Chapter 55: Real estate purchase options

____________ require a longer initial option period (or right to extend option period) to provide time in which to (3): 1.) study a property 2.) obtain government clearances & 3.) locate financing for development. If these objectives are met, developer is able to purchase property on a previously-agreed set of terms.

Developers

Option agreement is not enforceable unless?

owner receives some sort of consideration

Any # of additional option periods may be agreed to, one following expiration of another. The # of extensions depends only on (2)? [See RPI Form 161- 1]

1.) owner's willingness to grant extensions & 2.) buyer's willingness to provide more option money to pay for those extensions.

The contingency provisions include approval of (5):

1.) property's physical condition 2.) leasing income & operating expenses; 3.) available mortgage financing 4.) title & zoning restrictions on use; & 5.) existence of equity investors to fund the closing

Chapter 55 Learning Objectives (3):

1.) understand nature & function of an option form as a method to purchase property 2.) explain pros & cons of using an option to purchase for both a buyer & a seller 3.) advise on the exercise of an option to purchase real estate

A seller considers granting an option when they (4):

1.) want to retain ownership rights to property for a fixed period into future (for tax purposes) 2.) aim to sell at a price based on higher future market values 3.) need to provide an incentive to induce a prospective tenant to lease property; or 4.) want to give a promoter or developer incentive to work up a marketing or use plan & buy the property

Typically, a small amount of option money is paid for a short initial option period, sometimes called a _________ The term of free-look option may be 20-30 days, granted on payment of a small amount of option money, such as $100.

"free-look" period

A recorded option ceases to constitute constructive notice of buyer's option rights when (2):

1.) 6 months have run after expiration date stated in recorded option agreement or memorandum w/o the prior recording of an exercise or extension of option; or 2.) 6 months have run after option or memorandum was recorded if: expiration date of option can't be determined from recorded instrument or memorandum

Example: Broker employed by seller under listing agreement contains: seller's promise to pay broker's fee if they: negotiate a sale, exchange or grant of an option to purchase seller's property. Broker's agent locates a qualified buyer. Seller grants buyer (optionee) an option on receipt of option money paid by buyer. Broker receives no fee on grant of the option (though one is permitted) & option doesnt contain fee provision. However, broker has earned fee & is entitled to payment under listing due to seller entering option agreement. After listing expires, buyer exercises the option & acquires property Broker demands seller for fee under listing agreement Seller refuses & claims: broker is not entitled to fee since: buyer exercised the option after listing agreement expired & option did not provide for fee on its exercise Think: Did broker earn a fee?

Here, broker did earn a fee During listing period, seller granted buyer option to buy property, which buyer later exercised to acquire the property

Example: Owner & tenant sign lease agreement granting tenant an option to purchase leased property. Option includes (3): identities of owner & buyer, property description & price to be paid. However, it does NOT specify an escrow period for delivery of price & deed after exercise of the option. Tenant timely exercises option & escrow is opened Owner responds by placing conditions on escrow period not included in option, negotiating to prolong the close of escrow until: they locate §1031 replacement property. Tenant counters, attempting to resolve owner's demand for an extended escrow & their need to record a purchase-assist mortgage to fund purchase price. Owner then refuses to perform, & claims: option can't be enforced since: ongoing negotiations to resolve the time for payment of price & delivery of deed are essential terms & didnt exist in the option. Does lack of terms regarding: time for price payment & delivery of deed make purchase option unenforceable?

No! Option agreement need only identify: parties involved, property in question & price to be paid. When option doesn't state: method for price payment or length of escrow period, method for price payment is implied to be cash through escrow. Similarly, time for price payment of the price in exchange for the deed is implied to be of a reasonable time period (60 days) after exercise of option.

What is option to buy?

-Agreement -granting: irrevocable right to buy property -w/in specific time period

What is consideration?

-Anything of value -given or promised by person -to: induce another to enter into contract

What is option money?

-Consideration -given by: buyer -to: seller -for: granting buyer an option to purchase property.

What is option period?

-Time period -during which: an optionee/ buyer -may exercise their right to buy -under an: option agreement

What is constructive notice?

-To be charged w/ knowledge of conditions existing on property -by: recorded documents or occupancy of property -at time of transaction

Chapter 55 Key Terms (5):

1.) consideration 2.) constructive notice 3.) option money 4.) option period 5.) option to buy

A buyer considers acquiring an option when they (5):

1.) dont yet want to commit themselves to buy 2.) are speculating in a depressed market & believe values will soon rise 3.) need time to investigate & determine whether property will operate profitably 4.) need time for promotional work (such as syndicating, subdividing, rezoning, obtaining permits or mortgage commitments, or to complete a §1031 reinvestment); or 5.) are tenant & may want to own leased premises in future

When syndicator exercises the option, a ________ is automatically formed, no differently than accepting an offer from seller to sell the property under: purchase agreement containing nearly identical terms but without contingency provisions -->On exercise, both parties become obligated to perform as agreed & need to proceed w/ closing the sale If syndicator allows option period to expire by NOT exercising the option, seller can sell property to another buyer, unaffected by the option since: seller's irrevocable offer to sell represented by the option has expired.

bilateral sales contract

While _________ is needed to create option agreement which is binding on owner, __________ paid for option may be a minimal amount.

consideration amount of consideration

Conversely, the option contains seller's irrevocable offer to sell property on terms stated in option agreement. Syndicator only agrees to become obligated to buy property when they timely accept seller's irrevocable offer to sell, an acceptance called _________ If syndicator decides to buy property, they will exercise the option w/in time period set for agreeing to buy property, called the ________

exercising the option option period

In exchange for seller's grant of an option to buy property, syndicator pays seller _______ The amount of option money is the price syndicator pays to buy the option & "tie up" the property by effectively removing it from the market. [See Figure 1] Here, the option agreement gives syndicator control over property w/o committing themselves to purchase it until they exercise the option, if ever. Successful completion of property analysis & solicitation of investors will indicate whether they exercise the option or not.

option money

In option agreement: owner is referred to as the __________ & potential buyer is referred to as the _________ They become: seller & buyer, respectively, on optionee's ________

optionor optionee exercise of the option

Consider a real estate syndicator searching for investment-grade, income-producing real estate. A property is located which appears to be financially suitable for a group investment, a real estate brokerage activity called _______ However, syndicator won't commit themselves to purchase property until they have fully investigated the condition of property's improvements, operating data, location & record title &availability of mortgage financing, an effort called due diligence.

syndication

In the case of a syndicator or developer using an option to: control property they are not yet certain they want to purchase, the consideration is the option money paid to owner to grant the irrevocable offer to sell. Option money is typically set at an amount that compensates owner for? , similar to a payment of rent or interest (less any actual & implicit income produced for owner by property).

the time the property is kept off the market

A buyer considers acquiring an option when they:

• do not yet want to commit themselves to buy; • are speculating in a depressed market & believe values will soon rise; • need time to investigate & determine whether the property will operate profitably; • need time for promotional work, or to complete a §1031 reinvestment; or • are a tenant & may want to own the leased premises in the future.

A seller considers granting an option when they:

• want to retain ownership rights to the property for a fixed period into the future (for tax purposes); • aim to sell at a price based on higher future market values; • need to provide an incentive to induce a prospective tenant to lease the property; or • want to give a promoter or developer incentive to work up a marketing or use plan and buy the property.