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- Matt007 wrote:Good advice Amber and Adrian.. only my personal opinion but I think a basic foundation knowledge of developing is also a very good place to start from. My experience with options is lol well documented but that said I'm now in partnership with some knowledgeable people for my main project and it's showing me so very much more than what I originally learnt from the 'expert'.. I'll use options again for sure, but need to do some more learning and one or two smaller projects I think before heading back to a project similar to the monster I've created up north!
We always recommend starting out with smaller projects first. If we decide an Option is the best way to proceed to enable us to control a site we would send the Vendor our ‘Letter of Intent To Purchase Under Option’ before we went to the expense of having our solicitor prepare a formal Option Agreement.
This outlines the basic terms upon which we would be prepared to purchase the property. The terms are not complex and we mention in this that we expect additional terms to be incorporated into the Formal Option Agreement.
Infact we just received a ‘Letter of Intent To Purchase Under Option’ today from another developer for one of our development sites. Not going ahead with it though as the offer and terms is not even close to what the development site is worth to us.
Options are one of the most powerful tools available to developers. They give developers the right to control a site during a set period of time, without the obligation of taking ownership, and usually with only a comparably small monetary risk.
Amongst other advantages they can buy time for the developer – to complete their preliminary feasibility and planning to determine the projects financial viability and to even obtain the Development Approval Permit. According to Robert Balanda in “Options Made Simple” they can even be used as an effective tax minimisation strategy.
Simply, an option gives a buyer the right (but not the obligation) to purchase the property for the payment of a fee. The amount of the option fee is negotiated between the two parties and is typically a percentage of the agreed property purchase price.
An option contract also allows the luxury of tying up a property without having to settle on it, which is when your name is revealed in the public record as the buyer of the property.
Walt Disney, for instance, assembled the Florida Walt Disney World site using options as he didn’t want to reveal to the many different property owners that he was the intended purchaser, as they could of held out for a much higher price.
A downside with options is, that the money that is given as the option fee, is usually forfeited if the developer decides not to go ahead and does not purchase the optioned property. On the other hand the significant advantage of options is that the usually small option fee is all that is at risk.
The precise terms and conditions of the Option Agreement will depend on the relative bargaining strength of buyer and seller. While not all sellers will agree to an option contract many will, especially if the terms of the option are not unreasonable.
The option fee can vary from nominal to several thousand of dollars – it will usually be determined by the seller and be dependent on their aggressiveness in selling the property. If they have hopes of a fast sale a substantial fee will usually be requested to compensate them if they should lose a sale to another buyer.
The option agreement is usually attached to the contract of sale. Once the option is exercised a contract of sale becomes into effect. The contract of sale will detail the price and all of the necessary terms and conditions.
Options are only one of the strategies that we use to control a development site.
Adrian and Amber Zenere
http://www.RealEstateDevelopmentClub.com
