The decision to buy or sell real estate is monumental and carries a host of procedures and steps that can become complicated. Options to purchase and the right of first refusal contracts have specifications about when and how a home or other piece of real estate can be bought or sold. Before signing an option agreement, buyers and sellers should understand the types of contracts involved with the sale of a new home.
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If you need assistance drafting, reviewing, or disputing an option agreement in a real estate contract, contact the business contract attorneys at Jones Gregg Creehan & Gerace today to schedule your initial consultation. Our legal team is well-versed in every aspect of buying and selling real estate, including option agreements and the right of first refusal contracts. Working with one of our experienced business law attorneys can help you protect yourself, your rights, and your interests. Contact Jones Gregg Creehan & Gerace today to schedule your initial consultation.
What Is an Option Agreement?
An option-to-purchase agreement provides a home buyer with the exclusive right to purchase the real estate within a specified time frame and for a fixed price. In an options agreement, the property seller gives a potential buyer the exclusive right to purchase the property. During the time period stated in the option agreement, the seller agrees that he or she will not sell the property to someone else. Once the time frame in the option agreement expires, the seller is free to sell the property to another person or company.
The potential seller is essentially paying the buyer for the exclusive option to purchase the property. Paying for an option agreement can be beneficial if the potential buyer needs more time to decide or time to get his affairs in order before finalizing the purchase of the property. In some cases, an option agreement will give the purchaser the option to purchase the property at a variable price period during the option. This is specified in the option agreement. The seller cannot work with any other potential homebuyers.
When option agreements are used in commercial real estate, the option to purchase can take many more forms. In most cases, the option agreement is structured similarly to a purchase and sales agreement or lease agreement. In commercial real estate, the price in an option agreement is usually fixed. The buyer and potential seller will agree to a specific price. However, in some situations, the price may fluctuate.
Option Agreement Types
There are three main option agreements in real estate contracts: the straight option, the letter of credit option, and the interest option. The straight option is usually the most straightforward, as the name implies. Each option has its responsibilities and requirements from the buyers and sellers who signed the option agreement.
The Straight Option
The straight option gives the buyer the ability to purchase the property for a specific price during a specific period of time. In most straight option agreements, the money that the potential buyer pays for the option to purchase will be deducted from the final purchase price upon closing. However, if the potential buyer forfeits the option to purchase the property, he or she will also forfeit the deposit paid for the option agreement.
The Letter of Credit Option
The letter of credit option is a less common type of option agreement. This option involves a letter of credit from a bank. The letter of credit will be issued for the amount of the option price. If the potential buyer decides to exercise the option and purchase the property, the letter of credit will be avoided. If the potential buyer decides not to exercise the option agreement, the seller will collect the value of the letter of credit from the authorizing Bank. This option eliminates the need for an investor, but it requires more paperwork and is more time-consuming than the straight option.
The Interest Option
With the interest option, the buyer agrees to pay the seller the amount of Interest they would have earned, based on the property’s appraised value. If a potential buyer doesn’t agree to purchase the property, the seller will at least receive some form of compensation from holding the property and not selling it for its full appraised value.
The Right of First Refusal vs. Option to Purchase
Understanding the difference between the right of first refusal and an option to purchase can be helpful. A right of first refusal gives a tenant the option to purchase the property in which he or she lives after the seller offers another party. Right of first refusal clauses are typically added to lease agreements or other documents and can occur in residential and commercial real estate contracts.
In this scenario, the tenant is already living in the property he or she is considering purchasing. Once the owner starts negotiating with a third party to sell the property, the person with the right of first refusal has the right to purchase the property on those same terms or decline. If you have questions about what type of contract will benefit your needs, we recommend discussing your case with one of our experienced attorneys.
Discuss Your Case With an Experienced Pittsburgh Business Law Attorney
Whether you’re considering whether to sign a real estate contract with an option agreement, or you’re involved in a dispute over an option agreement, you need an attorney on your side. Don’t hesitate to seek assistance from the experienced Pittsburgh real estate law firm Jones Gregg Creehan & Gerace. We provide clients with skilled legal counsel for individuals and businesses. Contact Jones Gregg Creehan & Gerace today to schedule your initial consultation to learn more about our contract review, drafting, and other legal services.