Real estate option contracts have long been a common strategy for selling raw land and some types of commercial properties. Can home sellers use option contracts to their advantage, too? Absolutely! Options contracts are not common in home sales, but they can be handy tools in some situations. Let’s start by defining option contracts, then we’ll discuss strategies home sellers can use to take advantage of them.
An option gives a buyer the right to buy a property in the future, but no later than a specified expiration date. The buyer is not required to execute the purchase, but the fee they pay to obtain the option might not refunded if they decide not to buy or are unable to buy before the option expires. They are buying an option to buy the property, not the property.
Make Fast Cash On A Home Sale
Sellers can use real estate option contracts to make quick cash at the beginning of the transaction. In a standard sale, the buyer typically requires an inspection period and time to process their mortgage. That means the seller has to wait until escrow closes, usually 30 to 45 days, to put any cash in their pocket. With an option contract, the seller collects the non-refundable option fee immediately or within a few days of when the option contract is signed.
Lock In A Future Buyer While Staying In The Home A While Longer
Some sellers want to remain in their home some period of time, but want to line up a buyer now. If the home is in high demand, they may find buyers willing to purchase an option. In this instance, the option is locked in now but the option period begins at a point in the future.
Use The Option Contract Fee As Non-Refundable Deposit
Buyers that require a long time to close escrow sometimes offer a non-refundable deposit to convince sellers to accept an extended escrow period. There are instances when non-refundable deposits can still be refundable, so using an option contract may be a better way to make sure there are no circumstances under which the money must be returned if the sale doesn’t go through.
Working With A Delayed Buyer
Some buyers may want to purchase the home but are committed to staying in their current residence for a long time. Here’s an example.
“Dave, I’d like to buy your home but my job requires me to stay in Boston until next July.”
“No problem Fred, we are in no hurry to move out right away. Would you be willing to purchase an option that allows you to buy the home no later than next August? I’ll apply the option fee to the purchase, though if you fall out I keep the fee.”
“Great! Let’s do the paperwork.”
In our example, the seller didn’t need to move right away and was compensated for holding the property off the market until the option expires next August.
Working With An Unsure Buyer
Some buyers can’t make up their mind whether or not to submit an offer, but don’t want to walk away from buying the home, either. If the seller has the flexibility, they can offer the unsure buyer an option to give them more time to make up their mind. Here’s an example.
“Dave, I’d like your home. We live out of state and I’d like my husband to take a look at it before we make an offer.”
“No problem Susan. But we may have interest from other buyers. If you want me to hold it for you, I’m willing to sell you an option for a small fee that would keep me from accepting another offer in the next 30 days. I’ll apply the option fee to the purchase, though if you don’t make an offer I keep the fee.”
“Great! Let’s do the paperwork.”
Options can provide flexibility while compensating sellers for extended escrow periods or other delays.
One other note – when working with a broker to sell your home, compensate them for their efforts by agreeing to give them a commission on the option fee and extending the listing period to include the option period.
Caution: Real estate option contracts are not standard for home sales and can have a lot of variables, e.g. the option fee may be applied to the purchase price or not. Consult an attorney regarding the content of the option contract, even when you are working with a real estate broker.
Have questions about real estate option contracts or selling your home, land or investment property? Drop me a line!