Within the world of real estate markets the word option refers to a purchase agreement between a property owner and a potential buyer for some time in the future. During times of increasing property values sellers are not liberal with selling options because they limit the seller’s choices. Conversely, when property values are declining there is a good chance that seller’s will offer purchase options on their properties; options are also popular with sellers who wish to move their investments from one specific market to another.
Most of the time the two parties to a purchase option will work out most of the agreements particulars in spite of the fact that sometimes there are state or local restrictions. The agreement is accomplished by the potential buyer paying a fee to the seller that, in effect, reserves the “first option” to purchase the property for the buyer and impedes the seller from granting a sale to anyone else as long as the option is in effect. Although most options are in effect between one and three years the parties can negotiate for different lengths of time. It is important for both the buyer and seller to remember that with a more extended term in the option agreement there exists a greater possibility of divergence between the agreed upon price and the actual value of the property.
An agreed-upon purchase price is not actually a required feature in an option, but it is generally part of the agreement and a large part of why a buyer would purchase an option. Agreeing to a purchase price means that in spite of what the real value of the property is at the time of purchase, the buyer pays the established price without the worry of how the property is valued at the culmination of the option. As an added advantaged options are, themselves, a tradable object that the option holder can sell to a third party throughout the duration of the option.
The option fee is an amount negotiated by the parties and there is no limit to how much the fee can be; there is no minimum either. It is rare for the fee to be refundable and it goes straight to the seller. Generally, option fees range between one and five percent of the established sale price, however, if a seller becomes desperate to divest himself or herself options can be sold for as little as $1. For the seller, the principal attraction of options is to offset any loss in property value. Options also are a great way to increase the possibilities of a sale by inviting interested buyers. However, option holders are not committed to purchase the property as the option expires.
In this respect, options are popular among real estate speculators, especially when the option fee is extremely low. As there is no obligation on the part of the buyer to exercise the option and purchase the property and the option can be sold by the buyer to another party, low cost options are useful in real estate speculation. If the property value increases over the period of the option, then the owner of the option stands to make a solid profit through buying the property at the lower amount agreed to in the option. Conversely, if the property value declines in value, the option holder can decide not to purchase the property and forfeit his option fee.
Options can be helpful for the everyday homebuyer, as well, that is looking for a home in a certain place, instead of an investment. If a buyer needs time to arrange financing or amass a down payment then an option will allow the buyer to hold onto the property until the agreement expires. Buyers markets are marked by the availability of options because they usually benefit the buyers more than sellers. However, sellers also benefit from the use of options. People who cannot currently buy a home but desire to do so in the future can benefit from options, as well.
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