An option contact is one in which the seller extends and keeps open an offer for the sale of real estate. It's for a certain or fixed amount of time, at a fixed or certain price, to a particular potential buyer.

Such contracts can be beneficial to both the buyer and the seller, but particularly for the buyer. For example, an option can give the buyer time to secure financing, investigate zoning laws and inspect the land. It can also be used as an investment: buy an option, wait for the land's value to increase, then exercise the option and make a profit.

However, in order for an option to be valid and enforceable, there are some rules that need to followed, and there are some things that it should include.

What an Option Contract Is & What It's Not

What's bargained for and sold by the seller in an option contract is the right by the potential buyer, or "optionee," to have the offer remain open during the period and on the terms specified in the contract. If the option is exercised according to its terms and conditions, a binding contract is created. The seller must sell, and the buyer must buy, for the price or consideration and on the terms stated in the contract.

A contract for the sale of land, on the other hand, binds the seller to sell and the purchaser to buy. In an option contract, only the seller is bound to the option. That is, the optionee doesn't have to exercise the option and doesn't have to buy, but the seller must keep the offer open.

A contract that's contingent or conditional on the happening of a certain event is not an option contract. So, if a contract states that the seller will sell and the buyer will buy if and when the buyer secures financing, both parties are bound upon the happening of the stated occurrence. In an option, however, the buyer is not bound to buy until he or she decides to exercise it.

Legal Requirements & Essential Parts of an Option

Like any contract that pertains to land, an option agreement must comply with the "statute of frauds," and so it must:

  • Be in writing, and any cancellation or change ("modification") of the option should be in writing as well
  • Be signed by the seller

In addition, like any other contract, it must be supported by consideration to be enforceable, which means that there has been value given in exchange for the promises made in the contract. The option should state the consideration paid for the option. Without consideration, the seller could withdraw the offer without being liable for breaching the contract. If the consideration stated has value, even if only one dollar, it'll be sufficient. This is true even if the value is minimal or clearly inadequate relative to the subject of the contract.

The option should state how long the offer will remain open. If the option is for a fixed period, like six months, the exercise of the option must take place within that time. If a time is not specified in the option contract, a court will require the seller to hold the offer open for a "reasonable time." An option can't be extended for an indefinite time or "forever."

The option must state clearly the the sales price, that's the price for the land once the option is exercised, or the means of determining the price, such as by stating a maximum price to paid. If the court can't determine the price from the contract, either directly or by other means, or if the price is left to future agreement by the parties, the contract will be missing an essential element and won't be enforced by the courts.

Any conditions to the exercise of the option should be clearly stated in the contract. Conditions often take the form of limitations, for example, providing that the option can only be exercised by written notice, or in a specified form, or only by certain persons.

Pages: 1 | 2

Tagged as: Real Estate, Residential Real Estate, option contracts