Are Option Agreements Legal?Posted on October 10, 2011 by
In a column I wrote two weeks ago, I made the point that Options are the most powerful and underused documents in real estate. After the column ran, I got a call from a long-time realtor. He had some questions about Option Agreements and offered to buy me a cup of coffee. I said yes because, as you may know, I love free coffee… and a doughnut!
The first question he asked was, “Are Options legal?” I answered, “Yep, they’re very legal. In fact, did you know that most Georgia Association of Realtors’ Purchase and Sale Agreements (aka The GAR forms) begin life as Option Agreements?”
He gave me a very skeptical you’ve-lost-your-mind look. After he pulled out one of his GAR forms, I had him turn to Page Three and look at item 11-A-1. It read: Contract is an Option Contract. You could have pushed him over with a feather.
After that, he said, “I’ve heard the terms Option Agreement and Lease/Option a lot. Can you explain how an Option works?”
I used the following example – which is a deal Kim and I recently did – to demonstrate one of the ways an Option can be used to make an impossible deal possible.
About a year ago, Kim and I bought a $150,000 property for about $65,000. While we hosted an open house, a very nice couple stopped in. The couple loved our property, but could only qualify for a $120,000 mortgage.
For most sellers, this deal would be dead, right? But not if you have the Option tool in your deal-structuring toolbox!
Here’s our agreement: 1) We sold the couple the property for $120,000…$30,000 below market value. (You’re probably thinking that this was pretty stupid of us, right? Just remember: Stupid is as stupid does!) 2) At the closing, Kim and I netted a $50,000 profit – Cha-Ching! 3) Because the couple was buying at way below market, they agreed to pay all closing costs – Sweet! 4) For $10, the buyers sold us a Purchase Option. This gave us the option to buy the property back at any time within the next 12 years at a purchase price of $120,000 – the same price as the couple’s purchase price. 5) We recorded our Option and secured it to the property using a Security Deed.
One more thing to add: We also agreed that if/when we exercise our Option, we’d turn around and immediately sell the property. Anything the property sells for above $150,000 – the property’s fair-market value at the time the couple purchased – we’d split 50/50 with the couple.
Was this a Win-Win deal? You tell me. The couple was able to buy a nice home, in a wonderful neighborhood, at a price they could afford. We were able to quickly sell the property, make a nice chunk of change, and because of the Option, have the opportunity to make a lot more money further down the line.
Think about this: We can buy this house back at a purchase price of $120,000 at any time between now and 2022. Sure, property values are down today, but don’t you think there’s a good chance that by 2022, this property will be worth more – and probably a good bit more – than $120,000?
We L-O-V-E Option Agreements because they can help you make the impossible deals possible!