How Put and Call Option Real Estate Agreements Work

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Education & Training with Property Investment Wise

Put and Call options are an effective way by which parties enter a contract to acquire or sell property with minimum upfront commitment. The arrangements offer a party the right, and not a distinct obligation, to purchase an asset or property. Put and Call option agreements have a diverse variety of uses in real estate, business assets, and as tools of succession planning.

What is a Put and Call option?
There are three components in a Put and Call option contract:
i. Put option – The seller can rightfully compel a buyer to acquire the property.
ii. Call option –The buyer can rightfully compel the seller to sell his/her property.
iii. Put and Call option – Both parties have the right to coerce each other to sell or buy the property. Such options run consecutively. The call option precedes the put option.

How do call and put options work?
Option agreements have two principal components in put and call option real estate. The first one is the body of the option contract. It outlines the terms that regulate how the parties may exercise their specific options. The second component entails the sale contract being an annexure of the option agreement. 

The agreement will contain all the terms and details, including the length of the contract and the purchase price. When exercising either of the options, each party will be required to sign the sale contract agreed on. The option agreement is the most common way of handling the options of real property. However, there are other mechanisms available depending on the type of contract or specific circumstances. 

Characteristics of a Put and Call option agreement
Notwithstanding the differences in Put and Call options explained above, the following features remain similar between the two. 

i. Option fee
An interest in land is the subject matter in an option deed. Therefore, consideration should be paid when entering and option deed. Depending on the type of option agreed upon, the consideration may be either:
• A call option fee remitted to the seller by the buyer; or
• A put option fee paid to the buyer by the seller. 
In case the agreement is a Put and Call option, each of the forms of consideration is paid. In this case, the consideration may be nominal. 

ii. Documentation of Put and Call option
Put and Call options are documents by way of deed. The technical terms used on parties to the option deed are grantor which refers to the seller, and grantee, the buyer. The option deed annexes a valid and complete contract for sale and purchase of land, as well as other technical documents. Therefore, this requires an agreement on all the aspects of the transaction before entering into the option deed. The elements may include the purchase price and settlement period. The contract for buying and selling of land becomes binding on the parties once they exercise the appropriate option. 

iii. The call option exercise period
This refers to the set duration in which the buyer can exercise a call option. The period is agreed on by the parties before entering the option deed. These two periods are ordinarily sequential. If the call option period expires before the buyer has exercised the call option, the buyer is precluded from doing so. The seller can, therefore, exercise their put option, requiring the buyer to purchase the land during the put option exercise period. Additionally, none of the parties is compelled to exercise an option in the relevant period. The option will end with the expiration of the duration for the final option if none of the parties exercises their option. 

iv. Assignment
A buyer who enters a call option deed before exercising the call option may assign their rights to a third-party under the call option deed. After completing the assignment, the third-party will assume the position of the buyer. The seller will then continue with the transaction according to the terms of the call option deed.

v. Nominations 
Buyers may appoint a third party to exercise the call option on their behalf. Appointing a nominee is different to and assignment. When a nominee exercises the call option, the new contract will now be between the seller and the nominee and not the seller and the buyer. 

Put and Call Option agreements have a variety of uses and may be more beneficial than a sale contract alone. However, some significant legal issues will require consideration. Both option agreements and sale contracts have their limitations, and one should seek consultations before entering any real property arrangement. 

Posted by

Joe McCord works at REAA.

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Rainmaker
559,172
Maggie Dokic | Miami, FL | 888.883.8509 X101
eXp Realty LLC - Miami, FL
GREEN, CDPE, SFR, Pinecrest | Palmetto Bay |

I'll never forget years ago, my real estate professor telling us how the purchase of all the land where Disney World was built was the greatest example of utilizing options to your benefit. Thanks for this very informative post Joe.

May 23, 2017 12:29 AM #1
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