Option to Purchase - make money in property using little or none of your own money!

Option to Purchase

This agreement grants a potential buyer the RIGHT but not the OBLIGATION to purchase land or a property at an agreed price and within a defined time period from a Seller in consideration of the Buyer paying the Seller some money (an ‘Option Sum’).

If the Buyer chooses to exercise his option then the Seller must sell him the property on the terms agreed between the parties. If the Buyer decides not to purchase the property then the option will simply expire and the Seller may keep the Option Sum.

Here is a simple example. You see a property on a corner plot. The plot is big enough for a new four bedroom house. You approach the owner of the house and with the proposition that she could get a 20% premium on her plot, which means if the market value is £100,000 you can get her £120,000. Once you have her interest you get her to grant you an option over the land. Let's say you pay £100 for this option and it lasts for 12 months. You now have 12 months in which to gain planning permission on the plot. Once you have it, the land is now worth £170,000. You can now market your option to developers in the local area.

Upon completion you will be paid £50,000 for your option. The developer will then exercise the option and buy the property for £120,000 - in total he has paid £170,000 for the plot because you were paid £50,000 for your option plus the £120,000 to the homeowner. 

You win because you made £50,000 taking almost no risk whatsoever, the developer picked up a great plot and the seller got £20,000 more than the land was previously worth - win/win/win all round! 

Typically the most heated negotiations between the Buyer and Seller are about the amount of the Option Sum and how long the option period will be before the Option expires. The Buyer will want to pay as little as possible for the option sum and have as much time as possible within which to exercise the option and vice versa for the Seller.

This agreement is fairly straightforward. However your attention is drawn to clause 1. The agreement provides for the sale of the property being subject to the normal standard conditions of sale (assuming the property subject to the option is going to be a domestic property).

This may not be acceptable to purchasers of land or commercial properties (or indeed a domestic property). In any event you must have your solicitor review this agreement to set out clearly on what terms you will purchase the property.

The option to purchase agreement can be obtained from this link - http://www.property-system.com/index.php?pageid=investing