An option contract in real estate gives the willing buyer the right to purchase a property for an agreed upon price and time frame.
Option Contracts in Real Estate
Klauster Properties Limited (KPL)
Option Contracts for whom and for what?
Option Contracts in real estate provide control over a property without transferring ownership. Options to purchase and lease options are commonly used by traders, developers, investors and also more and more by people as path for home ownership.
Real estate investors use option contracts for instance to control a property for future plans or appreciation. Property trades take options to sell on a contract or the property.
Developers and builders take option contracts to obtain council approvals e.g. for changes to land, zoning and subdivition or feasibility tests.
As path into home ownership, people use lease-option contracts to occupy a property (lease) with the option to purchase during or at the end of the lease. For the buyer postponing the financial transaction until the time and conditions are right can be seen as risk management strategy. In this way the buy can also use changes in interest rates to his/her advantage.
The option contract binds or obligates the seller but not the buyer to execute the transaction. For the “right” to purchase or not to, the buyer pays a non-refundable consideration, which commonly is a part of the purchase price if the buyer completes the transaction.
Lease Option Contract
why would you enter such agreement?
For the lease holder (buyer) the lease option contract includes the “option” to control the property and the “lease” to move in on day one, but settle the property only if everything goes to plan during or at the end of the lease. This type of agreement is adaptable to unpredicted changes in life.
For the seller to sign a contract today and passing on the property in future has also benefits e.g. as path into retirement. The purchase price and time frame are established, and until the settlement the seller gets payments on the lease.
In comparison with a tenancy agreement, the lease holder is protected by the option agreement and more likely to take care of the property. As both parties secure their interests a lease-option agreement can be seen as win-win situation.
What does a lease option contract cost?
No extra costs. You will agree to an option consideration fee that will be held for you as part of the deposit. You would use it like a bond when signing a tenancy.
Duration of lease option contract
It is up to both parties - mainly it depends on your circumstances and time needed to qualify for a home loan. Common length is generally from one year to three years.
Why would you sign an option agreement?
You can lease something much nicer today as you could afford but able to buy tomorrow.
Why is a lease option worth money?
Consider you live in your home before having paid for it. You might have signed a “home improvement” clause for investing in your lifestyle and creating equity. That would increase the ratable value (RV) and your borrowing capacity for a home loan.
Think twice - Taking home ownership is like an enforced saving plan that helps reducing housing costs and accumulating wealth when paying off the mortgage.