Property Options: What Are They And How They Can Get You Into The Property Market
Have you seen a property that would make a great development, but don’t have the funds in place to pay for it right now? A Property Option could help you get your foot in the door, writes DG Institute Founder and CEO Dominique Grubisa.
Are you a glass half empty or a glass half full kind of person?
While plenty of would-be developers are throwing their hands up over the current housing downturn, the glass-half-full types are rubbing their hands in delight. While there’s now less potential for rapidly flipping properties to make a capital gain, there are plenty of other opportunities arising.
One of these is the possibility of taking out Property Options.
These are legally binding agreements that allow developers to secure the purchase of a property without having to lay down all the money upfront. Under an option agreement, the vendor and buyer agree to a sale price, the vendor receives an option fee, and, if the deal shapes up, the buyer pays the full price when he or she is ready. If funds for the development can’t be raised or the deal doesn’t stack up, the buyer forfeits the option fee and walks away.
When the market was hot, vendors had their pick of buyers and could often shift their property in a week or two. Now that things have cooled down, they are far more open to creative options around the sale.
Most Property Options have two phases – the call option, which outlines the buyer’s right to purchase the property within an agreed period of time at an agreed price, and the ‘put option’ where the seller offers the property to the buyer at the agreed price at the end of the agreed period of time. While the option is in operation the seller agrees not to sell the property to a third party.
Property Options can work in favour of both the vendor and the buyer. For vendors, it allows them to achieve a higher market price for their property because option terms are usually around 24 months which means they can negotiate a price that is in keeping with current market trends. For buyers, as well as not having to pay all costs up front, they can value-add to the property during the term of the option with the view of on-selling it at a higher price.
Before entering into a property option agreement, it’s always advisable to have a solicitor help draw up the required agreements, and the legal costs for this can vary between $1500-$2000 which should cover the drafting of the option agreement and the contract of sale that goes with it. If you want to save money on this side of the deal, you can contact the relevant land property department in your own State or Territory for a template on what to include in the option agreement.
The biggest cost in a property option agreement is the actual option fee, which can range between three to ten percent of the property’s market value, although this too can be negotiated with the vendor. Although Government Stamp Duty isn’t usually paid at the time of the initial option agreement, it is payable when the property is purchased at the end of the agreed term. The handling of this does vary from state to state though, so make sure you are aware of the stamp duty consequences before you proceed.
There are risks involved in this type of deal, for both the seller and buyer. For the buyer it’s important to investigate the property you’re thinking of purchasing. Some vendors may use this type of deal if they’ve had trouble selling their property on the open market. For example, if it’s an older property that needs some work, the vendor may not have the time, capital or even inclination to get it prepared for sale, or it could be a heritage listed property that has a number of restrictions on it in regards to renovation or refurbishment.
If you’re looking to invest in a parcel of land for future development, it’s important to negotiate and firm up the expectations in regards to that development through the initial contract phase as sometimes the vendor may require you to promote the site for development through a planning process which can be costly and time-intensive.
For vendors there is the risk that the buyer may pull out of the deal before the end of the contract terms, but they still retain the initial option fee paid at the start of the deal.
If you’re interested in learning more about property investment and profiting from distressed property, join the upcoming Real Estate Rescue webinar with Dominique Grubisa. Get in touch to learn more.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.