Question

What is an option contract? How is it used in land acquisition? What should developers be concerned with when using such options? What contingencies may be included in a land option?

Answer 1

• Option contacts are special type of agreement which gives the buyer or seller the right to purchase or sell at a pre specified rate and a timeline.

• I’m real estate investment, when the landowner and purchaser enters into this agreement, a token payment is made by the purchaser to the owner to lock down the land at certain purchase price. This restricts the owner from selling his property to any other party till the timeframe mentioned in the contract expires. This gives the purchaser the freedom to explore for any better option and even if the market price for the land rises, the seller is still obliged to sell him the land at the pre specified rate.

• The token amount paid by the purchaser or the developer is often non-refundable and can be a hefty amount based on the type and size of the land. If the developer feels that he do not want to purchase the land for any reason, he’ll end up loosing that amount. Also if the developer is expecting the price of the land to go down further from the current price, then there is no point of getting into such option contact as the pre specified price will be higher than the future price in that case.

• A simple contingency plan may be to add certain percentage/ amount to the pre specified rate if the price goes beyond a upper limit to compensate for a loss to the seller.