Property option contracts, also known as real estate option contracts, are agreements between a seller, advisor, and buyer that grant the advisor the right, but not the obligation, to purchase a property at a predetermined price within a specified period of time. There are two timeframes that make up the total contract. A due diligence period and a contract period.
In simpler terms, a property option contract allows the advisor to secure the opportunity to buy a property in the future without being obligated to do so. This is the due diligence period and it is used to confirm an opportunity exists for both parties and perform numerous checks, whilst also sourcing the buyer and deciding whether to proceed or not with the purchase. This period prevents the seller from selling the property to someone else during this agreed due diligence timeframe.
The advisor will pay the seller a fee, known as an option fee or contractual fee when signing the Heads of Agreement (HOA) for this right.
Don't be confused! this is not a deposit for the sale. This fee could be any amount and is purely for contractual reasons and generally at the discretion of the advisor. The HOA is a non-binding document and is just used to form the foundation of the agreement in writing with the seller. If both parties have agreed to this HOA and signed, then the option contracts can then be drawn up by solicitors for both parties to agree and sign on.
The contract time frame (the timeframe agreed after the due diligence period) is for the buyer. Once a buyer is found and depending on the initial negotiations the seller has in place with the advisor, a deposit of the agreed sale price is generally paid to the seller from the buyer, and the buyer then has the remainder of the contract timeframe to action the standard real estate sale of contract that is attached to the option agreement and finalise payment with the seller and to start the project if they so choose.
In either case for the advisor whether or not they decide to action or not action the option agreement the option fee/contractual fee will be non-refundable. However, if the seller reneges on the deal within this initial due diligence timeframe the option fee/contractual fee will be refunded in full to the advisor.
Property option contracts are perfectly legal and most commonly used by builders and developers in real estate transactions Australia wide, especially when there is uncertainty or additional time is needed to secure financing, conduct inspections, perform due diligence, or in our case, act on all of the above whilst finding a buyer. They provide an opportunity for potential buyers to control a property for a period while they assess its suitability and make an informed decision about proceeding with the purchase.