on, nor is there a minimum. Fees are paid directly to the seller and are hardly ever refunded. A typical option fee will generally be between one and five percent of the negotiated purchase price; however, sometimes sellers find themselves in a position requiring the urgent sale of properties and can sometimes agree to option fees as low as $1. For sellers, the essential benefit to selling options is to neutralize any losses in property value or drain on cash. Options can also significantly increase the probability of selling the property by attracting interested buyers. Unfortunately for sellers, the option holder is not required to complete the purchase when the option is terminated.
Real estate speculators have embraced sale options especially if the charge is reduced. Speculators love using options as a tool because they are not obligated to actually procure the property, and the option can be sold to a third party. However if the property value rises during the term of the option then the holder can count on a healthy profit after investing at the lower, previously arranged amount. On the other hand, the speculator can chose to relinquish the option fee if property values are dropping.
Options can be helpful for the everyday homebuyer, as well, that is looking for a home in a certain place, instead of an investment. If a buyer needs time to arrange financing or amass a down payment then an option will allow the buyer to hold onto the property until the agreement expires. Buyers markets are marked by the availability of options because they usually benefit the buyers more than sellers. However, sellers also benefit from the use of options. People who cannot currently buy a home but desire to do so in the future can benefit from options, as well.
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